The Court of First Instance recognizes that cryptocurrency is “property” and capable of being held on trust
Introduction
Cryptocurrencies are undoubtedly digital assets popular among traders and
investors in recent years. A landmark decision Re Gatecoin Limited [2023] HKCFI 914 handed down by the Hong
Kong Court of First Instance confirms the proprietary nature of
cryptocurrencies and that they are capable of being held on trust.
Background
of the case
Gatecoin Limited (“Gatecoin”) is a Hong Kong company and was wound up by the Court on
13 March 2019. Gatecoin had since January 2015 operated a cryptocurrency exchange platform
through which customers open and register an account with Gatecoin and deposit
cryptocurrencies for trading or withdrawal purposes.
This decision was handed down upon an
application made by Gatecoin’s liquidators to seek directions or determinations
on (i) the characterisation
of cryptocurrencies and fiat currencies held by Gatecoin; and (ii) the allocation of the cryptocurrencies
and the fiat currencies to the customers.
The Court
was specifically asked to determine whether the cryptocurrencies are held on
trust for Gatecoin’s customers.
The Liquidators have identified 3 different sets of terms and conditions
(“T&C”) which were in force at
different time periods. Accordingly, there are the following 3 groups of
customers registered with Gatecoin:
1. Group A customers who registered their accounts agreeing to the 2016 T&C;
2. Group B customers who registered their accounts agreeing to the
Trust T&C; and
3.
Group C customers who registered their accounts agreeing to the
2018 T&C.
Whether
cryptocurrency is “property”
In order to determine whether the cryptocurrencies are held on trust,
the Court has to consider whether cryptocurrency is “property”, which is
capable of forming the subject matter of trust.
The requirements for “property” were
stated by Lord Wilberforce in National
Provincial Bank v Ainsworth [1965] AC 1175. Before a right or an
interest can be admitted into the category of property, it must be (i)
definable, (ii) identifiable by third parties, (iii) capable in its nature of
assumption by third parties, and (iv) have some degree of
permanence or stability.
The Court notes that the definition of
“property” under s.3 of the Interpretation and General Clauses Ordinance (Cap.
1) is different from other jurisdictions. However, the definition of “property”
in Hong Kong is an inclusive one and intended to have a wide meaning. Further, the Hong Kong courts
have consistently applied and followed the principles expounded in Ainsworth when determining
whether a right or interest meets all the requirements for property. On the
basis of the above, the Court held that it is appropriate to apply and follow
the reasoning in foreign jurisdictions.
After reviewing authorities in various
common law jurisdictions, the Court held that cryptocurrency satisfies the 4
criteria for “property”
as explained in Ainsworth and
is a type of intangible property in that:
1. Cryptocurrency is definable
as the public key allocated to a cryptocurrency wallet is readily identifiable, sufficiently distinct and capable of being
allocated uniquely to individual accountholder;
2. Cryptocurrency is identifiable by third parties in that only the holder
of a private key is able to access and transfer the cryptocurrency from one
wallet to another;
3. Cryptocurrency is capable of assumption by third parties in that it
can be and is the subject of active trading markets where (a) the rights of the
owner in that property are respected, and (b) it is potentially desirable to
third parties such that they want themselves to obtain ownership of it; and
4.
Cryptocurrency has some degree
of permanence or stability as the entire life history of a cryptocurrency is available in the
blockchain.
Whether
Gatecoin held cryptocurrencies on trust
Group A, B and C
customers
The Court first held that the question whether the Currencies are held
by Gatecoin on trust for Gatecoin’s customers (be it Group A, B or C) should be
determined by construing the terms of the 2018 T&C. The earlier versions of
the T&Cs (i.e. 2016 T&C and Trust T&C) have no application because
the 2018 T&C came into force in March 2018 and superseded the Trust
T&C. From that time onwards, all Gatecoin’s customers including Group A and
B customers who registered their accounts when the 2016 T&C and Trust
T&C were in force were required to click to acknowledge and accept the 2018
T&C before they could continue to access and use Gatecoin’s website.
