This blog post is an update on cryptocurrency litigation in Canada over the last 90 days. Although there's been a number of proceedings that mention "bitcoin" or "ether" on CanLII, there are really only four where the main subject matter was cryptocurrency.
The cases below concern a dispute over BTM management software, a self-represented person who ran a type of crypto investing club, a technical decision with respect to cryptocurrency ETFs, and exemptive relief granted to a well-known cryptocurrency dealer.
1. October 4th: Cash Cloud v. BitAccess, 2022 ONSC 5622
Conway Litigation and Fasken went to bat for their clients, "Cash Cloud Inc." and "BitAccess Inc." (respectively). BitAccess is a long-standing Canadian maker of kiosk machines to buy and sell bitcoin (called "BTMs"). The two parties have been locked in litigation since 2020 over the termination of Cash Cloud's access to the BitAccess software.
A few weeks ago, BitAccess submitted to the court the testimony of the Chair of SEC who had recently spoken to the Senate about companies that exchange cryptocurrency being required to register. BitAccess cited this as part of their ongoing effort to end the court order that restrains them from terminating Cash Cloud's service. BitAccess argued that there were legal concerns about Cash Cloud's operations, which includes around 5700 machines in the United States and Brazil. The court rejected BitAccess's claims of illegality:
There was no evidence my order actually ran afoul of any U.S. laws or regulations.
Cash Cloud was given 60 days more access to BitAccess's systems, after which they will be disabled. The court ruled that this was enough time to download the data and complete a transition. It's unclear if there will be further steps in this dispute.
2. September 19th: Re Cerato, 2022 ABASC 121
A self-represented litigant, Jan Cerato (also known as Jan Strzepka), defended at his ten day hearing, that "WhaleClub" was not unlawful. The Alberta Securities Commission ruled that WhaleClub had been offered to the public, and the "private investment club" exemption didn't apply due to the nature of the offering. The panel described the club in paragraphs 6-7 of the decision:
Starting in December 2017, Cerato solicited members of the public to invest in the WhaleClub (the WhaleClub), which he promoted primarily through online forums and in-person workshops as an investment suitable for individuals who were inexperienced with cryptocurrency trading. The only requirement was for investors to contribute a minimum of $10,000 in fiat currency or the equivalent in Bitcoin, which was pooled with capital invested by others and used by Cerato's team to trade cryptocurrencies. Investors generally understood that their principal investment would be used for 90 days, at which point they would be repaid their principal along with 75% of any profit, and the trading team would retain 25% of any profit.
 Cerato did not file a prospectus for the WhaleClub investment and he did not explain to investors the risks associated with the WhaleClub. Instead, he marketed the WhaleClub by focusing on the returns for investors, telling them that the minimum goal was to double the investment with the potential to "double the funds a number of times together" in the initial 90 days. One WhaleClub promotion suggested that an investment could double every few weeks, and Cerato told an investor that his capital would multiply tenfold in a short period of time.
The panel found that there was no subscription agreement, no registration, and it concluded that the club was not permitted under applicable securities laws. An administrative penalty of $40,000 was handed out, along with $125,000 for costs incurred by the Alberta Securities Commission (for the investigation and hearing), along with several orders related to not being involved in securities going forward.
An interesting finding of the panel was that
we do not find that he sought a direct financial benefit from his misconduct. The panel surmised that an indirect benefit may have been involved, but this part of the decision doesn't really explain why Mr. Cerato participated in WhaleClub.
3. August 31st: Purpose Investments Inc. (Re), 2022 CanLII 80263
Purpose Investments Inc., a major cryptocurrency ETF provider, sought a technical order to continue operating certain ETFs. The order was needed to reduce the costs of prospectus filings in connection with several ETFs: "Purpose Bitcoin Yield ETF", "Purpose Ether Yield ETF", and "Purpose Crypto Opportunities ETF". There's not much to discuss about this decision, which is most relevant to securities lawyers and has no implications for cryptocurrency or even cryptocurrency ETFs.
4. August 15th: Newton Crypto Ltd. (Re), 2022 CanLII 82544
Newton, a Canadian virtual currency dealer that's partly owned by a major "liquidity provider", DVX CM (which operates in Canada through DV Chain (Canada) Inc.), was granted exemptive relief to operate nationally as a "Crypto-Asset Trading Platform". The application appears to be a relatively standard "restricted dealer" application. Newton Crypto Ltd., like many virtual currency dealers in Canada, uses Coinbase Custody Trust Company LLC (in the US) as their custodian, in combination with Fireblocks (run by another US company) as a hot wallet solution for up to 20% of the virtual currency that they hold.
This decision includes a number of details about Newton's operations that, while not particularly unique, are helpful for anyone trying to understand the current state of the virtual currency dealer space as it transitions to significant oversight by provincial securities regulators.
Newton's exemptive relief decision is now posted to the Ontario Securities Commission's list of
registered crypto asset trading platforms: https://www.osc.ca/en/industry/registration-and-compliance/registered-crypto-asset-trading-platforms.