Pulat Yunusov and Alyssa Tomkins

1Hello, I'm your host, Pulat Yunusov. This episode is supported by my law practice. Once in a while, I record this show for you. I love it, but my day job is commercial litigation, and I've been doing it for 12 years. I'd like you to know that your referrals are safe with me. You can find my contact information on my website at www.lawco.ca. Thank you very much and enjoy the show. Hello everyone, this is part 2 of the fascinating conversation between Alyssa Tomkins and me about cryptocurrency and law. And without further ado, let's start with a question that Alyssa has about something.

3Mm-hmm.

5Good question. It's a question about human psychology, I think, and it's a question that we have to— when we answer this question, we should remember that crypto is a product of human mind, and the intended user of crypto and cryptocurrency and blockchain technologies is a human, is us, a person. And crypto wondering about good or beneficial or useful, socially acceptable uses and the purpose of cryptocurrency is the same thing as wondering about good and socially acceptable and beneficial and valuable behavior of people. People can harm and people can help. They can do both. People can be good, people can be bad. People can, can do bad things, people can do good things.

6Any product of human mind will do exactly what its intended user guides that product to do or directs that product to do. Now, this is a philosophical intro. I will descend to earth and I will speak about specific examples, but I just wanted to start with that brief philosophical introduction. And I wanted to remind everyone that in my opinion, products of human mind cannot be good or bad. It's what people— it's the use that people put them to. That's my position. So now, more specifically, I really believe, just as I said in my bio in this book, I really believe that cryptocurrency, and specifically the technology behind cryptocurrency and blockchain, is really the greatest invention of the 21st century so far.

7And the number one purpose of this technology right now, the number one use to which we are putting this technology right now, is a huge test. It's a huge massive scale proof of concept. It's the earliest possible application of any technology. It's the earliest possible application and use of any product of human mind. It's testing. We are proving the concept right now, and this is— call it a beta test. I don't know if our viewers remember, but for the longest time, when you went to Google, to the search engine, they had word— the word beta right next to Google. And in technical terms, it's a very, very specific term of art. Beta is a stage in testing.

8There is a stage of— in testing of a computer product, of a technology called alpha. That's the first stage where it's really raw and you don't have a lot of users testing. Then you have the beta test when you open it up to the world at large. You let everybody in, but you give them notice. You tell them, you are using it at your own risk. We're not promising anything. We're not giving any warranties. It's beta testing. That's what Google did with that beta notice. It was embedded in their logo for, for years. I don't know when they stopped being a beta product. I don't remember. A long time ago, probably. But today cryptocurrency is in beta stage.

9The alpha stage is usually not open to the public. When you finish your technology product, when you finish your computer program and you want to test it, if you first— you go to the alpha stage and you have a limited number of trusted testers that will be trained to test, that will be trained to look for bugs and to give you back the feedback that you need. The second stage is beta, and the beta is when you throw it out to everyone, throw it out into the wild, and and then you just expect the world to give feedback in all kinds of formats and forms, including political statements, you know, congressional hearings, legislation, whatever.

10That's also a form of feedback to technology. So today cryptocurrency is in beta stage of testing. It's in the stage of proving the concept. So whatever nefarious uses it is put to is a byproduct of testing. The criminals are known to be one of the earliest adopters of technology. Why? Because they have the lowest barriers to entry. They don't need to comply with the laws. They don't need to do due diligence. They don't need to exercise due care. They live outside of all of these notions. They don't— they're not participants in the system, so they can try anything, whatever they want, and they can do anything with whatever they want. They are not constrained.

11So of course, when a new thing comes along, the first people the chances will be very high that a lot of people who will try it will be such people, because they simply have the lowest transaction cost, the lowest barrier to entry. So our perception of this technology will necessarily be influenced by this higher likelihood of criminal participants. It's simply a perception bias caused by the beta testing nature of this technology today. Just because our imagination is limited and we cannot see uses for this technology beyond what is apparent and what is in the media, and just because most, you know, a lot of criminals use it, doesn't change the truth or the nature of this tech.

12And let's talk about the actual nature of this technology, and let's talk about what potential uses it can be put to that are actually in good standing, in good standing with how we view the world, with our system of values and laws. Well, first of all, have you ever heard the expression software is eating the world? Yes. So this expression came out of Silicon Valley, and this expression is the mantra of the modern startup revolution. What it simply means is that almost everything in our life can be automated or replaced with software, and it consequently almost everything in our life can be done in a new way And consequently, almost everything in our life, almost every process, almost every transaction, almost every interaction, almost every experience in our life can be converted into a startup and monetized.

13This is the basic foundation of modern digital economy. Whether we like it or not, we live this reality. We have lived this reality for 2 decades now, more than 2 decades. Software is eating the world. Now I want to say something about the world and about software and about the software appetite, about the size of software's mouth and its teeth and what it actually has broken its teeth on. The one thing that software has broken its teeth on and couldn't eat is money. Until recently for various reasons. We can talk about that also. So to preface this, this discussion, I want to say that there are largely two kinds of money. Most people have absolutely zero idea about this.

14One money— one type of money, I'm sorry— one type of money is banknotes and coins. This is the only type of money that you will ever have in your own possession and physical control. You know how in civil procedure we have this expression power, possession, control, right? Well, power and control means that you can tell— it may be in somebody else's possession, but you can tell them to give it to you and they will give it to you. Possession is different. Possession means you have it and you can produce it immediately. It has to do with discovery and production of records and documents. Now, with money, the only kind of money that you have is in your possession, and most of us don't have it in our possession anymore anyway, is banknotes and coins.

