Canadian Court Takes Over Funds Due to Crypto Exchange’s Ownership Dispute

Reuters

A Canadian court has taken control of $26 million CAD claimed by cryptocurrency exchange QuadrigaCX because of a disagreement regarding the fund’s derivation.

Ontario Superior Court of Justice’s Judge Glenn Hainey has issued on November 9 an interpleader order to the Canadian Imperial Bank of Commerce (CIBC). The order enables the court to take over the funds until the real ownership is determined. However, CIBC will continue to be liable for the funds, considering the fact that the bank imposed a freeze on its own volition.

Meanwhile, Duhaime Law financial crime lawyer and managing partner Christine Duhaime clarifies that an interpleader right takes place when at least two entities have laid claim to the same funds, whether it is a debt, obligation, or money.

In this instance, the challenge lies on whoever has the right to an estimated $26 million CAD and an additional $69,000 USD or roughly equivalent to a total of $20 million USD. CIBC has frozen the funds after it questioned whether QuadrigaCX, payment processor Costodian, or Costodian director Jose Reyes has the rights to the funds.

Hainey has discovered that the parties are bickering as to who truly has the rights to the funds.

CIBC now needs to transfer the funds to the Canadian court until the funds’ true ownership is determined.

Duhaime, who does not have any involvement in the case, explains:

“The Court holds the disputed funds in trust only until the entitlement to the funds has been lawfully determined and competing claims are resolved.”

The financial crime lawyer further states:

“The next step is that CIBC will transfer the disputed funds into the Court’s account and then the parties, including the customers of Quadriga who bought digital currencies with them during the time in question, can make an application for the return of funds that they believe are theirs. That includes Quadriga, who can bring an application to claim the funds.”

She also says:

“The Court holds the disputed funds in trust only until the entitlement to the funds has been lawfully determined and competing claims are resolved.”

On the other hand, the judge has not ruled whether CIBC’s freeze on the funds is wrongful or not.

Duhaime clarifies that there is nothing wrong with it especially when CIBC filed an application and that there no hearing has been called regarding any party’s conduct.

The good thing for QuadrigaCX users, Duhaime adds is that they can now apply to have their funds released by the court. However, these customers will have to disclose their identities, which may result in tax consequences for several users.

Meanwhile, Gerald Cotten, the founder and CEO of QuadrigaCX, expresses his displeasure with what is happening.

He hopes that the situation will be settled before the holidays after the parties have faced a judge.

Although he asserts that less than 1 percent of the crypto exchange’s users have been affected by CIBC freeze, he believes that full services will go back to “regular timeframes” in the coming weeks.

Duhaime claims that by general standard, when banks “de-risk” accounts they give clients no less than 30 days’ notice, although this may rise to as much as 90-120 days if crypto exchanges are involved.

This provides customers with an opportunity to search for alternative banking services.

Normally, banks do not hold on to funds during de-risking operation by anti-money laundering specialists because this will require banks to keep the “high-risk account” open.

Still, CIBC’s move only serves as a reminder to payment processors that banks indeed look at their clients and make “de-risking decisions all the time.”

Duhaime concludes by saying:

“It’s not just about your client, it’s about ensuring that your client’s client operates in a way that does not pose a reputational, legal or regulatory risk to a bank.”