What’s the case about?
An application for the transfer and preservation of bitcoin pending the ultimate determination of proceedings.
Background
The proceedings concerned a dispute between cryptocurrency traders as to the manner in which certain companies were established and their various roles and entitlements. One of the matters in dispute was which entity had the legal or beneficial ownership of certain units of bitcoin.
The bitcoin was held by the rehabilitation trustee (an office which exists under Japanese insolvency law) of the Mt Gox cryptocurrency exchange.
The Federal Court had previously granted an anti-suit injuction, preventing Digital CC from pursuing litigation then on foot in the USA. In seeking the anti-suit injunction, Mr Karis (who resided in the USA) had undertaken to pay any funds received by him from the rehabilitation trustee to his Australian solicitors, to be held on trust pending further orders.
It then became apparent that the rehabilitation trustee would distribute bitcoin, rather than funds. This judgment related to the manner in which the bitcoin would be preserved pending the resolution of the larger proceedings.
The judgment does not include detailed reasoning as to the nature of cryptocurrency, however notes that:
- the bitcoin was one of the subjects of and was central to the dispute, the rights to it were contested and it was apparently of potentially significant value (at [39]);
- in those circumstances, Her Honour Justice Banks-Smith considered she had power under section 23 of the Federal Court of Australia Act 1976 (Cth) to grant the relief sought (at [39]); and
- cryptocurrency is not simply money and whilst its use as currency was becoming widespread, particular issues may arise with it which may be dealt with in the interests of all parties more efficiently by a specialised trustee (at [43]).
Nature of the trustee
The main issue in dispute was the identity of the trustee to hold the bitcoin pending the resolution of the proceedings.
Ultimately, Her Honour preferred a trustee which held an Australian AFSL and which had particular experience with cryptocurrency. Her Honour concluded on that issue:
[43] Fourth, I have given careful thought to the identity of the proposed trustee and the contest inherent in the proposal that Mr Del Monaco might hold the bitcoin on trust in lieu of Boutique Capital. I make no criticism of Mr Del Monaco. However, it seems to me that the sensible course is for an AFSL licensee with experience in dealing with cryptocurrency to assume that role. Cryptocurrency is not simply money, as senior counsel for Mr Karis acknowledged. Whilst its use as currency is becoming widespread, there was no evidence before me that suggested Mr Del Monaco or his firm had any particular expertise in dealing with cryptocurrency units, exchange platforms, wallets, keys or the like. It might be said that if the bitcoin are simply held on trust, any such expertise is not particularly relevant. However, it may be that particular issues arise which may be dealt with in the interests of all parties more efficiently by a specialised trustee. I also have concerns as to the generality of Mr Del Monaco’s evidence about his willingness and capacity to act as trustee, dealt with in three lines in his affidavit. I acknowledge his undertaking to keep the Court informed of relevant developments, but the fact that the Court is updated may not necessarily assist with the issues at hand. I would expect in any event that Mr Del Monaco would keep the solicitors for Mr Karis and the Court informed of relevant developments.
[44] I prefer the Digital CC proposal that Boutique Capital assume the role of trustee. I am satisfied on the basis of the information that has been included above, and having regard to the regulatory processes in place under the Corporations Act, that Boutique Capital is well placed to communicate with the rehabilitation trustee about any intricacies of the proposed distribution of the bitcoin, respond to any question of the rehabilitation trustee, and address any issues that might arise in the course of facilitating a distribution to Boutique Capital.
Form of Orders
The Orders made in the proceedings were unusual, given that they also provided for the transfer of the applicant’s claims in the rehabilitation of Mt Gox to the trustee. The orders ultimately made were (insofar as they relate to that issue):
1. By 5.00 pm (AWST) on 29 July 2022 the applicant is to notify the rehabilitation trustee of Mt Gox Co Ltd of the transfer of his claims in the rehabilitation to Boutique Capital Pty Ltd (AFSL 508011), to be held by Boutique Capital on trust pending the resolution of these proceedings and in accordance with order 3.
2. Such notification is to be made by the applicant in accordance with the online or offline manner of notification identified by the rehabilitation trustee in two memoranda, copies of which were provided to the applicant’s solicitors by the first respondent’s solicitors on 6 July 2022.
3. Boutique Capital must hold any bitcoin or funds relating to the bitcoin received from the rehabilitation trustee on trust to be distributed only in accordance with an order of this Court or the joint instruction of the solicitors on the record in this proceeding who represent the applicant and the first respondent respectively.
4. The applicant must provide a copy of these orders and reasons for decision to Boutique Capital forthwith.
Take aways:
- Where a trustee was required to hold cryptocurrency pending the resolution of proceedings, the Court preferred a trustee who held an Australian AFSL and had prior experience with bitcoin;
- The judgment contains a form of orders for the transfer and preservation of bitcoin on an interim basis.
Where can I find the case? [2022] FCA 859
Proof of Case 