15This is the only type of money that we can immediately produce. That we can immediately initiate a transaction with. No other money— no, the other type of money is not in our possession. It is in our power and control. It's called deposit money. It's called bank deposit money. Bank deposit money is in possession and control, not power, but in control of the banks, commercial banks. It never ever lands in your possession. You never have actual possession of bank deposit money. So you may be a proud owner of a bank account with a magnificent balance of $10 million, and you may, may be walking around and saying that you have $10 million in your possession, but that's not true.

16You don't have a $10 million You don't have $10 million in your possession. You have an account receivable, speaking in accounting terms, or a liability owed to you by the bank equal to $10 million or valued at $10 million, but you don't have $10 million in your possession. And there is a difference between control and possession. Yes, it is in your control though. You can go and ask the bank to give this money to another bank. Why am I saying to another bank and not to another person like you? Because the other person that you want to pay will also not have that money in their possession. Banks are not capable of giving money to their customers' possession unless they will pay it out in banknotes and coins.

17A check is not money. A check is a letter. It's a letter to your bank that instructs your bank to transfer some money from your account to the account of the bearer or to the account of the person that you name in that letter. But neither person, neither the payer nor the payee, will ever have possession of that money. They will have control of that money. So the way the system is designed, only banks are allowed to have possession of money. In our free capitalist society, we are not allowed to have possession of our own money. We are allowed to have control, but the difference between possession and control is stark. Remember the expression possession is 9/10 of the law?

18There is a reason for that expression. There is a difference between the law of physics and the law of, of humans. You and I, Alyssa, practice the law of humans. We don't practice the law of physics. We don't practice the law of nature. We apply the law of nature when, for example, we are careful not to jump out of the window from the 10th floor because we know the law of nature will kick in and we will be smashed on the sidewalk. So we know how to apply the laws of nature. We apply them daily just to survive. But we also apply the laws of, of humans, the law of human societies. And the law of human society is very different.

19The law of human society is aspirational, it's declaratory. We as lawyers are used to thinking that if we get a court order, it's like we change the reality. No, we haven't changed the reality. And we know that because we know that enforcement can take years or may never happen. That's why lawyers routinely negotiate judgments down to lower amounts just to avoid enforcing. There is an actual discount on judgments, unless, you know, it's a judgment against an insurance company, but doesn't matter, right? You know what I'm talking about. So there's a difference between laws of nature and laws of humans. And deposit money, bank deposit money, is now physically in your possession. It's in your control according to the laws of humans.

20But the law— but the laws of humans, as we have just shown, are different from the laws of nature, because the laws of nature work 100% of the time. The laws of humans don't work 100% of the time. There is a discount on the laws of humans, always. They're always on sale. They're no— they're never at face value. This is the reality of the laws of humans. Unlike the laws of nature, there is never a discount, there is never a sale on the gravity, on the law of gravity. It's never conceding anything. You will never negotiate it down to a smaller amount. You will always die when you jump out of the 10th floor, always.

21You will not always have to pay a million dollars on a million-dollar judgment. Sometimes you will get away with paying $900,000. So the laws of humans are almost always on sale. There's almost always a discount on them. The laws of nature are never on sale. So the difference between possession and control is that possession is subject to the laws of nature. You always get 100% of the, of the face value. $100 note is a $100 note. There are some complexities there. I've lived in a country where $100— well, 100 ruble note suddenly was worth zero, right? But let's assume that those things don't change. So possession is subject to the laws of humans— I'm sorry, nature, no discount.

22Control is subject to the laws of humans. So we all probably heard, or many, many of us may not have heard, how when a certain country was sanctioned a few years ago, a certain country in the Middle East, people with names from that sounded like names from that country suddenly started receiving letters from banks telling them that the bank close their account and doesn't want to do business with them anymore. I don't know if you've heard that, Alyssa, but this happened in Toronto. Maybe it didn't happen in Ottawa. Ottawa is a better town, we all know that, but in Toronto it happened. So this shows to you how they how, for example, control is not 100% of the face value.

23You think, you expect certain things from your bank account but your expectations are not 100% fulfilled when you get a letter that tells you to close that account. The same thing happens with freezing money. In my practice, I've seen parties wrongfully take money out of somebody's account on false pretenses with improper garnishments, for example, things like that. People manipulate and abuse the system of human laws. To improperly garnish bank accounts. So someone would call, a client would call and say, look, I just noticed my bank account is down to zero, like somebody took all the money. I, I did. And I, and I told him, when I looked at the statement, I told him, it's not the someone, it's the bank.

24The bank took your money, didn't ask for your permission. That's, that's what— that's how control is different from possession. Yeah, you have control. You don't even have control, this is power. This is more like power. You, you have power, but Your power is not the same as possession. So there are two types of money: banknotes and coins. You have possession, power, and control over them. And then there are bank deposits. There is bank deposit money. It's issued by the central bank of the country, Bank of Canada in our case. It mints this money. It's purely digital. It's an entry in a database that is tightly controlled by Bank of Canada and commercial banks. The only customers that are allowed to have— that are allowed to receive this money are commercial banks, right?

25And then commercial banks are allowed to open accounts for mere mortals like us, but then we're not even— we cannot take this money, we cannot take it into our possession because this money is kept as database entries in a system that we do not have access to. Like, literally, you cannot log in into their backend system. You think you can log in into your online banking, but you know, one day you log in and your money is not there because of compliance risk. Not even compliance with an order, but compliance risks. So banks don't want to do business with you anymore because they see you as a compliance risk, or for various other reasons.

