Last year Computers & Law reported on the UK Jurisdiction Taskforce’s Legal Statement on the Status of Cryptoassets and Smart Contracts. The statement said that in principle, cryptoassets can be treated as property and that smart contracts are enforceable by the courts.
In AA v Persons Unknown & Ors, Re Bitcoin [2019] EWHC 3556 the Court held that a cryptoasset such as Bitcoin is property in an application for an interim proprietary injunction.
The High Court of New Zealand has now issued its ruling in Ruscoe v Cryptopia Limited (in liquidation) CIV-2019-409-000544 [2020] NZHC 728. The ruling referred to the UK case and the legal statement.
Background and questions for the court
Cryptopia Ltd was a cryptocurrency trading exchange. It was placed into liquidation in May 2019 after suffering a serious hack and the loss of some $30 million of cryptocurrency from its exchange.
There were two main issues raised by the liquidators:
(a) are cryptocurrencies a type of “property” under the New Zealand Companies Act and, linked to this, can cryptocurrencies form the subject matter of a trust?
(b) was Cryptopia, in providing a cryptocurrency storage and exchange service for its customers, a trustee of the currency brought onto the exchange by accountholders and held by it?
The court’s ruling
The court considered case law and legislation. In particular, it referred to the established case law which states that “property” (i) must be definable; (ii) is identifiable by third parties; (iii) is capable in its nature of assumption by third parties; and (iv) have some degree of permanence or stability.
The judge said that he was
“satisfied that cryptocurrencies meet the standard criteria outlined…to be considered a species of “property”. They are a type of intangible property as a result of the combination of three interdependent features. They obtain their definition as a result of the public key recording the unit of currency. The control and stability necessary to ownership and for creating a market in the coins are provided by the other two features – the private key attached to the corresponding public key and the generation of a fresh private key upon a transfer of the relevant coin.”
The judge next considered two common arguments that cryptocurrencies do not have the status of “property”:
(a) the common law recognises only two classes of personal property: tangibles and choses in action. Cryptocurrencies are said to be neither.
(b) information is not generally recognised as a form of “property” and cryptocurrencies might be said to be a form of information.
The court dismissed both arguments. The first was a red herring and the argument that cryptocurrency is mere information and therefore it is not property is a simplistic one and therefore wrong in the context of the case.
Finally, the court rejected the argument that there were any public policy grounds why cryptocurrencies should not be considered as property.
The court also concluded that the various cryptocurrencies were at equity held on separate express trusts by Cryptopia for all of the accountholders.
The court also considered other issues, including how any recovered stolen digital assets should be dealt with. Only those account-holders who hold types of cryptocurrency that were stolen would have suffered a loss as a result of that misappropriation. Any recoveries of misappropriated cryptocurrency should enure to the benefit of those same accountholders. The judge set out an appropriate process to follow.
