Amin Hosseini is an IPilogue Writer and an LLM Candidate at Osgoode Hall Law School.

On Friday, November 11, 2022, FTX. Shortly after that, filed for bankruptcy, and a Japanese exchange called Bitfront shut down. FTX is a global, centralized cryptocurrency exchange based in the Bahamas. It enables customers to exchange their digital currencies for other digital currencies or regular money. Sam Bankman-Fried ("SBF”) was the CEO of FTX.

The collapse came when FTX. is the cryptocurrency exchange with the highest daily trading volume of cryptocurrencies globally. On November 9, Binance it would no longer purchase FTX, mentioning reports of mishandled funds and regulatory investigations. Since then, the price of has plunged by more than 90%. The FTX's native token is called . It is generally used as collateral for future positions and to lower trading fees.

��According to a report by , on November 2, Alameda Research ("Alameda”), the cryptocurrency trading firm led by SBF, was found to have an unusually high stockpile of FTT. FTX and Alameda's connections may have been more complex than had been previously disclosed, raising the question of whether FTX moved customers’ assets to Alameda. Since Alameda and FTX owned most of the FTTs, the other business would suffer severe financial consequences if one of them is compelled to sell or transfer its FTT holdings.

On November 6, that it would sell its FTT tokens. The value of FTT fell, triggering investors to race to sell their holdings in FTX out of concern that it would collapse like other cryptocurrency corporations. FTX rushed to execute withdrawal requests, but could not pay. As a consequence, FTX filed for bankruptcy.

John J. Ray, the new CEO of FTX, believes such a disaster is due to a lack of supervision and poor record-keeping. He numerous mismanagements leading to the disaster, including concealing misuse of customers' funds through software, using unprotected group emails, and communicating using applications with auto-delete features that restrict access to FTX records.

Platform customers, unsecured creditors, must wait in line to receive whatever assets the court may take from FTX based on priorities established by equitable principles. The bankruptcy has highlighted an $8 billion shortfall. After the fall of FTX, it will be more difficult for crypto exchanges to gain trust.

Industry experts are now predicting a "". The cryptocurrency market has long battled to win over investors and authorities. Investor trust in digital assets has weakened in the fallout of FTX, which will likely lengthen the impending crypto winter.

The FTX collapse underscores the lack of investor fund regulation in cryptocurrency markets. The cryptocurrency industry requires more stringent regulation to be rid the market of manipulation, fraud, mismanagement, cyber security risks, and money laundering. What steps will be taken to address these concerns will remain to be seen.

Further Reading:

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Emily Prieur is an IPilogue Writer and a 3L JD Candidate at Queen’s University Faculty of Law

In May 2021, a phenomenal by Keir Strickland-Murphy (Osgoode Law ‘22) touched on the recent boom of Non- fungible Tokens. In this piece, I will recapitulate Strickland- Murphy’s exploration of IP ownership of Non-fungible Tokens and expand on recent developments since May.

What are non-fungible tokens?

Non-Fungible tokens (“NFTs”) are unique digital assets that as a certificate of authenticity for an object, be it physical or virtual. Blockchain acts as a ledger to secure these assets. Blockchains are often relied upon for their security, so much so that certain universities have begun through them. As described in their name, NFTs have unique properties and are not interchangeable. As such, any digital asset can be tokenized through the “minting process”, much like a refrigerator, car, or computer is given a serial number. Unique identification is a valuable tool for the many and auction houses that have started using the blockchain to sell or . The sale of an NFT also includes a smart contract.

Strickland-Murphy noted that and were early adopters of the NFT craze. Since then, public fascination has only grown since then, with celebrities like Jimmy Fallon and Emily Ratajkowski jumping on board. In May 2021, Emily Ratajkowski sold an NFT called “. The NFT came in the form of a digital-only photograph featuring the model. Ratajkowski explained the impetus for its creation in her essay “Buying Myself Back”, where she shares that the photo she shared on Instagram had been hanging in the Gagosian as part of Richard Prince’s “New Portraits” art show. Prince had been putting other people’s photos from Instagram on canvas and re-selling them for $90,000. Given this situation, Ratajkowski’s NFT auction was, as Ratajkowski explains it, an opportunity to reclaim ownership over her photo.

Recent celebrity obsession with the Bored Ape NFTs has further fueled the NFT buzz. A bundle of 101 Bored Ape Yacht Club NFTs recently . The funky cartoon images have caught the attention of . The interest in Bored Ape is almost palpable as the release of the Yacht Club NFTs can be connected to nearly a in the sale of the NFT Ethereum.

If an image is attached to an NFT, does that mean I own the copyright for that image?

Where an NFT buyer has purchased an image, they do not necessarily receive the copyright associated with that image. If we refer to the computer serial number example, just because you own one version of a computer does not mean you own the patent for the underlying software in the computer. In this case, the software would still belong to the software engineers that invented it. Similarly, if you purchase a painting, you do not assume the copyright over that painting once you have purchased it.

