Many cryptocurrency advocates are watching a Canadian court case to see how it will affect the future of DeFi. – Photo: Shuttestock
Cryptocurrency advocates are overseeing a Canadian court ruling ordering $16 million in preliminary custody (£12.12m) in allegedly stolen digital assets to third parties to see how this could impact decentralized finance (DeFi) in the future.
An Ontario court granted the law firm Cicada 137 an Anton Piller order or civil search warrant, assigning the company the missing digital assets and its litigation and recovery rights.
Cicada 137 is seeking multiple court orders against Andean Medjedovic, a 19-year-old resident of Hamilton, Ontario who allegedly stole the assets from the Indexed Finance system running on the Ethereum blockchain in October 2021.
Indexed provides a way to buy and hold multiple crypto assets through one cryptocurrency.
“DeFi and digital assets are becoming more mainstream,” Jason Beichman, a Toronto-based civil litigation attorney at Rayman Beichman, told Capital.com. “With increased regulation in the sector and institutional investors on board, there is an increase in stability but also a shift away from what may have been the original intentions of a decentralized economy. Growth requires change.”
The case is a very typical fight over an alleged asset conversion, he added. The plaintiff alleges that assets were unlawfully confiscated and the defendant alleges a right to those assets.
Courts dealing with digital assets
“The case is also one of about a half-dozen early examples in recent years of courts demonstrating a willingness and ability to treat digital assets as a legal value concept,” Beichman said.
He said it is remarkable that legal concepts dating back a century or more are sufficiently flexible and adaptable to be applied to something new like digital assets, wallets, private keys and crypto exchanges. This decision, he added, will bring more clarity to cryptocurrency law and regulation.
“A framework for regulating crypto is evolving and is, in my opinion, part of the reason for the explosion in crypto’s market value and market share,” he said. “There’s a balance of so much regulation that it stifles the purpose and benefits of crypto, but we’re a long way from that and development will continue.”
Cicado also obtained a court order preventing Medjedovic from distributing assets until the case is resolved.
Arrest warrant issued
A judge issued an arrest warrant for Medjedovic in December 2021 after he refused to wire funds to Cicada or appear in court.
According to the Canadian attorney, an order from Anton Piller allows a party to enter a property, conduct an investigation, seize assets, request records and hold property under the control of an independent third party. This form of civil search warrant is used to secure certain materials when they are threatened with destruction.
Such arrangements are often used in intellectual property cases.
Benjamin Bathgate, an attorney for McMillan representing Cicada, said the case is the first in Canada and one of the first globally to involve attacks on blockchain smart contracts and interactions between users on DeFi trading platforms, the Canadian attorney reported.
First crypto-related Anton Piller order
According to Bathgate, a Canadian attorney, this is the first time an order from Anton Piller has been used in a cryptocurrency case.
In a statement to Capital.com, Bathgate said Cicada funded the civil process and is seeking justice for itself and other victims. Cicada provided the evidence and brought forward the case that led to the orders against Medjedovic and the warrant, and these efforts represent the best chance of bringing him to justice and recovering the allegedly stolen cryptocurrency.
“Despite Mr Medjedovic’s claims that he wants his day in court – to defend his claims and assert that the code is law – he has declined the court’s invitation to attend his trial,” Bathgate said.
“Rather, he is flouting court orders and continues to trade victims’ cryptocurrency tokens, with no apparent recognition that he will be no exception. His unlawful conduct is invariably held accountable by the same legal rules that govern all of our interactions. His disappearance will only delay this final, not prevent it.”
The legal team includes associates Reuben Rothstein and Joseph Osborne, and law student Madeline Klimek.
Bathgate told the Canadian Lawyer that the case will be the first legal test of the code-is-law theory, widespread among computer programmers about how laws apply in the digital world.
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Novel concept
Beichman said the code-is-law concept is “novel” and “we’ll see how that plays out in this case.”
University of Toronto finance professor Andreas Park told Capital.com that defending the Code of Law is “interesting”. He explained that DeFi generally operates on two components – a piece of code that operates on a blockchain, typically Ethereum.
The creator of a protocol provides the code that anyone can access through a related website.
“Essentially, the plaintiffs here have alleged that the attacker or exploiter, this child, stole money,” Park said. “That’s an allegation. So what he could do was use logs in a way that he could extract funds from that log. … That’s exactly what happened. So, in essence, the plaintiffs argued that the attacker used the protocol in a way they did not intend.”
Legal certainty of protocols
Park said the case raises questions about the legal certainty of DeFi protocols, specifically whether the creator controls the protocol even though the blockchain powers it.
“Obviously there’s an implicit answer here, which is that the law still applies,” he said. “But again, I think this is very difficult. Consider one thing: In principle, DeFi is limitless. In principle, the ethos is there is no jurisdiction for it. So Canadian laws may very well differ from laws in the US and Europe. Who is the ultimate judge of the future?”
He said it was entirely possible that the court would rule in favor of the accused.
“If they rule against the accused, then I think the interpretation is: Digital assets don’t live in the Wild West. There are still a number of rules that apply, codelaws are not (legal) codes if you will.”
But US attorney Jason Gottlieb of New York-based Morrison Cohen, who specializes in cryptocurrencies, told Capital.com that while some people insist DeFi is unregulated, all forms of funding are regulated.
“In the United States, the CFTC has broad anti-fraud and anti-fraud authority over all futures-market commodities, and — as two U.S. district judges have ruled — that includes anti-fraud authority over all cryptocurrencies,” Gottlieb said.
Wealth is just wealth
Assets are just assets, he added.
“It can be new, it can be complicated, it can be abstract — but ultimately, people shouldn’t be allowed to just take your stuff, whether it’s digital or physical,” Gottlieb said. “The case against (Medjedovic) just says: Manipulating markets to take other people’s stuff is wrong. It’s illegal. And we should not condone it.”
Gottlieb dismissed the code-is-law defense.
“Code is not law,” he said. “Law is law.”
Gottlieb was asked if the case could lead to more laws and regulators covering crypto in Canada, the US, and other countries. He said regulators should focus on scams and manipulators in the crypto space because scammers make it look bad. However, he claimed that further anti-fraud legislation was not needed as regulators already had wide-ranging anti-fraud powers.
“They just need to focus more energy on addressing the actual wrongdoings in this area and less resources on chasing responsible projects for non-registration” — when regulators haven’t provided a way to register those products or companies,” Gottlieb said.
The US Securities and Exchange Commission has taken legal action against some crypto companies allegedly selling unregistered securities.
“I hope that regulators will work more cooperatively with responsible players in the crypto space to address the real wrongdoing, like the market manipulation and theft that (allegedly) happened here,” Gottlieb said. “We will see.”
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