If and to the extent that Group A and B customers have accepted and
agreed to the terms of the 2018 T&C, the Court held that it should not
ignore the contractual bargain reached between the parties and should not allow these customers to
rely on the terms of the Trust T&C.
Based on the 2018 T&C, the Court held that the cryptocurrency is not
held by Gatecoin on trust for the Customers but are held by Gatecoin in its own
right for the following reasons:
1.
The 2018 T&C contains no express declaration of trust.
2.
The 2018 T&C expressly disclaims any
fiduciary relationship between Gatecoin and its customer.
3.
The 2018 T&C provides that Gatecoin
would be entitled to any accretions to the cryptocurrencies;
4.
All the cryptocurrencies deposited by Gatecoin’s customers were not
segregated but were transferred to, and mixed with those cryptocurrencies
deposited in the 18 Mother Wallets controlled by Gatecoin.
5.
Gatecoin was able to use the
cryptocurrencies kept in the wallets it controlled in the way it saw fit
including for the purpose of carrying on trades in its own right.
6.
There was no requirement for Gatecoin to
hold an amount equivalent to the customer’s assets on account.
7.
In Gatecoin’s audited financial statements
for the years 2016 and 2017, the cryptocurrencies held by Gatecoin were treated
as its assets while the “customer deposits” were treated as liabilities.
Non-consenting Customers
Still, the above
ruling does not conclusively determine the matter as one cannot rule out the
possibility that there may be Group A and B customers who had registered their
accounts before the 2018 T&C came into effect and did not access or use the
Platform from March 2018 up to the date of the liquidation of Gatecoin (such
that they did not accept or agree to the terms of the 2018 T&C)
(collectively “Non-consenting Customers”).
The 2016 T&C
is silent on the nature of Gatecoin’s holding of Currencies for Group A
customers. However, an intention to hold
the cryptocurrency on trust was evidenced by the fact that:
1.
The person who was engaged to draft the Trust T&Cs was instructed by
Gatecoin’s representative that Gatecoin held the property on behalf of its
client and was instructed to incorporate express trust language in the Trust
T&Cs.
2.
Gatecoin agreed to compensate the affected customers of the value of ETH
stolen at the time the compensation was paid (as opposed to the time of the
Hack). Such treatment was consistent with Gatecoin holding the ETH in
customers’ accounts on trust.
3.
In any event, even if the 2016 T&C by itself did not create a trust,
once the Trust T&C was adopted, they applied to Group A customers,
rendering the relationship they had with Gatecoin to be one of trust. The 2016
T&C provided that Gatecoin might change the terms at any time without prior
notice.
The Trust T&C contains express trust language and recognizes that
accretion to cryptocurrencies belonged to the customers.
The Court further found that certainty of subject matter, certainty of
object and certainty of intention were all present in relation to the
Non-consenting Customers. The Court
agreed that Gatecoin holds the cryptocurrencies on trust for the Non-consenting
Customers.
Takeaway
This case is a landmark decision confirming the proprietary nature of
cryptocurrencies. In determining whether
the cryptocurrencies deposited on cryptocurrency exchanges are held on trust,
the Court will consider, among others, the contractual
terms and conditions governing relationships between the cryptocurrency
exchange platform and customers and also the actual operations of the platform.
It is advisable
for owners of cryptocurrencies who wish to deposit their cryptocurrencies on an
exchange to understand clearly the terms and conditions they are entering into
since these could significantly affect their rights, especially if the
cryptocurrency exchange platform is wound up in the future. Given that Hong
Kong now has a new licensing regime for virtual assets trading providers
(VATPs), owners and investors of cryptocurrencies could consider trading in
VATPs that are regulated by the Securities and Futures Commission. If in doubt,
you are advised to consult a technology lawyer to better understand and protect your
rights.
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Important: The law and procedure on
this subject are very specialised and
complicated. This article is just a very general outline for reference and
cannot be relied upon as legal advice in any individual case. If any advice
or assistance is needed, please contact our solicitors. |
Published by ONC Lawyers © 2023 |