Founder of failed B.C. cryptocurrency exchange ordered to pay $535K for broken bitcoin contract

The founder of a failed B.C. cryptocurrency exchange has been ordered to pay $535,000to a man who agreed to sell him 50 bitcoin in 2019 despite the fact the missing commodityis now worth more than $3 million.

According to a B.C. Supreme Court judgment, Michael Gokturkwrote to Scott Nelson in August 2019, two months after Nelson transferredbitcoin into Gokturk's digital wallet at an agreed price of $10,700 a piece.

Within months, Gokturk's Einstein Exchange would shut its doors amid a B.C. Securities Commission investigation,a cloud of complaints, lawsuits and debts of $16 million owing to customers.

"None of this is your problem and I owe you what I owe you," Gokturk wrote to Nelson, who was asking for the money he'd been promised.

"Keep these text messages and email records as proof. I am sorry I have been avoiding you.This has been the absolute worst year of my entire existence. These are not excuses, I just don't know what to tell you besides the truth."

'Wire is being set up right now'

The details of the correspondence are contained in a B.C. Supreme rulingreleased this week.

Nelson, a Vancouver technology entrepreneur,sued Gokturkfor breach of contract in 2019, asking for either the amount the bitcoin was worth on the open market on Feb.16, 2021 $3,084,393 or the amount Gokturk originally agreed to pay.

In coming to a decision, Justice Sheila Tucker found Gokturk had breached a contract that concluded on June 7, 2019, when he sent Nelson a text reading: "BTC received! Thank you. Wire is being set up right now. Will send you confirmation."

Tucker said the law required her to award Nelson the amount lost at the time of the breach, not the amount his bitcoin would be worth in 2021, following recent astronomical gains.

"Using the date of breach to assess the damages puts the defendant in the position he would have been had the contract been fulfilled, Tucker wrote.

"The fact that [bitcoin]is worth more now than it was at the time of the contract does not result in an injustice."

'No one will lose their money here'

The judgment comes a year and a half after accountantsestimatedthat the Einstein Exchange had "hard" assets of $30,000 in cash and less than $15,000 in cryptocurrency when the court appointed aninterim receiver to take control of the company on Nov. 1, 2019.

The same report noted that customers were owed around$16 million, noting Nelson's lawsuitand another call from a creditor who said they were owed $7 million but had not yet filed a claim with the court.

Gokturkspoke to the CBCin January 2018 about a storm of online criticism that accompanied the opening of the exchange. Customers claimed that staff were slow to respond and expressed fearthey might lose their money.

At the time, Gokturkclaimed his team was overwhelmed by the response and demand for digital currency and promised that "no one will lose their money here."

Gokturk has filed responses to a number of B.C. Supreme Court claimsin the months since the collapse of the Einstein Exchange, arguing that he was not personally liable for agreements made with the company.

The responses claim thecustomers signed agreements acknowledging that"some digital currency exchanges had been the subject of cyberattacksthat have resulted in the loss or theft of digital currencies to their users and there is a risk that a similar cyberattack could affect Einstein's services and result in the theft or loss of your digital currencies."

According to Tucker'sdecision, Gokturk's counsel withdrew last November, after which he stopped responding to Nelson's lawyer and failed to attend an examination for discovery.

He did not respond to a request for comment through LinkedIn.

'Which date do you use?'

Evan Thomas, a Toronto-based litigator with Osler who specializes in digital assets and blockchain, says Tucker's decision is notable because it's one of only a few in a growing body of Canadian law to deal with disputes involving cryptocurrency.

He says it's interesting to see judges treat bitcoin as property in the same way as a physical asset like a gold bar.

Thomas says courts have also had to grapple withthe question of how to determinethe value ofa commodity that has seen such rapid shifts in worth in recent months.

In the past year alone, bitcoin has risen from around$13,000Cdnper unit to highs of nearly $80,000. One bitcoin was worth $68,000 CdnThursday.

"This has come up before in cases about how do you value bitcoin, a cryptocurrencywhich is a bit unique in commodities in that the prices can change quite dramatically over relatively short periods of times," he said.

"So, of course, there's an obvious question: which date do you use?"

Thomas says it's well-settled law that breach of contract disputes assign value at the date thebreach occurred which in Gokturk and Nelson's agreement was June 2019, "when the buyer actually failed to pay the money for the bitcoin."

The decision says Nelson doesn't know whether Gokturk sold the 50 bitcoin and ifhe still has any or all of itin his possession.

Thomas says it's easy to see how Nelson might feel out of pocket by $2.5 million, even if Gokturk pays the court-ordered amount.

But had bitcoin dropped in value instead of soaring in the interim,Thomas says Nelson likely would not have asked for50 worthless bitcoin as compensation.

"The law says it you're going to make that argument when the price goes down, you have to live by the same argument if the price goes up," Thomassaid.

"We can all disagree on whether that's fair or not, but that's just what the law is."