26But I don't want to even cast this light on, on, on this on this, on this example as if Possession of your money is necessary only to escape compliance or to reduce being a victim of overcautious banks. No, it's not even about that. It's about software eating the world. The reason this— so first of all, the reason software didn't eat money that much is because banks control the money. Most money is not banknotes and coins, and banknotes and coins cannot be eaten by software simply because they are not digital. And the digital form of money is tightly controlled by banks that are completely happy with the way things are. And they— you cannot start a bank easily.

27You cannot start a banking startup. It's just incredibly hard to start a bank. I invite everyone to watch my interview with Evan Thomas, who is chief of legal for Wealthsimple Crypto here in Toronto, and we actually talked about that. Is it hard or easy to start a bank here? Now, that's why software didn't eat the world of money because banks didn't let it. I mean, there were some attempts, whatever, but there is no Uber of banking, for example, for good reason. And if you want software to— but the fact of software eating the world has been so tremendous. It defines us today. It's part of our identity everywhere outside of money, everything outside of—

29Yes. So crypto is like bank—

31to exactly

33Yes, it's, it's, it's exactly like Banknotes suddenly became digital. Remember, there are two types of money: banknotes and bank deposits. But, and banknote software cannot eat banknotes because they are physical, they're not digital. But somebody solved that problem. Banknotes can be digital. So imagine banknotes, but they are digital and they are open to being eaten by software.

35Yes, it basically is a computer simulation of a banknote. It means that banknotes can be programmed now. Remember I told you if you write a letter, put it on your desk, it's not going to do anything. It's going to sit there for a millennia until it falls apart. But if you can schedule emails, for example, so digital things can have behaviors added to them, arbitrary behaviors. Now we can add arbitrary behaviors to a $20 note because we have it in the digital form. It's not called dollars though. It has many names. There are many cryptocurrencies. Software opens up completely new universes to things. Could you imagine 20 years ago that you could pull out, out of your pocket, this panel made of glass and metal, not even press buttons, but just tap your finger on it a few times, and a car would pull over 2 minutes later?

36And they will already know who you are, and you will know who they are. You will not need to talk to them. You will open the door, get on the seat, get in the car, shut the door. They will know where to take you. You will get out of the car, leave, and go. Could you imagine that 20 years ago? And this is the one of the most banal, corny, cringy, trivial examples I can give you. Like, the— our entire world has changed. It's part of our identity. It's part of who we are because software has eaten the world. Now imagine how our world will change if software starts eating money. Money is actually 90% of our world is money.

37and it hasn't even started doing anything with money in any significant, any significant extent yet, the software. But cryptocurrency allows that to happen.

39They're not in the picture.

41There are no banks. Why do you need banks? Why do you need banks traditionally? Why have we needed banks? Because our— so the— look, first of all, even now you don't need banks if you use banknotes, right? And your question will probably be, why do we even allow banknotes if all of the uses I can think of are nefarious.

43already happening.

45That's already happening, right? Because the society doesn't want to relinquish those controls over us. So at some point, society has made a decision, whatever, let's call it society, Society— let's, let's pretend that we participate in that, right? So the society has made a decision that people are not to be trusted with possession of money. Or maybe it was a natural development. Maybe people thought that they don't want to deal with money because it's risky and they can lose it and it's icky. And why don't we have banks do that? Because they already give us loans, they're already experts on money. So what happened first was basically people would store their gold or cash with banks and then just send letters called checks to banks directing them to make payments on their behalf.

46So banks are like travel agents. Banks are travel agents. But when was the last time you used a travel agent? When was the last time you used a travel agent? Only if you are a VIP, if you have some kind of luxury level of needs, you will use a travel agent, right? Right now everybody goes to— or goes online to book their travel because online software has eaten that world. Software has eaten the world of travel. Now if you are in a different financial category different from us, different from you and I, you don't even want to go online. You just have a number, you call the number and you tell the guy or, you know, the agent on the other side, you tell them, okay, I want to go to the Maldives approximately around that season, find me something good and just do it all for me, and then send the cab to pick me up, take me to my private jet, right?

47So this is going to happen to the financial system. People are gonna be their own travel agents with cryptocurrency. Traditionally, you needed banks to pay people because banks had the actual possession of your money. Control is not enough to pay. You, you need to exercise control. Control implies that you have an agent, so you would send an instruction to your bank to take your money from its possession and pass it on to the possession of the, of another bank that your payee uses, your payee's bank. So banks— money changed hands, yes, but those were hands of banks, not your hands. You never touched money. Even if you could touch digital money, you wouldn't be able to.

48Now, in this system, like banknotes, you don't need travel agent. You don't need to instruct someone to make payments. You have to do payments on your own. Or, or if software properly eats this world, you will be able to do— to instruct your virtual agent or an AI that will have control over your money. You will be able to say, hey Siri, pay this guy this much. Or, hey, Siri, and describe a more complex transaction. Or you can type it up, right? Just like we do with our travel now. We go online and there are fairly simple to more complex interfaces, forms that will fill out to plan our travel. We don't use travel agents anymore.

49I'm always wondering when I pass by those retail travel agencies in malls, why are they still around? Well, I mean, why are 15% of the population not vaccinated yet? I don't know. I mean, people have different preferences, right? Whatever. So but the software has been eating the world for decades now, and we are reaping that it's completely changed who we are, but it hasn't really touched the money side. The banks are resting, the banks are sitting in comfort and in full confidence that this system will continue. This is a shockingly reckless attitude. That betrays complete lack of understanding of history. Once you release software into the world, like a virus, it will eat everything.

