On October 2, 2014, the Bitcoin Foundation Canada, the Bitcoin Embassy and the Bitcoin Alliance of Canada were panelists for the Senate Committee on Banking, Trade, and Commerce Committee’s “Study on the Use of Digital Currency”. As chief-legal-officer of the Bitcoin Foundation Canada, I had the privilege of sharing a panel with four other top-notch digital currency industry experts. It was a truly fascinating experience and I was extremely impressed by the quality of the Committee’s questions and their interest. Their 2015 report is eagerly awaited. The video of this hearing can be accessed here.
My remarks aimed to explain how digital currency is subject to the current legal framework in Canada and Quebec, specifically consumer protection law. This blog post is a slightly modified version of the statement that was submitted to the Senate for the purpose of this hearing:
Mr. Chair and honourable Senators, I speak to you as a member of the Quebec bar and my remarks today will focus on consumer protection law in Quebec and digital currency, specifically Bitcoin. We can identify the applicable legal rules by looking at the function or activity in which Bitcoin is being used. To quote American Judge Frank H. Easterbrook, “the best way to learn the law applicable to specialized endeavours is to study general rules”. Guided by that principle, it is clear that claims that Bitcoin offers consumers no consumer protection at all are simply false.
The question is not so much whether consumers need to be protected, but whether they need more than they already have. Consumer protection laws are broad and apply to consumer contracts for goods or services where Bitcoin is tendered as payment, whether the transaction is defined as barter or otherwise. Additionally, the chapter on sale in the Civil Code of Québec applies, mutatis mutandis, to contracts for exchange. A consumer’s purchase of Bitcoin from an exchange or vendor would also in principle be governed by these rules.
What does this mean? Consumers tendering payment in Bitcoin or purchasing Bitcoin enjoy implied and legal warranties under consumer protection law and the Civil Code. Additionally, Bitcoin exchange services subject to Quebec consumer law have to disclose any fees they charge to consumers, including exchange fees. It merits mention that traditional financial service providers are also subject to this rule and must disclose fees related to currency conversion services as was confirmed in September by the Supreme Court.
Merchants must also provide instructions necessary for the protection of the consumer against risk or danger of which the consumer would otherwise be unaware. This obligation is relevant when dealing with a technology as novel and complex as Bitcoin especially since many users are still unaware of basic security precautions that need to be taken.
A key complaint about Bitcoin is that the irreversibility of transactions is seen to favour the merchant over the consumer. This is considered anathema to consumer protection law, which is designed to do the opposite. Recall however, that consumer protection law is not beholden to chargeback technology for the protection of consumers engaging in online commerce. In Quebec, the online merchant must perform his obligation before exacting payment unless a credit card is used. This means that if an online merchant sells goods and services for Bitcoin in Quebec to Quebec consumers, he must perform his obligations before the consumer is required to pay. This provision has likely gone unnoticed until this point due to the fact that the only viable way to undertake e-commerce online was with a credit card. If chargeback is limited to credit cards, then the law clearly prejudices one technology over the other. No e-commerce will be prepared to send or deliver their service before getting paid – thus requiring a reliance on credit card, and the exorbitant fees, in order to do business online. The Bitcoin sector has shown great interest in building its own solutions to the problem of trust in consumer transactions. One is the use of multi-signature addresses that require multiple permissions (or signatures) to transmit funds from a Bitcoin wallet. An escrow agent and dispute arbitrator can hold one key to a multi-signature wallet, and the consumer and seller the other two.
It is important to examine digital currency in the context of a broader innovation known as “decentralized autonomous organization” technology, or DAOs. Decentralized autonomous organizations are software built to run on their own and mimic the operations of a corporation. The use of DAOs to raise funds, spend them, and make distributions through participation of its stakeholders is a highly anticipated use of this technology and has already been subject to experimentation. An issuance of ownership units and their trade in a secondary market may engage provincial securities rules.
We must acknowledge that digital currency technology is distinct from the programs and services that operate on it. Where possible, legal obligations should be based on the function performed rather than the technology, or medium, used to execute it. In the spirit of competition and technological neutrality – legal treatment of digital currency should avoid favouring the use of one technology over the other. Bitcoin is complicated and impressive and it requires a substantial level of technical understanding. It is encouraging that the Canadian government is indeed educating itself before making any decisions on these matters. The opportunity to share my thoughts and research with you here today has been a great honour. Thank you.