In Canada, an is necessary to transfer copyright from an artist to a purchaser. Therefore, the purchaser of an NFT will only receive the underlying copyright when the smart contract accompanying the NFT expresses this. Of course, unless waived by the artist, the moral rights associated with the artistic work remain with the artist. ensure the integrity of the work, and, when reasonable, the artist’s right to association with their work by name or pseudonym.

What about copyright infringement?

The images associated with NFTs have caused some confusion. An NFT seller must hold a copyright in the image associated with the NFT they are selling. To “mint” an image as an NFT, it is crucial that a seller holds the copyright or a license. However, as long as the seller is the copyright holder, several NFTs can be associated with the same image. In short, NFT sellers can sell as many NFT’s associated with a particular image as they wish, so long as they hold the copyright to that image. If they do not own the copyright to an image, they cannot tokenize it into an NFT and lawfully sell it.

Although NFT’s are a relatively recent addition to the investment scene, numerous lawsuits involving their associated copyrights have already emerged. Rapper Jay-Z Damon Dash, co-founder and shareholder of his record label RAF Inc., for attempting to mint one of his music albums, Reasonable Doubt, as an NFT. The court held that Dash does not own a copyright to the album simply by being a minority shareholder in the record label that owns it. As such, he cannot, in the court’s words,.

Quentin Tarantino is at an impasse with his efforts to profit off the booming NFT industry. Tarantino is embroiled in a legal dispute with the film production company Miramax after announcing that he would be auctioning off excerpts of his original Pulp Fiction screenplay, which he touts include “secrets” about his creative process. that Tarantino does not own the rights to the screenplay and, therefore, selling these secrets through an NFT would constitute copyright infringement.

Old Laws Protect New Trends

Despite the law’s reputation as conservative and , in the case of NFTs, old copyright laws have proven to be tremendously practical. Although the world of blockchain is exciting, it is at this junction that potential NFT sellers should take a moment of pause amongst the excitement to contemplate the legal implications of selling NFTs with legally protected works. When infringing a copyrightable work through the minting process, one must balance the cost of copyright infringement versus the value of the NFT itself.

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Prior to the panel discussion on blockchain and digital identity, the audience watched a about the vastly complex, amorphous concept of blockchain. It highlighted the potential blockchain has to connect Canadians and explained the idea of a “digital ID”, including the requirement for verification by multiple factors. The video promised that blockchain is a secure way to go about our business, with the potential to create new possibilities that aren’t available in our current brick-and-mortar world.

We then turned our attention to the panel of experts: Chetan Phull, Principal Lawyer at SmartBlock; Karim Hamasni, Development Lead, Crypto Asset Innovation at RBC; Taha Jalil, Software Developer at Coinberry; and Neissan Monadjem, Senior Advisor for Blockchain and Fintech. The moderator asked a series of questions, and the answers I found most interesting were those related to the role of governments and lawyers in making sure blockchain is secure, beneficial for society, and widely adopted.

Monadjem is from Brazil. He explained how blockchain has been available as a tool for filing tax returns for years now in his home country. Yet, for many reasons, most of the country has refrained from taking part in this exciting wave of fintech. He says one major reason was the lack of education about the new system and its potential benefits when it first became available. He hopes that in Canada, the government will see the benefit in collaborating with developers to foster education, incentives and policies around the integration of blockchain technology in Canadians’ day-to-day lives.

One challenge that proponents will face is reconciling new applications for blockchain technology with our current privacy law framework. Phull discussed the recent complications with Libra, Facebook’s cryptocurrency. He explains that Facebook promises to respect your privacy by not copying any of your data for its records, yet anti-money laundering laws require that Facebook keep diligent records. In a world where we want secure, yet efficient transactions, we need regulations that reconcile society’s need for accountability with most people’s fundamental desire for privacy.

One area that might show improvement on the privacy front is data collection for targeted advertising. The panelists believed that implementing blockchain technologies could allow for users to own their data and even monetize on it if they so choose. By taking out the middle player in a transaction, you take out the company that will exploit your data. Instead, you as the user have the potential to sell your data in exchange for personalized advertisements, that you might actually want to see. If citizens are concerned with privacy, it’s possible that having the government require blockchain technologies to give users ownership over their own data collected in the course of a transaction would provide a great incentive for blockchain adoption.

How about blockchain’s effect on governmental processes? Monadjem, in a revolutionary and impassioned moment, suggested to the audience that Canadians could have daily, or even hourly elections. By voting through their blockchain keys, Canadians could provide immediate feedback to our decision makers, who could know exactly where they stood with voters after each decision or speech. Monadjem points out that citizens could hold politicians accountable this way, abandoning the outdated practice of voting every four years in favour of daily or even hourly votes that could change who is in power.