50The only reason it hasn't eaten the financial world completely yet is because it is a tightly controlled system that is surrounded by by several walls built by the government, by the consortium of the government, the central bank, and commercial banks. And because the money is so critical to the functioning of society, national security, economy, right? It's so critical. That's why the, the walled garden. But humans tend to like freedom, so they tend to come up with things to escape from walled gardens, right? And like, this is happening now. And it's only a proof of concept stage.

52There are only two ways to freeze crypto. Well, first of all, let's just remind ourselves how, how to freeze Canadian dollars. One of the reasons the bank deposit walled garden exists is because it plays well with the justice system. The fact that money is not in your possession means that the just— and, and the fact that the banking system is fully compliant with the justice system. They work tightly together and they're really part of the same order. Those two facts mean that court orders work with banks. You serve the— as long as you serve the bank with court order, they will immediately comply. The money is not in your possession. They will put a flag on your file, and it means they will not freezing money Freezing traditional money simply means that the bank will refuse to follow your instructions.

53That's all it means. It's already not your money. It's never been your money in the sense of possession. It was— you, you just had control over it, but you're just losing control. They will refuse to follow your instructions. That's all freezing means.

55And with crypto, because there is no bank and because there is self-custody presumably. There's no bank and you're not part of the system. Now suddenly you're, let's say, you're a rogue or someone, right? You're not only not part of the system, you're opposed to the system. Of course you're not going to be able to freeze crypto in that sense where you just send an aspiration printed on a piece of paper with a stamp on it to the target, to the intended target. And tell them, okay, you have to comply with this aspiration. Why should they, right? They won't necessarily do it. So there are two ways to freeze cryptocurrency though. It's possible. So number one, you will be surprised how many people don't have actual possession of their crypto.

56You would think that crypto is designed for self-custody, but no, people still— it just shows that banks are not completely useless also. There is a reason why people enjoy banks and use banks, because people don't want to have risks or take risks of self-possession, self-possessing valuables. Imagine you have $50 million worth of jewelry. Probably going to be a little bit uncomfortable to keep it in your custody. You probably want to have a safe deposit box or something. So there is definitely demand for third-party custody of valuables. And Bitcoin or other cryptocurrencies, just like jewelry, just like a suitcase of cash or banknotes, it's a valuable property. And sometimes you don't have— there is cost to keeping custody of value, custody of valuable assets.

57There is cost to that. So sometimes you want to delegate that. So people delegate custody of their crypto to agents that will play well with the justice system. For example, because they are domiciled in the jurisdiction of this justice system and they have physical offices and they are organized they, they take advantage of some kind of corporate statute or organize themselves and enjoy the benefits of incorporation, so on and so forth. So they will play along with the system. For example, exchanges. They're just like Toronto Stock Exchange, but they're exchanges for cryptocurrency. They will accept custody of your crypto, hold it for you, for example, because down the road you want to sell it for Canadian dollars.

58You still need to pay Canadian dollars in Starbucks or when you want to buy a house, right? So sometimes people want to sell their cryptocurrency for Canadian dollars. One of the easiest ways to do it is to transfer possession of their cryptocurrency to an established exchange, and then the exchange will then— will have possession of your cryptocurrency. And at some point you can ask exchange or send an instruction to an exchange to sell it for Canadian dollars. Then they will have your Canadian dollars in possession after that sale, and then you can ask for a withdrawal of that Canadian dollar amount to your bank account. So you will never have possession of Canadian dollars.

59You will have possession of crypto until you relinquish it to the exchange. So One way to freeze crypto is to find out— and you have to do the same investigation that you would do with tracing any asset— to find out if cryptocurrency in question is in possession of a cooperative party in your jurisdiction. That is the easiest way, right? So let's say Wealthsimple is one such exchange. And if crypto is in possession of Wealthsimple, Wealthsimple, it will definitely play along with the justice system here. You'll just get an order, and then you get served that order on Wealthsimple. That's it, it's done. They will flip the switch. It's just like a bank, okay?

60You can still do the same thing with crypto. You can have a bank-like relationship with a custodian, number one. Number two, is the method number 2. You know, if, if crypto is in possession of the person, of the individual, the good old breaking the legs method works. And don't take me literally, but I, I do suggest violence, state violence. Or consequences of contempt order. It is a form of violence because incarceration is a form of violence, right? So let's say you obtain a freezing order. The person— and the order directs the person whose custody you think or suspect or know the crypto is to turn over cryptocurrency to a third-party custodian, and the person doesn't comply with that order.

61And then if you meet the test of contempt, the three-partite test, and you the court finds that person contempt of court, then you can ask for incarceration, indefinite incarceration, until the person turns over the crypto. This is a very interesting topic because we don't have debtor jail. We haven't had that in a long time, right? That's why we consider ourselves a civilized society. But it is quite realistic. I'm not aware of any cases in Canada. In the US I think it happened, but not in Canada as far as I know, where someone was incarcerated as a result of breaching a freezing order or a judgment to deliver crypto and not released until they turned it over.

