Crypto-verse Trust: Cryptocurrencies as a Property Type in Hong Kong | Insights and Events

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Introduction

The emergence of cryptocurrency as an investment asset, alongside the proliferation of blockchain technology, has raised significant legal questions, particularly regarding the legal status of cryptocurrency. Jurisdictions like Hong Kong have struggled to define the legal nature of cryptocurrency, though a landmark ruling has shed new light on the matter.

On March 31, 2023, Judge Linda Chan in Re Gatecoin Limited [2023] HKCFI 91 (Re Gatecoin) found that the cryptocurrency has all the characteristics of property and therefore could be held in trust as part of a liquidation (although it was ultimately found that cryptocurrencies in question were not held in trust).

In this legal update, we examine the key considerations behind the decision in Re Gatecoin.

Highlights

Gatecoin Limited was a cryptocurrency exchange platform established in Hong Kong in 2015 that allowed customers to deposit, transfer and withdraw both cryptocurrencies and fiat currencies, and engage in trading of cryptocurrency.

Gatecoin itself was also engaged in cryptocurrency trading, including with its own customers. The company was dissolved on March 13, 2019, with liquidators appointed on March 20, 2019. As of October 31, 2022, more than 50 types of cryptocurrencies worth more than HK$140 million have been recovered by liquidators . The liquidators contacted 102,600 creditors, but only 1,132 of them presented their proof of debt. These creditors were customers with positive account balances on Gatecoin. It was recognized that the total value of the cryptocurrencies recovered by the liquidators would not be sufficient to reimburse all customers in full.

Three sets of terms and conditions (T&Cs) were relevant to the case: The applicable T&Cs:

Between January 28, 2015 and November 2016 (GTC 2016); From November 2016 to March 2018 (Trust T&Cs); and From March 6, 2018 to March 13, 2018 (CG 2018).

Customers who subscribed to the platform during the period of application of the 2016 T&Cs are referred to as “Group A”. Those who signed up when the trust terms and conditions were in place were referred to as “group B”, while customers who accepted the 2018 terms and conditions were categorized as “group C”.

While the 2016 T&Cs did not include provisions to create a trust, Gatecoin reserved the right to change the terms “without notice” to customers. In November 2016, Gatecoin introduced Trust T&Cs, which explicitly stated that customers would have a beneficial ownership interest in digital assets, and Gatecoin would act as a custodian holding the digital assets in trust. Gatecoin was also required to inform customers before making material changes to the terms, and customers were asked to agree to these changes. From March 6, 2018 and until the liquidation order, Gatecoin adopted the 2018 T&Cs, which stated that Gatecoin was not a fiduciary and that customers should not expect to receive cryptocurrencies additional ones created by blockchain forks.

Cryptocurrency as property

The first key question was whether the liquidators even had the power to realize and distribute the cryptocurrencies in the liquidation process. While Section 197 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) (CWUMPO) provides that liquidators shall take custody of all “property” in a liquidation, “property” is not defined in the CWUMPO. Accordingly, it was necessary for the court to consider the statutory definition of “property” pursuant to section 3 of the Interpretation and General Terms Ordinance (Cap. 1); as well as the criteria set out by Lord Wilberforce in National Provincial Bank v Ainsworth [1965] 1 AC 1175 (Ainsworth), which include being “definable, identifiable by others, capable of its nature of being assumed by others and having some degree of permanence or stability”.

The court also considered the approach taken by common law jurisdictions such as England and Wales, the British Virgin Islands, Singapore, Canada, the United States, Australia and New Zealand. Judge Chan relied particularly on the New Zealand High Court decision Ruscoe v Cryptopia [2020] NZHC 728 (Ruscoe), which shared similar facts with the present case.

In Ruscoe, the liquidators of a cryptocurrency exchange sought direction from the court regarding the nature of the cryptocurrency and whether it could be subject to a trust. After reviewing the criteria discussed in Ainsworth, the court concluded that a cryptoasset is a form of property.

Judge Chan agreed with Ruscoe’s analysis and found that the definition of ownership is broad enough to include cryptocurrency, even though it cannot be strictly classified as choice in possession or choice in stock.

In particular, the tribunal relied on the following reasoning in arriving at its decision (to [57]):

“(1) It is definable because the public key assigned to a cryptocurrency wallet is readily identifiable, sufficiently distinct, and capable of being assigned only to an individual account holder (§§104-108).