Phull pointed out that this would require extraordinarily complex constitutional changes, especially if these votes could take someone out of their elected office. And, while it might enhance voter participation, it might also increase the risk of vote-buying on certain issues. Or, even worse, apathetic young voters’ phones might be co-opted by opinionated parents across the country, skewing the votes. The debate between Monadjem and Phull was an interesting glimpse into the vastly different outlooks between those behind the technology, and those responsible for regulating it. Phull acknowledged that lawyers are the ones who have to point out every obstacle, and then still hope that computer scientists and engineers will want to go ahead despite those obstacles. Monadjem agreed and shared his view that computer scientists and engineers need to aim high, and think beyond our current frameworks in order for technology to constantly improve.

This is my second time attending an event presented by blockchain experts, and I’m still wrapping my mind around the concept. However, even though there may be more questions than answers about where blockchain technology can go at this point,one consensus we have reached thus far is that regulatory players and those in the technology space need to collaborate more.” Both parties can learn from each other about the complexities of developing new technology within the constraints of the law. Soon, blockchain technology may be central to our interactions with government, and with each other.

Written by Rachel Marcus, Guest Editor of the IPilogue and JD Candidate at Osgoode Hall Law School.

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The speakers briefly introduced cryptocurrency as a digital currency that relies on encryption techniques to generate and verify the transfer of funds. Blockchain is the underlying technology that records and keeps a ledger of cryptocurrency transactions. Several relevant legal issues surrounding cryptocurrency were raised, and it quickly became clear that the law lags behind technology in this space. As Phull mentioned, this is still a very niche area of the law but there is a growing need for related legal services and a greater understanding of common issues. Specifically, issues with cryptocurrency contracts and litigation and the recent anti-money laundering legislation draft were discussed.

Cryptocurrency Denominated Contracts

While now regularly pay for goods and services in cryptocurrency, contracts involving cryptocurrency as “money” present a unique challenge. Under�� of the Currency Act, “every contract […] for money and every transaction, dealing […] with money [….] shall be made […] in the Currency of Canada” unless executed in the currency of another country or a “unit of account that is defined in terms of the currencies of two or more countries”. To date, cryptocurrency – including bitcoin – is not officially considered currency in any country.

We learned from the Conference that it is best to treat cryptocurrency as a commodity to ensure that contracts are enforceable. Still, there are challenges related to the treatment of cryptocurrency as a commodity. Recently, the regarding Token Funder Inc. required that the initial token offering price be fixed to Canadian fiat currency instead of Ethereum to avoid the question of whether Ethereum should be considered “money”. Furthermore, suppliers of cryptocurrency are required to charge GST and HST on their payments, adding another hurdle to using cryptocurrency as payment in contracts.

With respect to enforcing cryptocurrency contracts, treating cryptocurrency as a commodity is similar to the treatment of foreign currency “as a commodity in the sense of an object of a commercial transaction” (). Therefore, should a dispute arise between two parties in a cryptocurrency-based contractual agreement, the aggrieved should not seek damages. As Phull describes in his , seeking specific performance or mandatory injunction is more appropriate.

Significant progress and clarity with respect to the Currency Act will be required over the coming years, as more individuals choose to use cryptocurrency as a means of monetary exchange.

Anti-Money Laundering Draft Legislation

Hartzman discussed how companies that engage in cryptocurrency exchanges act in a quasi bank-like role, yet businesses dealing in cryptocurrency are not currently required to have a licence to practice. CoinSmart, although unlicensed, is unique since it is the only Canadian company dealing in cryptocurrency that is backed by two Canadian banks (DC Bank in Vancouver and Luminis Financial in Toronto).

An absence of legal rules governing these businesses could allow for criminal activity and money laundering. Phull referenced the , which is set to be amended to impose more regulations on “money services businesses”. In a in the Canada Gazette, there is a summary of the proposed amendments for the legislation. Its objective is to create more regulations for decentralized virtual currencies, which are “convertible” – that is, exchangeable for funds. Convertible virtual currencies are vulnerable to manipulation by criminal organizations who . These tokens are attractive based on their anonymity, global accessibility, and simplicity of transactions that do not require an intermediary.

The legislation proposes that businesses “dealing in virtual currency” would be “financial services”. As a “money services business”, businesses would be required to fully comply and register with FINTRAC. For example, when entities receive more than $10,000 in virtual currency, there are reporting steps that the business must take. By monitoring suspicious transactions, this new provision will allow for some level of legal oversight, but it may not be enough.

Businesses dealing in cryptocurrency need to be fully recognized as a unique business. There is tension between whether Ontario’s or the should govern these businesses. Instead of tweaking one piece of legislation to include cryptocurrency regulations for two very specific crimes, it may be necessary to draft novel legislation that explores the many ways that individual users and businesses engage with cryptocurrencies.

If cryptocurrencies continue to become more accessible to the general public and are increasingly used as “money”, it will be necessary for the law to adapt to the technology. As the law currently stands, it is important for businesses to be aware of the potential complications that cryptocurrencies pose. We will continue to watch for innovation and new legal precedents in this area of law.

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Written by Lauren Chan and��Summer Lewis.�� Lauren Chan is an IPilogue Editor and a business student at the University of Guelph.��Summer Lewis is an IPilogue Editor and a JD candidate at Osgoode Hall Law School.

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