62I'm not aware of any such cases, but I think it's a realistic prospect. There is a realistic prospect that that will happen, and that will be a form of a debtor prison. You will be, you will be subject to violence until you pay up. So our system is definitely capable of that, and it's probably supportable by case law. It can happen. So they will, they will put the person in jail, and they will keep the person there until they turn over the crypto. What's involved in turning over cryptocurrency? Very simple. Remember I explained about public and private keys? Yep. So you need the public key to pay someone. You need their public key to pay them.

63But public keys are public. You don't need to hide them, you know, unless you don't want random people to pay you. If you publish your public key, anyone can pay you any amount. But private keys are secret, and private keys unlock cryptocurrency, and they allow you to sign cryptocurrency over to anyone. So turning over cryptocurrency to a third party means that the current person in possession of cryptocurrency will give you that string of characters that is the private key unlocking that particular cryptocurrency in question, and then you will use that private key to sign over that crypto to another public key that is in control of your third-party custodian, maybe, you know, an escrow company or someone like that, right, for temporary or permanent possession of crypto.

64So it's a private key, it's a string of characters. You will be looking for that string of characters. You will be— you will demand that the person, the target of your freezing order, say or write or communicate some text to you. That's all that is involved. So you will be forcing speech from that person. It will be forcing speech. So freezing crypto is— unless crypto is in possession of a cooperating third party such as an exchange— freezing crypto is essentially forcing speech. It's like you have to force someone to recite a poem, or you have to force someone to tell you their darkest secret, or like you're forcing someone to tell you if they ever stole from their parents' wallet or something like that.

65It's forced speech. Can our justice system force speech? We will find out, I think, very soon. There is a case going on right now.

67Medjedovic.

69Or Medjedovic, you know, the stress is always a question mark where they put the stress in those last names. So that case, that's the first case in Canada. I think that's the first interesting crypto case in Canada, with all due respect.

71Yes. Yeah, I will. This is what I'm gonna do. I'm going to do this. I'm going to share my screen and everybody is going to see that.

73Case Just one second, one second. Sorry, just—

75Oh, the convoy injunction is not that interesting, actually. I will explain why. It's not— the convoy injunction is not a cryptocurrency case. It's— cryptocurrency is collateral there, purely collateral. It engages cryptocurrency, but it's not a purely cryptocurrency case. It will not have far-reaching consequences for cryptocurrency law. But the Cicada 137 and Medjedovic will have far-reaching consequences in my opinion. So one second, I just want to share my screen. No, I didn't mean to share that. Okay, can you see the CanLII page? Okay, can everybody see the CanLII page? Okay.

77Okay, well, but I think the recording will also show the CanLII screen. We'll find out later. Anyway, it's— I'll also read the citation. It's 2022 ONSC 369, and there are many reported decisions, several reported decisions involving these parties or this defendant at least, so you can just search this defendant's last name on CanLII. Now, this is Stockwoods right here. There is a companion action, and you can— everyone can find out more by just searching for this last name. On CanLII. Okay, so this is what happened here. This is a really interesting case. And okay of course, the, the judge that heard this case and that made very interesting statements, and that will hopefully hear more and make more decisions on this case, is Justice Myers, who was a guest of the show.

78And everybody should watch that episode, it was really great. Discussion. All right, so this is what happened. This guy, he's a Canadian he's really young at the time. He was a teenager, probably 18 or 19, and he's very smart. He I would say he's probably a genius, and he's really good at computer programming, really good at math. And he knew a lot about cryptocurrency. He understood it deeply, and he understands— I don't want to talk about him in the past tense— he understands deeply cryptocurrency, he understands deeply how everything works. And there is another, there is another company or another party here called Indexed Finance. And I'm also sharing the screen here.

79I continue to share the screen, and this is a post by Indexed Finance, and they— here they described what happened between Indexed Finance and Andean Medjedovic. So Indexed Finance is a typical example of software eating the world of money. Indexed Finance is essentially— is it a startup? It's a company that has developed software that allows people to buy a token that represents several other digital assets. It's like an indexed fund or like a mutual fund but for crypto. Different tokens grow and fall at different rates. You know, people by now have portfolios of tokens, different tokens, and there is a demand for a token or cryptocurrency index or for token cryptocurrency mutual fund.

80Type asset. And this company, Indexed Finance, developed a code that created such a token that was a composite. It's actually a fairly tricky problem. How do you create— I already explained that a cryptocurrency token or a cryptocurrency is a computer simulation of money or something of value, how to create a computer simulation of a composite of several computer simulations, right? So these guys solve this problem. They're not the only ones. And of course, all of this is very new. I told you about beta testing. I told you about proof of concept. All of this right now, all of this entire ecosystem is in the proof of concept, in my humble opinion, in the proof of concept stage.

81So these guys developed software that emulated a composite of several cryptocurrencies, and that software relied on some clever algorithms that basically made educated guesses or bets about the value of different cryptocurrencies. And not only, you know, that was just one aspect. Essentially, the guy in question here, the Canadian guy Andean, He obviously, he figured out how indexed finance software works. He understood it very well. I think perhaps, perhaps the source code was public. He probably read the source code. I'm not sure if it was public. In the cryptocurrency world software called smart contracts is usually public. So he understood deeply, on a deep level, how that composite worked. And when he was learning about it, when he was probably looking at the source code, my guess is he found that it allowed certain things.

82The software allowed certain things that if he could execute those things those moves, those trading moves, that he could make money, he could come out ahead. So the way these products and the software works is you can stake cryptocurrency, you can borrow cryptocurrency, you can do different things with your cryptocurrency, with their cryptocurrency that they loan to you. And through these manipulations you can achieve certain index investment or composite investment, and then at some point you can sell their composite token and withdraw Ether. Because at the end of the day just like with regular investments, if you want to liquidate your position, you sell your shares, you get Canadian dollars or American dollars back.

