Understanding the Legal Status of Cryptoassets

Cryptoassets have received another wave of attention after a multitude of countries and private entities have begun demonstrating greater interest and even involvement in cryptoasset markets. As cryptoassets are gaining momentum in the marketplace, the legal sector is evolving accordingly, having witnessed several significant judicial decisions in various common law jurisdictions either indicating the possibility of accepting or even ruling that the specific cryptoassets involved in the litigation were a form of property. One needs no reminder that those judicial precedents are highly fact-sensitive and should not be understood as treating all cryptoassets as property. To properly understand the reach of those cases, it is of utmost importance to have a discriminating overview of the different types of cryptoassets. With the taxonomy in mind, this article will put those cases in context and provide a brief summary of the consequences of classifying cryptoassets as a form of property.

A TAXONOMY OF CRYPTOASSETS

Cryptocurrency, often used in a loose sense as a catch-all term for all forms of cryptoassets, is by no means all-encompassing, but only a significant species of the broader genus of cryptoassets. Cryptoassets can be, and are in fact, classified in various ways with reference to different criteria.

Cryptoassets can be classified with reference to their functionality. The Cryptoassets Taskforce, comprising the Bank of England, HM Treasury, and the Financial Conduct Authority, adopts a three-fold classification as follows: (1) exchange tokens, or more commonly known as cryptocurrencies, which are used as a means of exchange; (2) security tokens, which constitute “security” under applicable law; and (3) utility tokens which typically allow holders the right to access goods or services. Certain taxonomies introduce finer demarcations which include, inter alia, platform tokens that allow holders to use the platform; asset tokens, which are backed by external, off-chain assets.

Further classification can be made along the public and private divide. Such classification is gaining notability as various countries are looking into the possibilities of launching central bank digital currency (or more commonly referred to in its abbreviated form as CBDC) amidst the dominance of privately issued cryptoassets.

Each of the sub-classes above can be further distinguished based on its transferability. The aforementioned tokens are usually transferrable. Their counterparts are non-transferable tokens which typically include identity token which is granted to a specific person or thing for identification and verification purposes, and certification token which can serve as a digital issue of licenses, certificates etc.

Given that the development of cryptoassets is still in its early stages and rapidly evolving, it should come as no surprise that the classification would continue to evolve to reflect the actual landscape accordingly.

TREATMENT OF CRYPTOCURRENCIES IN VARIOUS JURISDICTIONS

In Singapore, B2C2 Ltd v Quoine Ptd Ltd [2019] SGHC (I) 03 is concerned with the application of conventional contract and trust principles to cryptoassets. The defendant’s cryptoasset trading platform reversed seven transactions for the sale of Ethereum in exchange for Bitcoin which were executed at better-than-market rates in favour of the plaintiff as a result of unintended mistakes in the operating system. The judge sitting in the Singapore International Commercial Court was of the view that the three certainties of trust, i.e. certainty of intention to create a trust, certainty of subject matter, and certainty of objects, were satisfied. In particular, in relation to the certainty of subject matter, the judge said it was correct for the defendant “to assume that cryptocurrencies may be treated as property that may be held on trust.” In arriving at the view that the cryptoassets in question, namely Bitcoin and Ethereum, were property, the judge relied on the four indicia of property set out in the landmark House of Lords decision in National Provincial Bank v Ainsworth [1965] 1 AC 1175, i.e. “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”, and was of the view that all four requirements were satisfied.

The B2C2 case was subsequently appealed to the Court of Appeal. In the appeal, the Court of Appeal held that the trust claim would in any event fail because of the lack of certainty of intention to create a trust, so there was no need to decide whether Bitcoin and Ethereum could be treated as a form of property. Despite leaving the question open, the judges expressed obiter that “there may be much to commend the view that cryptocurrencies should be capable of assimilation into the general concepts of property.”

In the United Kingdom, before the decision in AA v Persons Unknown [2019] EWHC 3556 (Comm) was made, the UK Jurisdiction Taskforce published a Legal Statement on the Status of Cryptoassets and Smart Contracts (the “Legal Statement”) with the intention of providing “the best possible answers to the critical legal questions” but not serving as legal advice. The UK Jurisdiction Taskforce stated that cryptoassets in general could meet the four indicia of property set out in the National Provincial Bank decision and in principle be treated as property.

Later, the English High Court in AA v Persons Unknown [2019] EWHC 3556 (Comm) had to deal with the plaintiff’s ex parte application for, inter alia, an interim proprietary injunction against the defendants. The Plaintiff insurer paid ransom in Bitcoin in exchange for decrypting the insured’s computer systems which had been unlawfully hacked and encrypted. In reaching the decision to grant the said injunction, the judge considered the Legal Statement “to be an accurate statement as to the position under English law” and was satisfied, among other issues, that Bitcoin met all the indicia of property set out in the National Provincial Bank decision and could, for the purpose of granting an interim proprietary injunction, be treated as property.

