Proof of Case

What’s the case about?

Is cryptocurrency “property” under Hong Kong law?

Background

In the 2023 decision of Re Gatecoin Limited (in liquidation) [2023] HKCFI 914, the Court of First Instance (Hong Kong) found that cryptocurrency is “property” in Hong Kong.

The liquidators of Gatecoin Limited (Gatecoin), which operated a cryptocurrency exchange, sought directions from the Court as to how assets of the company, including cryptocurrencies, should be dealt with in the liquidation. In particular, the liquidators sought directions as to the nature of customers’ interests in the cryptocurrency held by the exchange, including whether cryptocurrencies were held on trust for customers. Prior to the appointment of the liquidators, Gatecoin had been the subject of a cyberattack in which 90% of ETH held by Gatecoin was stolen.

In order to deal with the liquidators’ application, it was necessary for the Court to consider two main issues:

• Is cryptocurrency “property” under Hong Kong law?
• If cryptocurrency is property, was a trust created in favour of the customers?

Is cryptocurrency “property”?

Her Honour Justice Linda Chan commenced the analysis of this issue by reference to the requirements for property outlined by Lord Wilberforce in National Provincial Bank V Ainsworth [1965] AC 1175, namely:

“Before a right or an interest can be admitted into the category of property, or of a right affecting property, it must be definable, identifiable by third parties, capable in its nature of assumption by third parties, and have some degree of permanence or stability.”

The liquidators drew the court’s attention to the academic debate on whether cryptocurrencies (which the judgment stated were not choses in possession or choses in action) constitute “property”.  Justice Chan noted the preponderance of jurisprudence in Hong Kong, England and Wales, Singapore, Canada, United States, Australia and New Zealand recognised the proprietary nature of cryptocurrencies.

Her Honour’s judgment noted that:

• although the definition of property under the legislation in question was different from those adopted in those other jurisdictions, unlike other common law jurisdictions, Hong Kong’s definition of property was an inclusive one and was intended to have a wide meaning; and
• Hong Kong’s courts have consistently applied and followed the principles expounded in Ainsworth when determining the question of whether a right or interest meets all the requirements for property.

For those reasons, Her Honour applied and followed the reasoning in the UK Jurisdictional Taskforce’s Legal Statement on Cryptoassets and Smart Contracts and the decision of the High Court of New Zealand in Ruscoe v Cryptopia Limited (in liquidation) [2020] NZHC 728, and their conclusion that cryptocurrency is property which is capable of forming the subject matter of a trust. While the judgment referred to decisions in other jurisdictions, the concluding reasoning as to the proprietary nature of cryptocurrencies is relatively brief.

Was a trust created?

As the court found that cryptocurrency was “property”, it was necessary to consider whether certain cryptocurrencies were held on trust for Gatecoin’s customers.

In doing so, the court considered how Gatecoin operated the exchange, which was:

• once a customer deposited cryptocurrency with the platform, it would be transferred from the external wallet to a mother wallet and mixed with the cryptocurrencies in that mother wallet;
• Gatecoin would be able to apply any cryptocurrencies in the mother wallet for its purposes, including making a transfer in compliance with a withdrawal request made by any customer; and
• the customer ceased to have any control over the cryptocurrency from the moment it was deposited with Gatecoin.

The court found that Gatecoin had three different sets of terms and conditions for its customers during the relevant period of time.

The liquidators considered that certain of the cryptocurrencies were held on trust for customers, given that the second set of terms and conditions expressly referred to cryptocurrency being held on trust.

Her Honour found that whether the cryptocurrencies were held on trust for the customers should be determined by construing the terms of the last version of the terms and conditions. Those terms and conditions superseded the earlier terms and conditions, and all customers who registered their accounts when the earlier terms and conditions were in force were required to click to acknowledge and accept the final terms and conditions before they could continue to access and use Gatecoin’s website.

As to whether the three certainties arose to create an express trust, Her Honour found that:

1. there was certainty of subject matter as the subject matter could be derived from a claim to a proportionate share of an undivided bulk.  In that regard:

• there was compelling reason to draw an analogy between cryptocurrencies and a trust over shares or securities – in both cases, the right conferred upon the beneficiary would not depend on the precise identification of the asset owned;
• on the basis that there can be a trust over a proportionate share of all cryptocurrencies, the subject matter of the trust vis-à-vis each customer is sufficiently certain, as the account balance represents the proportion of the cryptocurrencies over which such customer has a beneficial interest in the pool;
• that was the conclusion in Ruscoe, where the court held that the internal ledger clearly recorded the contributions of each account holder, which provided sufficient certainty of subject matter; and
• in the present case, there was certainty of subject matter as the amounts of the cryptocurrencies held by the customers were recorded in the exchange ledger, and they co-owned and shared each type of cryptocurrency and fiat currency in proportion to the credit balances standing in their accounts;

2. there was certainty of object as the beneficiaries of the trust and the extent of their claim could readily be seen from the exchange ledger; and

3. there was no certainty of intention, as it was clear from the last set of terms and conditions that there was no intention to create any trust for the customers, in that:

• all the trust language in the previous version of the terms and conditions had been removed;
• the terms and conditions contained express disclaimers of fiduciary obligation; and
• the terms and conditions allowed Gatecoin to keep accretion to the cryptocurrencies, which was consistent with and reinforced the position that Gatecoin was the beneficial owner of the cryptocurrency.

Ultimately, Justice Chan found that the cryptocurrencies were not held by Gatecoin on trust for the customers (except for a potential group referred to as the “non-consenting customers”) but were held by Gatecoin in its own right.  Her Honour also noted that the objective facts showed the currencies were always treated as Gatecoin’s assets, rather than assets held on trust for the customers.

Take aways:

• Another common law decision which found that cryptocurrency is “property”, in this case in Hong Kong;
• Only a relatively brief analysis as to the basis on which cryptocurrency is property;
• Highlights the importance of the terms and conditions of a digital exchange, which were carefully analysed by the Court, particularly as to whether the cryptocurrency was beneficially owned by Gatecoin or by the customers;
• Helpful to liquidators and insolvency practitioners as to how a Court considers and applies established concepts of property and trusts to a cryptocurrency exchange.

Where can I find the case?  [2023] HKFCI 914