83So in the world of cryptocurrency let's say you want to get out, you want to clear your position, you on the other end of your position, you want to be with Ether. You don't want to be with that composite token or with other tokens. So Ether is like the convertible currency of the crypto world. Also Bitcoin is, but Ether is particularly popular, as I explained in part 1 of this discussion. Ethereum allows completely programmable applications of money. Bitcoin doesn't allow completely programmable applications of money on a native level. Ethereum allows it on a native level, natively permits those completely programmable applications. For that reason, it's just easier to build completely programmable money on Ethereum.

84So a lot of people wrote software for Ethereum that emulates investment funds, mutual funds, banks, insurance companies. All of these things have already been rebuilt from scratch on Ethereum. They already exist. The scale is vastly different vastly smaller than in the traditional physical world. So you will not have, you know, the size of insurance companies that we have like here in Canada on, on Ethereum, but it's still significant— millions, tens of millions of dollars, maybe even hundreds of millions of dollars. A lot of the traditional financial system has already been built from scratch. In the form of software, pure software, not cubicles, but software, automated software on Ethereum. So Indexed Finance is one such project.

85They wrote very clever software that allowed people to trade assets and achieve some kind of composite investment and borrow funds You know, you're familiar with the term margin call when you borrow to invest, right? I don't want to dive too deep in this, but at the end of the day, basically it was a— it is a software product that allows you to do a lot of investment things that you can do in the normal world, but with Ether, the money of the Ethereum world computer, the second largest cryptocurrency in the world after Bitcoin. So this guy Andean, he played with that. He went in, he dived right in, and he played with that, and he found that the— found out a lot about how that software worked.

86And he realized that if he did certain things with that software, if he pressed certain buttons, he could simply come out with a large profit, with a huge profit. So he calls it profit. Indexed Finance called it an attack. They called it a hack. And this is the crux of the issue that Justice Myers started addressing at the injunction stage, at the Mareva stage. This has not been considered on the merits. There was no— I don't think there has been any trial yet or any substantive hearing on the merits yet. But at the Mareva stage, Justice Myers started addressing this. Was this a hack, or was this a profit-generating move, or, or profit-generating cryptocurrency investment.

87So Indexed Finance's argument is that when they wrote the software, they did not intend this use of the software. Lawyers are very familiar with this theory. When I wrote this contract, this is not what I intended. So their reliance on this interpretation of that contract is absurd and criminal and wrongful because that's not what I intended, and that's not what parties who signed the contract intended as well, right? And then a contract that speaks for itself suddenly doesn't speak for itself anymore, and that's how litigators make a lot of money because they advance these theories of how parties never intended, what is plainly written down in the contract. And then you have to look at the context and things like that.

88And Andean and this guy who is now on the run, I think, he he says that it wasn't an attack. He said that he simply pressed buttons that Indexed Finance made available to press. This is a metaphor. He wrote elaborate he did elaborate things, technical things, to achieve the results that he achieved. But he says those buttons were there for anyone to press. It's just that he's very smart and he could find those buttons, but a regular person couldn't find those buttons because they're not smart enough. And Andean theory relies on the doctrine known as code is law, and Indexed Finance theory relies on the doctrine that says law is law.

90Yeah, code is law means simply that if you have a vending machine that has buttons and you press those buttons, and if you press those buttons in a certain combination, the vending machine will give you your Coke for free. It's not theft, it's the design of the vending machine. That's what code is law means. It means this machine according to the laws of nature, will behave this way if I behave that way. If I communicate with this machine— it's a machine, it's not human. This is not coercion. This is not violence. This is not fraud, this is not deceit. It's a machine. You cannot lie to the machine, right? Machine follows commands designed by its creator, provided by its creator.

91So if there is a vending machine that has certain buttons, and if you press these buttons in a certain combination, and it turns out that Maybe, you know, maybe the designer wanted free Coke for himself every once in a while and he left like a secret combination of buttons there that if you press you get free Coke. Is it the fault of the person who is so smart that he could see that, that they use that and take advantage of that? That's called code is law. It means that what you code into your product How you design your product governs what is right or wrong, not what you say you meant or intended, but how you actually design the machine.

92Because machines, again, are not humans. With humans, there is such a thing as abuse, manipulation, deceit, violence, vulnerability, betrayal. Psychology, and there is a huge field for argument over what is right and what is wrong. Machines— none such, no such things exist with machines. With machines, it's always the laws of nature will always work 100%. Jump out of the 10th floor window, you will die. You press a combination of buttons that are programmed to give you a free Coke, you will get your free Coke. So the person who knows this combination, is he a thief? So this case will tell us if this holds up in court, because the plaintiff here— and it's also very interesting who the plaintiff is, and it's also very interesting what the role of the designer of this code is.

93But maybe that's for a separate discussion. But what the court will test is if the Button's rule or the designer's intention rules, or what we in the abstract consider the right thing regardless of the Button's rules, People here saw their positions decline, their financial positions, other participants of this project, right? Other, other investors. They— where did the money come from? It came from others. It's a zero-sum game. It's not like it's a productive enterprise, you know, where you, you know, the new crop has been— has grown next year and you took a little bit more of that new crop, but everybody's still with their initial investments? No, the money came out from other people's pockets.

