The question of the decade, “what is cryptocurrency?” elicits many responses – not least from lawyers.
England, New Zealand and Canada and other courts in common law jurisdictions have broadly established that cryptocurrencies can be treated as a form of property for different purposes. The UK Jurisdiction Taskforce’s Legal Statement on Cryptoassets and Smart Contracts noted that:
“… it is important to understand whether the many statutory and common law rules applicable to property apply also to crypto-assets and, if so, how. Of particular significance are the rules concerning succession on death, the vesting of property on personal bankruptcy, the rights of liquidators in corporate insolvency, and tracing in cases of fraud, theft or breach of trust. It would, to say the least, be highly unsatisfactory if rules of that kind had no application to crypto-assets.”
In Re Gatecoin Limited [2023] HKCFI 91, a Hong Kong court expressly affirmed that cryptocurrencies are property that can be held on trust. This decision brings Hong Kong broadly in line with other common law jurisdictions. This article explores this judgment and its implications.
Crypto regulatory framework in HK
The Hong Kong government has recently stepped up its efforts to grow the jurisdiction as a cryptocurrency and “Web3” hub – and to do so under appropriate regulations. Financial Secretary Paul Chan has recently commented that:
“The premise of Web3 development is that the stability of the financial system and investor protection should not be damaged… I believe that everybody has learned from recent events that appropriate regulations are a must to create a sustainable development environment and a more ideal space for development.”
It’s one thing for these regulatory efforts to continue. It’s another thing for these regulatory efforts to occur within the framework of the law.
One of the main questions facing cryptocurrency has been – what is it? And more specifically – is it property?
The legal concept of “property” is a key foundation of business law and commercial agreements. If something is a “property” it is capable of being protected against an indefinite number of persons, in a variety of manners (depending on what property it is). Among other things, a property can be:
- subject matter of a trust;
- part of an estate; or
- a proprietary right in various ways (such as the subject of a proprietary injunction, or be a “security”).
The classic test for “property” has four criteria, as identified by Lord Wilberforce in 1965. The relevant right or interest:
- must be definable;
- identifiable by third parties;
- capable in its nature of assumption by third parties; and
- have a degree of permanence or stability.
Other intangible rights, such as stocks and bonds, are also treated as properties by a court.
The Gatecoin ruling
Gatecoin Limited is a Hong Kong incorporated company, and operated the “Gatecoin” cryptocurrency exchange platform which was wound up on March 13 2019.
During the course of the liquidation, Gatecoin’s liquidators applied for directions on:
- the characterisation of cryptocurrencies and fiat currencies held by Gatecoin; and
- how such amounts are to be distributed to customers (and in particular, whether such amounts were held by Gatecoin on trust for its customers).
Crucially for the latter question, there were three different sets of terms and conditions in force at different times, depending on when the relevant customer registered with Gatecoin. The liquidators argued that customers may have their amounts held by Gatecoin on trust or not, depending on which sets of terms they agreed to. If Gatecoin did not hold their amounts on trust, the relevant customer would only have a contractual claim against Gatecoin.
Decision
The Hong Kong Court of First Instance held that cryptocurrency is property, given it:
- is definable with the public key allocated to a cryptocurrency wallet thus is readily identifiable, sufficiently distinct, and capable of being uniquely allocated to an individual account holder;
- is identifiable by third parties as only the holder of a private key can access and transfer the cryptocurrency from one wallet to another;
- is capable of assumption by third parties in that it can be and is the subject of active trading markets; and
- has some degree of permanence or stability, as the entire life history of a cryptocurrency is available in the blockchain.
The court then determined that the cryptocurrencies and fiat currencies in question were not held on trust by Gatecoin for the majority of the customers, as those customers have expressly agreed to the latest set of terms and conditions, in which Gatecoin (among other things):
- expressly disclaimed fiduciary duties;
- did not segregate client assets from its own assets but rather mixed them together (both cryptocurrency and fiat currency);
- was entitled to keep accretions to the cryptocurrency (e.g. Gatecoin was entitled to airdrops or cryptocurrency created by forks);
- used customer assets for proprietary trading and other purposes;
- was not required to hold an equivalent amount of customer assets on account; and
- treated customer assets as its own assets, and customer deposits as liabilities, on its balance sheet.
The court therefore determined that Gatecoin (given the above elements of the terms) did not hold the relevant cryptocurrencies and fiat currencies on trust for those customers.
There were a small number of customers who did not accept the latest terms and conditions in this matterand as a result, those customers had their cryptocurrencies/fiat currencies held on trust, in contrast to the customers who did accept the latest terms and conditions.
What is the relevance of this decision?
There are a number of fundamental elements we take from this decision:
- Certainty that cryptocurrency is a property in Hong Kong. This decision is consistent with other common law jurisdictions where courts have determined this question (and, more broadly, how cryptocurrencies have been regarded by the wider business community and pursuant to policy considerations in different jurisdictions). Bringing such certainty is important going forward, particularly as Hong Kong steps up its efforts as a cryptocurrency and Web3 hub. Previous decisions in Hong Kong hinted that cryptocurrency is property – and it has now been clearly and expressly articulated, in turn increasing confidence in the Hong Kong legal system for this area. It is worth noting, for Asia practitioners, that the Court of Appeal of Singapore has expressly not decided whether cryptocurrencies are a type of property.
- Whether a trust arises will depend on the parties’ mutual intentions – which in turn, is determined by a review of the contractual terms between the parties and the “in practice” operation of the matter in question (in this case, a cryptocurrency exchange).
- Read the terms and conditions carefully. Many parties, whether operators or customers or others, regularly take terms and conditions (and accepting them) on platforms for granted. This case underlines that it is essential to review them carefully, as they will have a substantial effect on how the legal relationship between the parties are characterised, particularly in a liquidation scenario (which is something that has impacted various major exchanges recently).
- Are cryptocurrencies and other technological developments information or property? A question that may increasingly arise going forward (and which was not considered in this decision) is whether cryptocurrencies (and other technological developments) are merely “information”. Both common law and equity have historically not recognised property in “information”. However, decisions in a number of jurisdictions (notably, Roscoe v Cryptopia Ltd (in Liquidation) [2020] NZHC 728) have acknowledged that digital files and assets are distinguished from pure information, and can therefore be categorised as property. This will continue to be an important point to consider in similar matters involving whether certain technological developments are recognised as “property”, and particularly given the rising importance of data in the current digital economy.
It has long been an area of concern for businesses to protect data, with intellectual property rights (copyright and database rights) and other forms of rights (confidentiality / trade secret laws and contractual rights) offering limited protection for machine-generated data. Recognising some forms of data as property may become a focus for protecting and commercialising data.
Hoi Tak Leung, Counsel, Ashurst Hong Kong is admitted in New South Wales and Hong Kong and his practice involves TMT-related advisory work – including in relation to fintech, cybersecurity, data privacy and emerging technologies.
With thanks to Shashtika Sundar (trainee solicitor) for her contribution to this article.
