Why Lawmakers Should Stay Away From Cryptocurrencies
Pseudo-anonymous decentralized cryptocurrencies and tokens like Bitcoin and Ether, offer new financial options that we didn’t have before. For example, the ability to publicly track a transaction and monitor its path from one wallet into another.
The Supreme Court of British Columbia examined a case where a company offering its own tokens during an Initial-Coin-Offering (ICO) mistakenly sent the wrong tokens to an investor. This case raises some questions. First, who is responsible for the mistake, and second, does the immutability of decentralized cryptocurrencies imply that the mistake is irreparable regardless of national or international laws?
CopyTrack vs Brian Wall
On September 12 (2018), CopyTrack (company and plaintiff) went to the Supreme Court of British Columbia (BC) to dispute their case again Brian Wall (investor and defendant). The record states that Wall participated in the ICO as an investor and purchased 530 CopyTrack (CPY) tokens.
The CPY tokens were offered — at a given rate — by CopyTrack in exchange for investments in the form of ether — Ethereum’s own token. Once the ICO was completed, CopyTrack mistakenly sent Wall 530 ether tokens — which at the time was worth $495,000 CAD — instead of their own CPY tokens — worth $780 CAD.
CopyTrack sent out several emails requesting that “he immediately return the Ether Tokens”. Wall eventually agreed to do as requested, though days later the ether tokens were moved from his personal wallet “into five different wallets”. This was done “by an unknown third party who unlawfully accessed his wallet without his knowledge or consent,” Wall claimed.
Then, Wall informed CopyTrack that he “no longer has control of the Ether Tokens and is therefore unable to return them”. Unfortunately, Wall passed away several months after the event, shortly before the court hearings began.
The final decision of the court was that the tokens should be returned to CopyTrack, the legitimate owner of the Ether tokens, despite the pivotal question of whether cryptocurrencies can be defined or classified as “goods” or not:
“…regardless of the characterization of the Ether Tokens, it is undisputed that they were the property of Copytrack, they were sent to Wall in error, they were not returned when demand was made and Wall has no proprietary claim to them. While the evidence of what has happened to the Ether Tokens since is somewhat murky, this does not detract from the point that they should rightfully be returned to Copytrack.” — Copytrack Pte Ltd. v. Wall, Supreme Court of British Columbia, 2018
Incompetence of Companies Not Understood by the Court(s)
There are several aspects of this case that need to be reviewed. First, what sort of an incompetent operator would send half a million dollars worth of ether to an investor instead of the their own CPY tokens?
Moreover, the ether tokens raised during the ICO should have been stored offline — in a cold wallet — to avoid confusing them with the company’s CPY tokens. In any case, the transaction should have been verified by several operators using a multi-signature wallet, which it seems CopyTrack didn’t use.
Last and most important, the entire operation should have been done via a smart-contract to avoid human “error”. That is one of the main reasons why Ethereum and smart contracts were created in the first place.
Unfortunately, the judge did not seem to understand or care for such important aspects. The court viewed the transaction through mentality inspired by outdated legacy models established before the appearance of innovative FinTech such as Ethereum. An analogy would be applying road rules to aviation. CopyTrack was able to raise millions of dollars despite their lack of knowledge, and the name of Wall became tarnished as guilty after his death.
This is why it is of great importance that lawmakers and regulators understand crypto technology, else their decisions may hinder the development of innovations that they do not seem to grasp fully.
If this was put to a decentralized dispute resolution (see Kleros) hearing, CopyTrack would be just as liable for hosting an ICO without taking appropriate security measures. Ethereum Solidity developer Eliott Teissonniere said:
“Normally any serious team would set a multi signature wallet to protect the funds in case of a key [private key] being stolen, a malicious operator wanting to send funds, a key being lost.
If someone was able to send funds on its own behalf this raises serious concerns on:
- the ability of the team to secure and use with care the funds they own.
- the maturity of the team, anyone serious enough would have made a multi signature wallet.
- how much the project is centralized and not transparent.Also, the fact ETH was sent instead of tokens is very surprising when you consider that sending a token or eth [ether] is a different process, only someone inexperienced would have done this.
Finally with a well implemented multi signature wallet they would have been able to review the transaction before sending it thus spotting the mistake but also prove how serious they where to their community. What’s even more surprising is that people invested in their project.” — Eliott Teissonniere, 2018
How does this affect others?
An article from 19 October (2018) posted by Emilie Feil-Fraser, an associate of an international law firm — Gowling WLG — details the case and makes the following comment:
“Even if the funds are locatable, extricating the funds may be challenging given the difficulties presented by encryption. Unlike judgment debts for fiat currencies, banks and other financial institutions are not available to assist with enforcement.
Furthermore, it remains to be seen how much extra-territorial reach an order such as this will have. Depending on how jurisdiction is determined with respect to wallet holders, foreign courts may be reluctant or unwilling to enforce an order of the BC Supreme Court relating to cryptocurrency.” — Emilie Feil-Fraser, Gowling WLG, 2018
While cryptocurrency transactions can be tracked, it is impossible — up to date — to break the encryption and retrieve crypto tokens. If the tokens are sent to a centralized exchange or a custodial wallet linked to an identity — within a jurisdiction willing to comply with the ruling — then there is a chance of retrieving the tokens.
Furthermore, the court ruled that CopyTrack may “trace and recover” the ether in “whatsoever hands those Ether Tokens may currently be held”.
If you understand the basics of decentralized cryptocurrencies, you can see that this comment is naive. It‘s equivalent to saying that bank notes stolen during a robbery belong to the bank — regardless of how they circulate afterwards.
Lastly, if crypto tokens are sent to a coin mixer, exchanged on a decentralized exchange, or swapped for an anonymous coin — such as Monero — the trace would be completely lost. Think of it as melting gold bars and reshaping them.
This case shows that the lawmakers are not mentally equipped to deal with cryptocurrencies. See also our post on cryptocurrency taxation policies within the US.
CopyTrack tried to raise funds using a technology which removes the need for an intermediary, but, when they failed to operate the system as they should have, they did not hesitate to switch back to the legacy system for help. We must never forget one of the most important aspects of decentralized cryptocurrencies: personal responsibility.
Image from Pixabay.
