Canada: Asking A Court To Freeze Crypto Assets? Focus On The Facts, Not The Novelty
Litigation and Dispute Resolution Bulletin

An Ontario court has reaffirmed that cryptocurrencies can be subject to a Mareva asset freezing order.

Summary

In McRae-Yu v Profitly Inc. et al., 2024 ONSC 1593, Justice Hooper of the Ontario Superior Court of Justice allowed a Mareva order to continue against certain cryptocurrency wallets and assets held by the defendants.¹ The proposed representative plaintiff in a proposed class action alleged that he and other investors were victims of a scam perpetrated by the defendants and, in June 2023, obtained a Mareva order against certain of the defendants' assets.

The defendants requested that the court set aside the Mareva order. The court refused to do so. Instead, Justice Hooper found that the representative plaintiff had satisfied the five-branch test for a Mareva order and allowed the order to continue, subject to minor modifications.²

The case reaffirms that although cryptocurrencies are, by design, easy to dissipate, this reality itself is insufficient to satisfy the third branch of the test, namely that, without the order, there is a serious risk that the defendants will dissipate their assets to avoid judgment. A party seeking a Mareva order to freeze cryptocurrency assets should avoid focusing merely on their intrinsic liquidity when adducing evidence and making arguments regarding the risk of dissipation.

The Alleged Scam

The representative plaintiff alleged that he purchased non-fungible tokens, or NFTs, a type of cryptocurrency, from the defendants, and that the defendants allegedly promised to the public that anyone who invested in these NFTs would have an opportunity to participate in a secondary credit sale for the chance to win $1 million and a "monetary mystery box" valued at $250,000.³

However, the defendants were alleged to not have lived up to their promises.⁴ The representative plaintiff began to suspect that he and the other investors had become victims of a "rug pull" — a scam where an NFT seller props up the NFTs with fake promises to attract investors, but takes the proceeds from the sales and vanishes, without fulfilling those promises.⁵ Consequently, the representative plaintiff started a claim against the defendants and sought a Mareva order freezing the defendants' assets until trial — including their cryptocurrency wallets and assets.

Analysis

Justice Hooper found that the representative plaintiff had satisfied the five-branch test⁶ and allowed the Mareva order to continue. The McRae-Yu decision aligns with prior cases in Ontario that have repeatedly held that cryptocurrencies can be the proper subject of a Mareva order (and despite the lingering uncertainty surrounding whether cryptocurrency is "property" under Canadian law).⁷

The McRae-Yu decision provides useful guidance on the third branch of the test for a Mareva order — the risk of dissipation. In line with other authorities, the court in McRae-Yu noted that cryptocurrencies have certain characteristics that make them easy to instantaneously and anonymously dissipate.⁸ However, these characteristics alone were insufficient in this case to satisfy this branch of the test, absent other evidence. On this issue, the defendants relied on a recent Ontario decision which had noted that, "if this alone were enough to make out the risk of dissipation of assets, cryptocurrency or other digital assets would routinely become the subject of Mareva injunctions".⁹

Accordingly, what matters for this branch of the test is the risk of dissipation and the evidence establishing that risk, not merely the characteristics of the assets (e.g., cryptocurrency). In practice, a plaintiff often has limited evidence to prove that a defendant will dissipate assets other than evidence of the defendant's past misconduct. Thus, where a defendant has allegedly engaged in fraud, a court may "reasonably infer" a risk of dissipation if the court is satisfied that the claim of fraud will likely succeed (i.e., a strong prima facie case).¹⁰ Here, the court was satisfied to the requisite standard that the defendants made several promises to the public but failed to deliver on them and, therefore, held that the claim for fraudulent representation was likely to succeed.¹¹ Accordingly, the court concluded that, given the defendants' past misconduct, they would likely attempt to dissipate the remaining assets.¹² In other words, fraud begets fraud.¹³

Conclusion

The McRae-Yu decision and its predecessors have demonstrated that, despite their novelty and technical complexity, cryptocurrencies are not beyond the reach of the justice system. For investors, these decisions provide comfort that, in appropriate circumstances, the courts have both the tools and the will to protect victims of fraud and other serious misconduct. For lawyers, these decisions are a reminder that when seeking a Mareva order over cryptocurrencies, the focus should be on the merits of the claim and not merely the characteristics of the assets in issue.

The author would like to thank Julia Chung, articling student in Fasken's Toronto office, for her research and contributions to this bulletin.

Footnotes

1. McRae-Yu, paras. 3-4.

2. McRae-Yu, paras. 30, 47 and 57. In order to have the injunction continue, the following five-part test had to be met: (1) the plaintiff must show that he has a strong prima facie case; (2) the defendants have assets within the jurisdiction; (3) there is a serious risk that the defendants will remove or dissipate their assets before judgment can be obtained; (4) the plaintiff will suffer irreparable harm if the injunction is not continued; and (5) the balance of convenience favours the continuation of the injunctive relief.

3. McRae-Yu, para. 12.

4. McRae-Yu, para. 13.

5. McRae-Yu, para. 15.

6. The test includes the following five factors: (i) McRae-Yu must show that he has a strong prima facie case, (ii) the defendants have assets within the jurisdiction, (iii) there is a serious risk that the defendants will remove or dissipate their assets before obtaining judgment, (iv) McRae-Yu will suffer irreparable harm if the court does not continue the injunction, and (v) the balance of convenience favours the continuing the Mareva order. McRae-Yu, para. 30.

7. See, for example, Cicada 137 LLC v. Medjedovic, 2021 ONSC 8581, para. 6, and Kirshenberg v. Schneider, 2023 ONSC 2809, para. 30. In Cicada, Myers J. granted a preservation order and an Anton Piller order with respect to $15 million in digital assets stored in a digital wallet. His Honour made no finding about the nature of digital assets as property, but held, at para. 6, that: "ⁱt is enough for present purposes to find that people invested value to obtain control of the tokens that the defendant appears to have taken. The law will determine in due course whether the digital tokens are a specie of property and/or whether the defendant has any right to keep them (or control over them) or the value that they represent from the plaintiff regardless of how the law classifies them." In Kirshenberg, Akbarali J. stated: "I agree with the jurisprudence to date that, an interim preservation order or injunctive order is available, where the elements of the test are made out, in respect of cryptocurrency or other digital assets."

8. McRae-Yu, para. 37.

9. McRae-Yu, para. 37.

10. Avanew Inc. v Hossain et al, 2023 ONSC 3619, at para. 26. McRae-Yu, para. 41.

11. McRae-Yu, para. 35.

12. McRae-Yu, para. 41.

13. See, for example, "I conclude that the pattern of prior fraudulent conduct supports a reasonable inference that there is a real risk the conduct will continue, and the Defendants will attempt to hide or dissipate their assets". Avanew Inc. v Hossain et al, 2023 ONSC 3619, at para. 26.

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