In New Zealand, the defendant, a cryptoasset exchange, in Ruscoe v Cryptopia Limited (in liquidation) [2020] NZHC 728 suffered a major hacking and witnessed a loss of around NZD 30 million worth of cryptocurrencies. The defendant went into liquidation and the liquidators applied to the High Court for directions. Specifically, the High Court was faced with issues concerning the legal status of the cryptoassets in the value of NZD 170 million which was held by the defendant and unaffected by the hacking, and how the liquidators should deal with such balance between the account holders and other unsecured creditors. The judge ruled that the cryptocurrencies in question were property capable of being held on trust for the account holders as firstly they met the four indicia of property in the National Provincial Bank decision and secondly they should not be treated as “mere information”. In relation to the latter point, the judge was of the view that “mere information” was an item to record information or knowledge and could be duplicated indefinitely by anyone. In contrast, the cryptocurrencies in question were tradeable items which could be exclusively owned and transferred in a more secure manner than a mere choice in action.

IN LAW CONTEXT IS EVERYTHING

It is trite that each case turns on its own facts. It is thus worthwhile to put the above cases in context and highlight three observations.

First, insofar as the position in Singapore is concerned, whilst the International Commercial Court treated Bitcoin and Ethereum as a form of property, the Court of Appeal left the issue open. Put differently, there is no conclusive answer to the legal status of the said cryptoassets in Singapore.

Second, as stated by the UK Jurisdiction Taskforce in its Legal Statement, “whether a thing is property, or a type of property, depends on the context and the reason why the question is being asked. A thing may be property for one legal purpose but not for another”. In the AA case, the English court confirmed the status of Bitcoin as property but only in the context of an ex parte interim proprietary injunction without the benefit of counterparty’s submissions. Moreover, more generally, legislation may expressly vary the scope and definition of property.

Third, in all the cases cited above, the courts only dealt with the specific cryptoassets in question, but not more generally all forms of cryptoassets. Cryptoassets with features and functionality that differ from those covered in the above cases may receive diametrically different judicial treatment. Before illustrating the possible differences in judicial treatment, it is worthy to note that the cryptoassets e.g. Bitcoin discussed in those cases are transferrable. Given that all the cases above-made reference to the National Provincial Bank’s four indicia of property, it is at least questionable whether courts would treat non-transferable tokens, which fall foul of the third indicium i.e. being capable of assumption by third parties, as property.

CONSEQUENCES OF BEING CLASSIFIED AS A FORM OF PROPERTY

There are several consequences of being a form of property, as suggested in the Legal Statement.

First, unlike personal rights, proprietary rights are, in principle, valid against the whole world. Second, as in Cryptopia, holders of proprietary rights are ranked prior to the general body of creditors in insolvency. Third, a trust can be declared over property only. Fourth, one can assert proprietary remedies, such as proprietary injunction as in the case of AA, and restitution. Last but not least, save and except for those which require physical possession of underlying assets i.e. pledge and lien, security interests can be created over cryptoassets.

CONCLUSION

Although the judicial precedents above show the court’s readiness to treat specific cryptoassets as a form of property, regard must be given to the unique factual matrix of each case and the types of cryptoassets concerned. Moreover, insofar as the position in Hong Kong is concerned, the said precedents of other common law jurisdictions are not binding but at most of persuasive value only. Hence, the said overseas precedents may not necessarily reflect the attitude of the judiciary in Hong Kong. As such, we would be in a better position to understand the legal status of cryptoassets in Hong Kong when local courts have the opportunities to consider such issues and hand down clear and definitive judicial decisions. After all, in law context is everything. In this regard, as judicial precedents are highly fact-sensitive and cryptoassets are diverse in nature and fast-evolving, independent legal advice should be obtained to assess the legal status of each cryptoasset on a case-by-case basis.

Jurisdictions

Partner, P.C. Woo & Co.

Cristovao is a partner in the commercial & corporate department. Specializing in banking and finance matters, he often provides legal services demanded by banks, licensed money lenders, securities margin financiers, companies, high net-worth individuals and other entities. He represents clients in bilateral and syndicated loan transactions, project financing, secured and unsecured financing, acquisition and construction financing, bridge financing, etc. He has extensive experience in advising licensed money lenders and securities margin financiers on transactions relating to financing business such as loan transactions under the Money Lenders Ordinance (Cap. 163) and securities margin financing transactions under the Securities and Futures Ordinance (Cap. 571). He also acts for companies on general commercial / corporate matters, and compliance and regulatory issues.

Trainee Solicitor, P.C. Woo & Co.

Titus started his training contract in 2019 and has assisted in matters relating to data protection, social media and banking and finance. He also has experience in probate, real estate and dispute resolution. During his leisure time, he takes pleasure in studying blockchain, cryptoassets and artificial intelligence. Previously he wrote on blockchain and data protection for a prestigious law gazette and his work has been cited by other legal authors.