Cryptocurrency has been recognized as “property” for the purposes of the Bankruptcy and Insolvency Act by the Ontario Superior Court of Justice (Commercial List) in Re Quadriga Fintech Solutions Corp. et al.,[1] the first Canadian case of its kind. The Court also fixed the date of bankruptcy as the date for valuing claims denominated in cryptocurrency.

  • QuadrigaCX, a cryptocurrency exchange, commenced proceedings under the Companies’ Creditors Arrangement Act (the CCAA) on February 5, 2019 and transitioned to a bankruptcy on April 15, 2019.
  • Claims made against QuadrigaCX were denominated in various cryptocurrencies (e.g., Bitcoin, Litecoin and Ethereum), as well as US dollars and Canadian dollars.
  • The Trustee planned to convert claims to Canadian dollars using the prevailing exchange rates as of the date of bankruptcy. One creditor opposed the Trustee’s motion and argued that cryptocurrency claims should be converted to Canadian dollars using the prevailing exchange rates as of the date of the CCAA initial order.
  • The Court agreed with the Trustee and ordered that claims denominated in cryptocurrency be converted to Canadian dollars as of the date of bankruptcy.

Background

The Quadriga case arises from the collapse of QuadrigaCX, a Canadian cryptocurrency exchange launched in December 2013, that facilitated the buying, selling and trading of Bitcoin and other cryptocurrencies. Following the sudden death of QuadrigaCX’s co-founder and CEO, Mr. Gerald Cotten, on December 9, 2018, QuadriaCX’s exchange was suspended and thereafter the Nova Scotia Supreme Court granted Quadriga Fintech Solutions Corp. and certain of its affiliates an initial order pursuant to the Companies’ Creditors Arrangement Act (the CCAA) on February 5, 2019. Ernst & Young Inc. was appointed as the Monitor.[2]

On April 14, 2020, the Ontario Securities Commission issued a review of QuadrigaCX that focused on how QuadrigaCX operated, what happened to clients’ assets, the causes of its asset shortfall, and the implications of securities law.

On April 15, 2019, the CCAA debtors were assigned into bankruptcy under the Bankruptcy and Insolvency Act (the BIA). Ernst & Young Inc. was appointed as the Trustee-in-Bankruptcy.

The Claims Process

On June 27, 2019, the Nova Scotia Supreme Court granted an order establishing a claims process. Affected users of QuadrigaCX could file claims in Canadian dollars, US dollars, or one of more than six types of cryptocurrencies (or any combination thereof) traded on the QuadrigaCX exchange. Any distributions to creditors would be made in Canadian dollars. The order establishing the claims process did not explicitly fix a date for converting claims denominated in cryptocurrencies into Canadian dollars.

The Quadriga case was transferred to the Ontario Superior Court of Justice (Commercial List) on September 10, 2019.

On September 11, 2020, the Trustee disclosed that it had received 17,053 claims to that date. The Trustee subsequently brought a motion seeking an order setting the date of the bankruptcy (April 15, 2019) as the date for converting claims denominated in US dollars and cryptocurrencies into Canadian dollars. One claimant opposed the Trustee’s motion and submitted that claims denominated in cryptocurrencies should be converted into Canadian dollars using the prevailing exchange rates on the date of the CCAA initial order (February 5, 2019).

The date on which claims would convert into Canadian dollars was relevant because cryptocurrency prices were highly volatile and fluctuated significantly between the date of the CCAA initial order and the date of bankruptcy. Specifically, most cryptocurrencies rose in price during this period. Although the overall pool of distributable funds would remain the same regardless of the conversion date, the allocation of distributable funds from one user to another would fluctuate depending on the date chosen. For example, if claims were converted as of the date of the CCAA initial order, then the relative share of distributable funds that would be allocated to Canadian dollar claims would increase relative to claims denominated in cryptocurrencies.

The Decision

Justice Hainey heard oral submissions on January 26, 2021 and released his decision on March 1, 2021. His Honour ordered that claims made in cryptocurrency be converted as of the date of bankruptcy.

The Court first addressed the classification of cryptocurrency under the BIA, writing that the definition of “property” as used in s. 67(1) of the BIA is broad enough to include cryptocurrency.

The Court proceeded to address the opposing claimant’s submission that claims made in cryptocurrency were unliquidated and contingent claims because each claim represented a breach of contract by QuadrigaCX. The opposing claimant posited that the universal date for assessing such breach of contract claims should be the date of the CCAA initial order because QuadrigaCX’s affected users would have been aware of their claims by that date. Justice Hainey disagreed and wrote that claims made in cryptocurrencies were liquidated claims because they were proven obligations that could be easily ascertained “as a matter of arithmetic”. All that was required to determine the Canadian dollar value of cryptocurrency claims was to multiply the amount of cryptocurrency in question by the prevailing exchange rate, which could be determined by reference to the cryptocurrency market.

Justice Hainey then listed his three reasons for selecting the date of bankruptcy as the appropriate date for converting cryptocurrency claims into Canadian dollars:

  • Cryptocurrency claims are analogous to debts in a currency other than Canadian currency, which s. 215.1 of the BIA provides are to be converted as of the date of bankruptcy;
  • The bankruptcy of QuadrigaCX may be analogized to the bankruptcy of a securities firm as captured by Part XII of the BIA, and cryptocurrency may be analogized to a security and/or customer pool fund, which Part XII of the BIA provides are to be, in certain circumstances, valued on a pooled basis as of the date of bankruptcy; and
  • The principles of efficiency and economy applicable to bankruptcy claims administration support valuing cryptocurrency claims as of the date of bankruptcy.

The third point about efficiency and economy appears to be related to concerns raised by the Trustee that if cryptocurrency claims are treated as unliquidated and contingent claims, then it does not necessarily follow that such claims are to be universally converted as of the date of the CCAA initial order, which the opposing claimant had argued. Rather, the Trustee noted that case law suggests that each unliquidated and contingent claim may need to be assessed individually, which would be a significant administrative burden and cost to the estate.

Key Take-Aways

First, the Court in Quadriga explicitly recognized cryptocurrency as “property” that is divisible among the bankrupt’s creditors per s. 67(1) of the BIA. This appears to be the first time a Canadian court has so clearly and explicitly recognized a proprietary interest in cryptocurrency.

Second, it is notable that Justice Hainey refrained from classifying cryptocurrency as a specific type of asset (e.g. “currency”, “money”, “security” or “commodity”). While the Court compared cryptocurrencies to foreign currencies (s. 215.1 of the BIA) and securities (Part XII of the BIA), it limited these references to analogies and not findings of law.

Finally, the Quadriga case is one of the few cases involving a CCAA proceeding that transitions into a bankruptcy, and one of the only cases dealing with whether claims should be valued as of the date of the CCAA initial order or the date of bankruptcy.