Cryptocurrency and Monetary Instruments
Cryptocurrency and Monetary Instruments
Part 4 of the “Smartblock Law Guide to Cryptocurrency Contracts, Litigation, Monetary Instruments, and Financial Institution Regulations in Canada”
Chetan Phull · April 26, 2018
The “Smartblock Law Guide to Cryptocurrency Contracts, Litigation, Monetary Instruments, and Financial Institution Regulations in Canada” is comprised of:
Three monetary instruments are defined in the Bills of Exchange Act: bills of exchange, cheques, and promissory notes.
These instruments are respectively defined as follows:
- 16 (1) A bill of exchange is an unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay, on demand or at a fixed or determinable future time, a sum certain in money to or to the order of a specified person or to bearer.
- 165 (1) A cheque is a bill drawn on a bank, payable on demand.
- 176 (1) A promissory note is an unconditional promise in writing made by one person to another person, signed by the maker, engaging to pay, on demand or at a fixed or determinable future time, a sum certain in money to, or to the order of, a specified person or to bearer.
II. Cryptocurrency “inland” monetary instrument
We believe the test for an “inland” instrument would involve at least the following two steps:
- the cryptocurrency must be capable of being “a sum certain in money” as required by each instrument of the Bills of Exchange Act (see the above definitions of each instrument); and
- the cryptocurrency must be an actual fiat currency, pursuant to the Currency Act, s.13(1). Tether and other altcoins tied to BitAssets (i.e. SmartCoins) would not appear to meet this requirement.
Further to our discussion in Part 1, both of these steps at present would fail.
III. Cryptocurrency “foreign” monetary instrument as distinguished from money itself
For practical purposes, it may be possible to bypass the “inland” test if certain steps are taken to ensure that another country’s law of negotiable instruments applies, i.e. by drawing a “foreign” (as opposed to “inland”) instrument (see ss.160, 24(2), 177(2), 186). This possibility merits further research.
We caution, however, that any attempt to create a cryptocurrency monetary instrument not be confused with creating something that is considered cryptocurrency itself. For example, a hardware wallet meant to function as a physical gift card may not simultaneously be capable of being a bill of exchange or a promissory note.
Consider Bank of Canada v. Bank of Montreal,  1 S.C.R. 1148, 1977 CanLII 36 (SCC) ("BOC v. BMO"), regarding the distinction between legal tender as a form of “money”, and monetary instruments.
This case involved a rare 4-4 split of the Supreme Court of Canada. The dominant opinion found that a promissory note could itself be legal tender. The dissent held that money itself must be distinguished from promissory notes.
Parliament subsequently gave legal effect to the dissent through statutory amendment.* The net effect is that Bank of Canada notes are now officially legal tender (which is a subset of “money” per the discussion in Part 1), and are neither bills of exchange nor promissory notes.
Consider also Grant v. Ste. Marie (Estate of), 2005 ABQB 35 (CanLII) at paras. 25-26, which distinguished bills of exchange from legal tender on the basis of the rights attached to each.
In sum, a hardware wallet intended to function as a physical gift card or physical cash should consider:
- legal tender (a form of money) is distinguished from monetary instruments by statute;
- different legal rights apply with respect to legal tender (a form of money) as opposed to monetary instruments;
- the status and enforceability of cryptocurrency as “money” is uncertain (see Part 1);
- cryptocurrency cannot be the subject of an inland instrument; and
- it is uncertain whether cryptocurrency can be the subject of a foreign instrument.
IV. Cryptocurrency “foreign” monetary instrument as distinguished from a security
A hardware wallet treated as a monetary instrument could—purely as a consequence of such treatment—also be a “security” under Ontario’s Security’s Act. (See our article, “Security Tokens” – A Developing Concept”.)
Consider that the definition of “security” in this statute includes a “document” evidencing title to or interest in property (Securities Act, R.S.O. 1990, c. S.5, s.1(1) “security” (b)).
It is plausible that the blockchain ledger could constitute such a “document”. Although the only internal definition of “document” is restricted to the Part regarding civil liability for secondary market disclosure, that definition includes “a communication prepared and transmitted only in electronic form” (OSA, s.138.1 “document”).
On this basis, consider that such a “document” could potentially point to the hardware wallet as a security where the hardware wallet is subject to trades (Pacific Coast v. OSC, 1975 CanLII 686 (ON SC), aff’d 1975 CanLII 44 (ON CA), aff’d 1977 CanLII 37 (SCC); OSC v. BCCO Ltd., 1979 CanLII 2000 (ON SC)).
It will be open to future cases to consider whether a hardware wallet constitutes a security, and whether any complications arise if it concurrently exists as a monetary instrument.
Any conflict between existence as a security and a monetary instrument would require deeper analysis, because this scenario invokes a division of powers issue.
The federal government has exclusive jurisdiction over currency, banking, bills of exchange and promissory notes (Constitution Act, 1867, 30 & 31 Vict, c 3, ss.91 at items 14, 15 and 18). Meanwhile, the regulation of securities is largely a subject of provincial legislation (see our article, ”Overview of Securities Regulation in Canada”).
The court would need to decide which legislation governs on the basis of the hardware wallet’s “pith and substance”. This is a fact-specific analysis that demands careful legal consideration by skilled counsel.
Cryptocurrency does not naturally fit within the present law of monetary instruments. Legal consideration is therefore essential if you are involved in the creation, or use, of a cryptocurrency monetary instrument.
We invite you to consider our service offering for “Cryptocurrency monetary instruments”.
* The dominant opinion in BOC v. BMO heavily relied on a definition of “notes”, in a prior version of the Bills of Exchange Act, s.2, containing reference to “notes of the Bank of Canada payable on demand and intended for circulation in Canada”. After this decision:
- the definition of “notes” within the Bills of Exchange Act was amended to exclude this reference;
- the reference was inserted verbatim into the definition of “legal tender” within the Currency Act, R.S.C., 1985, c. C-52, s.8(1)(b); and
- the Bank of Canada Act was amended to state that the Bank of Canada’s notes are neither promissory notes nor bills of exchange (see Bank of Canada Act, R.S.C., 1985, c. B-2, s.25(6)).
Continue to Part 5: Financial Institution Regulations.
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