Receiver's right to Bitcoin?

NYDIG ABL LLC v. IE CA 3 Holdings Ltd., 2023 BCSC 638
Can a third party be compelled to produce documents and information pertaining to crypto assets pending a determination as to whether the debtor has an interest in those assets?

The Receiver sought to compel the production of certain information and documents from IEL and its affiliates. IEL is a public company that is the parent of the two debtor companies in receivership. A dispute arose between the petitioner, NYDIG, and IEL as to whether certain assets, in the form of bitcoin, belonged to the debtors and were, therefore, properly treated as collateral within the purview of the receivership.

Bitcoin is created by software as a reward for a process that involves creating new blocks and appending transactions in bitcoin’s blockchain. The creation of new blocks requires repeated trial and error computations conducted by specialised computers known informally as mining rigs. The goal is to guess the inputs to a mathematical formula known as a hash algorithm. If successful, the process results in a so-called “valid hash”. The speed at which the computers produce such solutions is called the “hashrate.” Mining rigs demand a great deal of computational power and the process is, therefore, energy-intensive.

IEL conducts its bitcoin mining operations from three purpose-built facilities in BC. Its operations include approximately 36,400 mining rigs owned by the debtors and distributed across the three sites. The debtors were special purpose vehicles that were incorporated for the purpose of taking title to some of the IEL group’s mining equipment. Pursuant to agreements entered into by IEL and one of the debtors, the debtor was to house the mining equipment, maintain it and provide the power necessary to operate it, and provide IEL with hashpower used to generate bitcoin. In exchange for those things, IEL paid the debtor fees, calculated on a per kwHour basis. The effect was that the debtors sold hashpower generated by the mining equipment to IEL, which then directed that hashpower into a mining pool for payment in bitcoin and then sold that bitcoin on the open market.

The Receiver believed that NYDIG’s advances of the funds used for the purchase of the mining equipment were made to IEL or the vendor directly, rather than through the debtors. The Receiver sought the following information from IEL:

• evidence of the hashpower generated by the NYDIG mining equipment at the BC sites and the quantum of hashpower produced by the debtors' mining equipment on an output/hashpower basis;

• the name of the mining pool that IEL or the relevant subsidiary used to pool the mining equipment's hashpower with the hashpower of other bitcoin miners in an effort to increase their chances of earning Bitcoin;

• the IEL public wallet key address or addresses to determine the total number of Bitcoin paid to IEL by the Mining Pool in consideration of the proportionate amount of hashpower generated by the mining equipment relative to the total amount of hashpower generated by all miners in the Mining pool;

• an accounting of IEL's sale of bitcoin and the revenue received from same, including all relevant supporting documentation; and

• IEL's bank statements showing its receipt of USD or other currency resulting from the bitcoin sales.

The Receiver argued that the answers to its questions were urgently required, regardless of the outcome of the dispute about the extent of NYDIG’s collateral. It argued that, pursuant to the receivership order, it was entitled to unfettered access to all records and information of any kind related to the business or affairs of the debtors. IEL argued that the application was premature, given that the court had yet to determine whether the debtors, and therefore, NYDIG, had any interest in the cryptocurrency generated using the equipment. Accordingly, it would be unduly burdensome to require IEL to comply with the Receiver’s demands when they may be entirely unrelated to the debtors’ business.

The Receiver was given broad discretion under the receivership order, among other things, to collect all monies owed or owing to the debtors and to exercise all remedies of the debtors in collecting such amounts. A necessary corollary to that power is the right to investigate the debtors’ business and affairs, including what it considers to be suspicious transactions, and to that end, to compel third parties to produce relevant “Records”. The meaning of that term is restricted only by the requirement that the information and documents be “related to the business or affairs of the debtors.”

The questions posed by the Receiver were related to the business or affairs of the debtors. There was no reason not to defer to the Receiver’s judgment as to how it should proceed in fulfilling its mandate. Nor was there any justification for postponing the Receiver’s activities until the dispute over the extent of NYDIG’s collateral is adjudicated, given that the Receiver would be looking for answers to its questions regardless of the outcome of that dispute.

Accordingly, the Court allowed the Receiver’s application and ordered that IEL respond to the Receiver’s questions.

 

Counsel: Chris Burr and Claire Hildebrand of Blake, Cassels & Graydon LLP for the Petitioner, Kieran Siddall and Scott Boucher of Norton Rose Fulbright Canada LLP for the Respondents and Mary Buttery, KC and Matthew Burgoyne of Osler, Hoskin & Harcourt LLP for the Receiver, PricewaterhouseCoopers Inc.