94Other people invested into this project. Or let's not even use the word invested— other people sent money to the software. That's another— just as, just as a little footnote here, When software eats the world or any part of the world, you can communicate with that part of the world differently, digitally. You could never send money to a program before. Credit cards don't count. I will— I can talk about credit cards, it's a completely different thing. You can never send— you could never send money to a machine before. Or to a program as an input to a program. Anyone who coded knows what an input to a program is, right? You input something like you input 2, 2 plus 2, and on the output you get 4.

95So with cryptocurrency, you can do money as input, not just information, but also money, because money now is information. Suddenly. So people sent money to the software in reliance on this expectation that the value of this asset will increase because the constituent cryptocurrencies will also increase. It's like a composite investment product, right? And of course, this guy where did the money came that this guy made? Probably came from other participants in this, in this scheme. So they are not happy merely by virtue of seeing their positions decline, right? But everybody loses money in the stock market, right? How does the stock market work? When you sell your shares that you earlier purchased for less than what you paid for them originally, right?

96You lose money, but the exact same amount of money ends up in the pocket of someone who is selling, who sold that share at the top. Stock market is also zero-sum game. It's very similar. It's almost exactly the same. I mean, I'm, I'm at a loss to see any difference between stock market and cryptocurrency market. Here.

98So unjust enrichment requires absence of a juristic reason.

100right? So for example, mistake is a classic example of unjust enrichment where You know, you sent an Interac e-transfer to the wrong email address, right?

102there was— that's a classic and easiest example of an— of the absence of a juristic reason for you losing $200, your financial position declining by $200, and some random dude somewhere, his financial position increasing by $200. This difference, there is absolutely no juristic reason for it. Means the law doesn't expect this dude's financial position to go up and yours to go down. You don't expect, he didn't expect, there was no contract between you guys, there was no policy reason, nothing. There was no reason. It was a pure mistake. This is a classic example of unjust enrichment. I mean, they argue unjust enrichment as far as I, as far as I know. But

104Yeah, it's, it's—

106They already got an Anton Piller, so the decision I cited refers to the Anton Piller that was already granted earlier. This decision, if I'm not mistaken, is a more of a Mareva-style decision because they're now trying to trace and freeze the funds in question. So this is actually a Mareva decision, but he goes into some merits and discusses code is law. In fact, if you search CanLII for quote, quotation, open quotation, "code is law," close quotation. I think all you will get is not this decision, actually, in another Medjedovic decision also by Justice Myers, I think, will discuss code as law.

108right? Code is law. Exactly, exactly, exactly. Yeah,

110Yeah, it's not— I don't think it's that straightforward. Of course, as every plaintiff comes in strong, like, I haven't seen a plaintiff that hasn't come in strong and basically saying, this is the biggest injustice since Adam and Eve, and I'm the most entitled person to win here. I mean, they make a really strong argument, and I'm not being sarcastic. Come on, they have a strong argument, and they have excellent counsel, probably some of the smartest counsel in Toronto. So, but I think it's really important to understand the other side, but the other side is not even defending itself as far as I know at the moment, because I think the other side is not cooperating with the court process here.

111I'm talking about Andean. I might be out of date on this. Maybe the latest developments are different. Maybe things have changed. But the last thing that I knew, that there were some issues with cooperating with the court process. Everybody can go and do their own research and find out. It's really easy now with CanLII and everything. What I want to say is that there is a lot of skepticism in the legal community, and I'm tightly involved with the crypto legal community. It's much bigger in the US, by the way, than in Canada. Much bigger. There's a lot of skepticism in the legal community about the code is law doctrine. But I would not dismiss it so easily.

112I would not dismiss it so easily because Code is Law is not arbitrary. Code is Law, the Code is Law doctrine relies on some of the clearest records ever in the existence of humanity. Software code. Software code is evidence of many things, including intention of designers. It's also evidence of reasonable expectations of users. That's the whole point of open source software.

114Yes, it is, because the intended audience of source code is always qualified users. It is obvious to those who publish source code that only qualified users will read it. No one will try to read source code unless they're qualified. I mean, they can try, but they will not make any progress from character 1. They will stop probably at character 1, not even at line 1. If you publish source code, it means that you expect someone to read it. Otherwise, you wouldn't publish it. Pub— the publishing implies outreach to an audience. Publishing implies that you want, you expect someone to read it, and you as publisher of source code must understand that only qualified person can read.

115So of course, if your intended audience consists only of experts who are qualified to read source code, then it's possible to speak of reasonable expectations of your audience. What is the only source? The only source of those reasonable expectations? The source code itself. There's no other source. Do not— I, I think it's wrong to say, well, my marketing material said otherwise. What if, you know, what if you go to that vending machine and the vending machine says you have to put in $2 to get your Coke? That's marketing materials. So the marketing materials say you have to pay $2, but then the vending machine itself behave differently. It behave differently.

117I would call it a benefit. It would save a lot of people from losing their money. It's not a concern, it's the opposite. People should not invest in cryptocurrency at the moment. It's in beta stage. It is completely crazy for people who are not, who don't know what they're doing to invest money unless they are prepared to lose all of it. It's not a concern, it's the opposite of a concern. It's a virtue. It's the virtue. If everybody understood that they would almost need to be at the level of reading source code to confidently invest in cryptocurrency, then we would have a lot less loss, a lot less losses, a lot fewer people.

118I get calls from people who lose their life savings, and they can barely, you know, communicate by email. Why did you wade into this world? You're barely like making it in the traditional world, and you're wading into this matrix? What are you, Neo? It's not a concern, it's the opposite. If everybody understood they shouldn't play with fire, Unless they were firefighters, we would have a lot fewer burns.

