Bankruptcy court looks at how to value bitcoin

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The cryptocurrency has been recognized as a “property” for the purposes of Bankruptcy and Insolvency Law by the Ontario Superior Court of Justice (commercial roll) in Re Quadriga Fintech Solutions Corp. et al.,[1] the first Canadian case of its kind. The court also set the date of bankruptcy as the valuation date for claims denominated in cryptocurrency.

  • QuadrigaCX, a cryptocurrency exchange, has initiated proceedings under the Companies’ Creditors Arrangement Act (the CCAA) on February 5, 2019 and declared bankruptcy on April 15, 2019.
  • The claims made against QuadrigaCX were denominated in various cryptocurrencies (for example, Bitcoin, Litecoin, and Ethereum), as well as US dollars and Canadian dollars.
  • The trustee planned to convert the claims into Canadian dollars using the exchange rates in effect on the date of the bankruptcy. A creditor opposed the trustee’s petition and argued that the cryptocurrency claims should be converted to Canadian dollars using the exchange rates in effect on the date of the initial CCAA order.
  • The court ruled in favor of the trustee and ordered that claims denominated in cryptocurrency be converted into Canadian dollars on the date of bankruptcy.

Background

The Quadriga The case stems from the collapse of QuadrigaCX, a Canadian cryptocurrency exchange launched in December 2013, which has made it easier to buy, sell and trade Bitcoin and other cryptocurrencies. Following the sudden death of QuadrigaCX co-founder and CEO, Mr. Gerald Cotten, on December 9, 2018, the QuadriaCX trade was suspended and subsequently the Nova Scotia Supreme Court granted Quadriga Fintech Solutions Corp. and some of its affiliates an initial order pursuant to the Companies’ Creditors Arrangement Act (CCAA) on February 5, 2019. Ernst & Young Inc. was appointed Monitor.[2]

April 14, 2020 The Ontario Securities Commission released a review of QuadrigaCX who focused on how QuadrigaCX worked, what happened to client assets, the causes of its insufficient assets and the implications of securities law.

On April 15, 2019, the CCAA debtors were declared bankrupt under the Bankruptcy and Insolvency Law (the BIA). Ernst & Young Inc. has been appointed trustee in bankruptcy.

The complaints process

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

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

On September 11, 2020, the trustee revealed that he had received 17,053 claims by that date. The trustee subsequently brought a motion seeking an order setting the date of bankruptcy (April 15, 2019) as the date for the conversion of claims denominated in US dollars and cryptocurrencies into Canadian dollars. A claimant opposed the trustee’s motion and argued that claims denominated in cryptocurrencies should be converted to Canadian dollars using the exchange rates in effect on the date of the initial CCAA order (February 5 2019).

The date on which claims would be converted to Canadian dollars was relevant, as cryptocurrency prices were very volatile and fluctuated significantly between the date of the initial CCAA order and the date of bankruptcy. Specifically, the price of most cryptocurrencies has increased during this period. Although the overall mass of distributable funds would remain the same regardless of the conversion date, the distribution of distributable funds from one user to another would vary depending on the date chosen. For example, if claims were converted on the date of the initial CCAA order, the relative portion of distributable funds that would be allocated to claims in Canadian dollars would increase relative to claims denominated in cryptocurrency.

decision

Justice Hainey heard oral submissions on January 26, 2021 and rendered his ruling on March 1, 2021. His Honor ordered that claims made in cryptocurrency be converted from the date of bankruptcy.

The Court first considered 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 considered the opposing plaintiff’s argument that the claims made in cryptocurrency were unsettled and contingent claims, as each claim represented a breach of contract by QuadrigaCX. The opposing claimant argued that the universal date for assessing such breach of contract claims should be the date of the initial CCAA order, as the affected users of QuadrigaCX would have been aware of their claims on that date. Justice Hainey disagreed and wrote that claims made in cryptocurrencies were claims liquidated because they were proven obligations that could be easily verified “as a matter of arithmetic. “. All that was needed to determine the Canadian dollar value of the cryptocurrency claims was to multiply the amount of the cryptocurrency in question by the going exchange rate, which could be determined by referring to the crypto market. -cash.

Judge Hainey then listed the three reasons he chose the date of bankruptcy as the appropriate date to convert cryptocurrency claims to Canadian dollars:

  • Cryptocurrency claims are analogous to debts denominated in a currency other than Canadian currency, which s. 215.1 of the BIA provides that they must be converted on the date of bankruptcy;
  • The bankruptcy of QuadrigaCX can be assimilated to the bankruptcy of a securities company as referred to in Part XII of the BIA, and the cryptocurrency can be assimilated to a common security and / or customer fund, which, according to Part XII of the BIA, must be, in certain circumstances, valued on a common basis at the date of bankruptcy; and
  • The principles of efficiency and economy applicable to the administration of bankruptcy claims support the assessment of cryptocurrency claims on the date of bankruptcy.

The third point regarding efficiency and economy seems to relate to concerns raised by the trustee that if cryptocurrency claims are treated as unliquidated and contingent claims, it does not necessarily follow that those claims should be universally converted as of the CCAA date. the original order, which the opposing plaintiff had invoked. On the contrary, the trustee noted that the case law suggests that each unsettled and conditional claim may have to be assessed individually, which would represent an administrative burden and significant costs for the estate.

Key points to remember

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

Second, it should be noted that Judge Hainey refrained from classifying cryptocurrency as a specific type of asset (eg “currency”, “money”, “security” or “product”). While the Court compared cryptocurrencies to foreign currencies (s. 215.1 of the BIA) and to securities (Part XII of the BIA), it limited these references to analogies and not conclusions of law.

Finally, the Quadriga is one of the few cases involving a CCAA proceeding that turns into bankruptcy, and one of the only cases dealing with whether claims should be assessed on the date of the original order under of the CCAA or the date of bankruptcy.


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