Introduction

The rapid rise of cryptocurrency platforms has introduced both opportunities and challenges for investors. As regulatory oversight intensifies globally, disputes over asset security and platform operations continue to emerge. A recent case, Chan Wing Yan & Anor v JP-EX Crypto Asset Platform Pty Ltd & Ors [2024] HKDC 1628, highlights the legal remedies available when a platform’s practices fail to safeguard investor assets. This article examines the case and provides key takeaways for the general public on how to protect their cryptocurrency investments.

Case summary

This case involves seven Defendants, including the operators of the JPEX platform, JP-EX Crypto Asset Platform Pty Ltd and Hong Kong-incorporated Web 3.0 Technical Support Limited (collectively, “JPEX”). The Plaintiffs, were users of the cryptocurrency platform, JPEX for the buying and selling of cryptocurrencies. The Plaintiffs claimed to have deposited substantial amounts of cryptocurrency, primarily USDT, into wallets purportedly held on the platform. However, they later discovered that these assets had been transferred without their authorization to unknown wallets. Despite their attempts to withdraw funds from JPEX, they faced obstacles, including arbitrary conversion of assets and increased withdrawal fees.

According to the Plaintiffs, JPEX falsely represented its operations as being secure and licensed, thereby gaining the trust of users. The Securities and Futures Commission (“SFC”) identified JPEX as an unlicensed virtual asset trading platform in September 2023, further exacerbating concerns. Despite being notified of the Plaintiffs’ claims, the Defendants failed to appear in Court or provide any defence, prompting the Plaintiffs to proceed with a default judgment.

The Plaintiffs’ primary claim against the 2^nd Defendant was based on breach of trust. Alternatively, they argued for debt recovery, asserting a creditor-debtor relationship akin to that of a bank and its customers. The Plaintiffs sought declaratory and injunctive reliefs, including the return of their assets and equitable compensation. The Court’s judgment provided critical insights into the legal framework governing cryptocurrency as a property and the related disputes.

Key findings

Cryptocurrency as property capable of trust

The Court reaffirmed that cryptocurrency, such as USDT, is recognized as property capable of forming the subject matter of a trust (Re Gatecoin Ltd (in Liq) [2023] 2 HKLRD 1079).

The Court found that the USDT deposits were clearly segregated in specific wallets before being withdrawn. Even if the deposits were transferred to cold wallets, the Court stated that a trust over a proportionate share of a fungible mass (such as cryptocurrency) could still be valid, as long as the beneficiary’s share was identifiable. This satisfied the certainty of subject matter required to establish an express trust.

The Court also noted that the balance of the crypto-assets was readily available through the platform’s records, and it was clear which assets belonged to which user. This satisfies the requirement for certainty of object, ensuring that the Plaintiffs’ claims could be traced to the specific crypto-assets held on the platform, making it clear which assets were subject to the trust.

The Court concluded there was certainty of intention to create a trust, based on both the parties’ conduct and public representations by JPEX. JPEX’s failure to provide private keys to users, its claims that user funds were stored securely in cold wallets, and its use of terms like “client funds” and “user’s assets” in public announcements indicated an intent to hold the users’ crypto-assets on trust. Despite the absence of the word “trust” in the terms of service, the overall conduct and statements made by JPEX clearly manifested the intention to treat the users’ assets as being held in trust.

Breach of trust

JPEX’s failure to safeguard user assets constituted a breach of trust. Specifically, the platform’s operators transferred the Plaintiffs’ assets to unknown wallets without authorization and denied Plaintiffs access to their funds. The Court held that such actions contravened the trustees’ duty to preserve and manage trust property for the benefit of the beneficiaries.

The Court highlighted that JPEX’s conduct – including withholding private keys from users and misrepresenting its storage mechanisms as secure – demonstrated a clear intention to hold users’ assets on trust. Representations made in public announcements further supported the Plaintiffs’ case, as these statements explicitly emphasized the security and protection of user assets.

Declaratory and injunctive relief

The Court granted declaratory relief, confirming that the Defendants held the deposited USDT on trust for the Plaintiffs. Injunctive relief was also issued to prevent further unauthorized transfers. The Court stressed that granting such relief was necessary to secure the Plaintiffs’ proprietary interests and avoid reducing them to unsecured judgment creditors.

The Court also ordered JPEX’s affiliated Hong Kong company to recover and deliver up the Plaintiffs’ assets or, alternatively, pay equitable compensation. This underscores the judiciary’s willingness to employ robust measures to ensure investor protection in the absence of a defence.

Legal takeaway

This case underscores the importance of investor awareness and proactive measures when engaging with cryptocurrency platforms. First, verifying the credibility of a platform is essential. Prospective investors should confirm whether a platform is licensed and adheres to local regulatory standards. The warnings issued by the SFC against JPEX illustrate the risks associated with unregulated platforms. Regularly consulting regulatory announcements and public advisories can help investors make informed decisions and avoid potentially fraudulent schemes.

Understanding the terms of service and agreements offered by cryptocurrency platforms is another critical step. While the agreements may not explicitly mention fiduciary responsibilities or trusts, the platform’s conduct and representations can create legal obligations. The Court in this case found that JPEX’s actions – such as withholding private keys and promoting asset safety through public announcements – demonstrated an intent to hold user assets on trust. Investors should scrutinize agreements for clauses that might grant platforms excessive control or limit user rights over deposited assets.

Finally, investors should be aware of their legal rights and the remedies available in the event of asset mismanagement or fraud. Claims based on breach of trust, as seen in this case, can be effective in recovering misappropriated assets. Additionally, seeking professional legal advice is vital for navigating complex cryptocurrency disputes and ensuring that claims are appropriately framed. Collaboration with regulatory authorities and law enforcement can also enhance recovery efforts and hold fraudulent platforms accountable.