120No, it's the greatest invention that is in the proof of concept stage. So imagine, imagine that we had the, the self-driving car. Someone invented the self-driving car and they put them on the street. And imagine we lived in a completely libertarian society with no traffic enforcement, right? I mean, would anyone in their right mind try that self-driving car unless they actually— or almost the engineers who designed it? Oh, exactly. Only the people who designed that car would even try and venture because they would have the confidence because they know what's on the inside. And they would also know the results of closed-circuit testing before they go get in those cars on the street and in public, right?

121So it's in the beta stage. I think that's another point for the Code is Law doctrine. There are some things in this world where marketing materials and verbal representations and even like contracts the click-through terms of service, they may say anything, but doesn't the source code also speak for itself? Of course, the counterpoint to that is that, you know what, it's not new. It's not new, and the exact same things happened before in other contexts, and we easily call them hacking, and we easily called them computer crime, where, for example, you find a vulnerability and you exploit it. The term of art is an exploit. For example your email software can have an exploit, can be designed in such a way that A malicious per— person can send you an email, and then you use your email software to open that email, and then that email will have certain code embedded in it that will execute, and that code will rely on knowledge of your email client by the malicious person.

122and then when that code is executed, then that email that the malicious person sent you can plant a bigger program on your computer that will take your computer over. This is not a fairy tale. It happens all the time, right? Happens all the time. And we had no qualms about calling this hacking and putting people in jail for this. Now I'm not saying this— the the, the thing with Indexed Finance and this case is the same thing. I'm not drawing any parallels. But in the email example, especially if this email client, this email software, it was open source software, and the malicious person read the source code and understood the source code well, can they— that malicious person— then say, well, I simply pressed the— this combination of buttons that I discovered and relied on the source code of this client.

123If that source code allows me to do it, then it's not a wrong thing to do. My response to that malicious person would be, it is generally considered to be a very bad thing when you take over somebody's computer because you invade privacy, and because you I assume they do it to steal money. When I say steal money they steal your identity, they use false pretenses. That's, that's, that's too easy. That's really obvious. There's no one's gonna have any difficulty pigeonholing that as crime because there is an element of deceit. This is what distinguishes crime from the, from the gray area or non-crime. Deceit, right? Deceit. You need to lie. The crime involves lying or violence.

124It's either lying or violence. Two things. Those things we don't tolerate in this society. There are no other things that are crime. It used to be, you know, drugs are crime. Okay, that's why people say that drugs should be legalized. Drugs involve— no, no, let's, let's say some drugs don't have to involve violence or lying. And people say, well, in that case, why is it a crime, right? This is a valid philosophical question. But is there any deceit in the Medjedovic case? I'm hard-pressed to identify deceit here. Show me the deceit. There's no violence, right? It's all behind computer screens. But show me the deceit. Show me false identity. Show me theft of identity, show me false pretenses.

126Oh my God, we've been talking for a long time.

128I

130That's great.

132Right.

134Oh, from the convoy case?

136Oh, I see, I see. So yes, so the court ordered Medjedovic to convey cryptocurrency to the third party. The last I heard, he didn't do it, and they might have had contempt hearings there. Not everything is reported, unfortunately, right? So we might want to— you know, I, I know our friends from Stockwoods are not going to talk about this because it's, it's an ongoing case, but maybe down the road later when the file is closed, someone will will talk about it a little bit. But at the end of the day, the crux of this issue is that this guy has the Ether in question in his custody.

137And the same physical properties of cryptocurrency, the same laws of nature, laws of math, apply when you have crypto in your own custody As I have explained earlier, as I explained earlier, the same laws of math— math is a, a, you know, a branch of science. It also is part— consists of laws of nature. Laws of math are laws of nature. So, and, and one of the laws of math is the law of big numbers, or the law of prime numbers, on which cryptography is based. It's really hard or impossible to crack or break private keys. I forgot to tell you about another way of taking possession of some of cryptocurrency from someone by force.

138You can try to break their private key using a supercomputer, and maybe the government can do it now. I don't know. I don't think so. So, so far, government agencies have been We have heard about several cases when government agencies quote unquote seized cryptocurrency, but usually the way it worked is people spilled the beans. One thing the police is really good at is getting information out of people. Like, people spill the beans, people tell people. Also, one thing you can do is you just do a surprise search. Because people write those private keys down. They're not only in their brains. People usually write them down, or people keep them on, on in, in the hard, you know hardware wallets or even software wallets, right?

139So private keys are hard to remember. People write them down. But once you write the private key down, you suddenly give cryptocurrency a physical form. But if something has a physical form, it can be grabbed by police officers' hands. And taken into police custody, and then police can take it to their computer, and suddenly you don't have your crypto anymore because they sign your crypto with your private key over to their public key, right? So, but this guy I think they couldn't get hold of this guy. So unless you— and they searched his parents' house, and I don't think they found any private keys. So another thing we will learn from this case is to what length Will this— the justice system and the police, the government go to take possession of cryptocurrency at some point?

140If they hit the wall, if they hit the wall, then then the laws of nature will prevail over sorry, over the laws of, of society.

142You and I should do a part 3

144you know, because— and I really, I think we should wait for feedback because I think a lot of questions will arise, and then we should do like a Q&A, or we should do a part Part 3 based on, on questions or something like that. This is an endless— Yeah,

146Thank you, Alyssa.

148Yes.