(2) It is identifiable to third parties as only the holder of a private key is able to access and transfer cryptocurrency from one wallet to another (§§109-113).

(3) It is capable of being taken over by third parties in that it can be and is the subject of active commercial markets where (a) the rights of the owner in this property are respected, and (b) it is potentially desirable for third parties so that they themselves want to obtain ownership (§§114-116).

(4) It has some degree of permanence or stability because the entire life history of a cryptocurrency is available on the blockchain (§§117-119)”,

The court therefore concluded that cryptocurrencies were a form of property that could be held in trust.

Construction of terms and conditions

Notwithstanding the court ruling that cryptocurrencies could be held in trust, the second question was whether Gatecoin had in fact held the cryptocurrencies in trust for its customers, giving customers ownership of the cryptocurrencies. currencies.

Whether a trust has been created depends on whether the “three certainties” have been met – object, purpose and intention.

The court found that there was certainty of purpose by equating cryptocurrencies with shares – where a beneficiary’s lack of ability to appropriate a specific part of the fungible mass would not invalidate a trust as long as the beneficiary’s proportionate share can be clearly delineated, such as a ledger used to record a client’s corresponding contribution.

Similarly, the court found that certainty of purpose was also fulfilled by the same registry that recorded the list of beneficiaries and their claim on the assets of the trust.

The bigger issue was certainty of intent and whether the 2018 terms and conditions, which expressly waived a trust agreement, applied.

The liquidators argued that the assets of the client accounts of Groups A and B were held in trust since:

Trust’s T&Cs superseded the 2016 T&Cs that Group A clients had accepted, and therefore applied instead of the 2016 T&Cs; Group B clients opened their accounts when the Trust T&Cs were in effect; Group A and Group B customer digital assets were considered trust property when the trust terms and conditions were in effect; Trust’s T&Cs explicitly stated that clients would have a beneficial ownership interest in digital assets; and Gatecoin was obligated under the “Trust T&Cs” to notify customers before making material changes to the terms, but Gatecoin did not do so before implementing the 2018 T&Cs.

However, the court focused on the intent of the parties as “confirmed by an objective assessment of the terms of the agreement or relationship (between the parties) with reference to that property”, and concluded that Group A and Group B customers must have accepted the 2018 T&Cs in order to continue their access to the Gatecoin platform.

Accordingly, the court held that the “contractual agreement between the parties” (i.e. the 2018 Terms and Conditions) should not be disregarded and that Group A and B customers should not be allowed to rely on the terms of the Trusted Terms and Conditions.

In essence, the three groups of customers, with the exception of those who did not access or use the platform during the period of implementation of the TOS 2018 until the date of liquidation, were therefore governed by the T&Cs 2018. Since the 2018 T&Cs expressly waived a trust agreement, customers in Groups A, B, and C only had contractual claims against Gatecoin.

Comments and takeaways

The case highlights the Hong Kong courts’ attempt to bring cryptocurrencies into mainstream property law by applying existing legal principles. Although cryptocurrencies may not fit neatly into the traditional classification of “goods”, they possess characteristics of intangibles similar to stocks and shares, which was reflected in their treatment in Re Gatecoin.

Additionally, the case demonstrates the court’s willingness to recognize cryptocurrency exchanges as fiduciaries and impose fiduciary duties on them.

This development aligns with the Hong Kong Securities and Futures Commission’s recent recommendations for virtual asset exchanges to protect client assets by holding them in trust and to separate those assets from their own ownership.

Platform users, potential investors of cryptocurrency platforms and cryptocurrency platform operators should therefore take note of how the terms and conditions of the cryptocurrency platforms are written and carefully consider the ramifications on their rights in relation to cryptocurrencies held by the platform or debts owed by the platform.

Furthermore, although not directly at issue, the court, by concluding that the customers of Group A and Group B had accepted the 2018 T&Cs by “click[ing] read and accept the 2018 T&Cs before you can continue to access and use [the Platform]”, asserted the enforceability of clickwrap contracts in Hong Kong.

Re Gatecoin provided valuable insight into the legal status of cryptocurrency as property and the implications for trust agreements surrounding cryptocurrencies. The case sheds light on the changing legal landscape surrounding cryptocurrencies and sets a precedent for future cases in Hong Kong and beyond.

The authors would like to thank Sabrina Chow, trainee attorney at Mayer Brown, for her assistance with this legal update.

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