Introduction
“There may be much to commend the view that cryptocurrencies should be capable of assimilation into the general concepts of property.” The Singapore Court of Appeal in the seminal case of Quoine Pte Ltd v B2C2 Ltd [2020] SGCA(I) 02 (“Quoine v B2C2”) opined when faced with the threshold issue of whether cryptocurrency is a species of property that is capable of being held on trust.
Quoine v B2C2 was cited by Gendall J in the New Zealand High Court decision of Ruscoe and Malcolm Russell Moore v Cryptopia Limited (in liquidation) [2020] NZHC 728 (“Ruscoe v Cryptopia”), who was faced with and addressed this same issue.
The dispute in Quoine v B2C2
The dispute concerned several trades of Ethereum (ETH) for Bitcoin (BTC) between B2C2 and two other users over a cryptocurrency exchange platform operated by Quoine. The disputed trades were executed at approximately 250 times the going market exchange rate for ETH/BTC, in favour of B2C2. Quoine had, due to an oversight, failed to implement certain necessary changes to its algorithmic programme. This set off a chain of events which eventually led to the conclusion of the disputed trades by B2C2’s algorithmic trading software. When Quoine became aware of the disputed trades, it unilaterally cancelled and reversed them.
B2C2 sued Quoine. The central issue on appeal was whether Quoine’s reversal of the trades was a breach of contract, for which the Court of Appeal held in the affirmative.1
The question left open in Quoine v B2C2
B2C2’s alternative contention was that Quoine held the cryptocurrencies credited into B2C2’s account pursuant to the disputed trades on trust for B2C2 and had breached that trust by reversing the disputed trades.
This contention was premised on the acceptance of cryptocurrencies as a species of property. At first instance, the High Court concluded that cryptocurrencies satisfy all the criteria in the classic definition of a property right as laid out by Lord Wilberforce in the seminal decision of National Provincial Bank v Ainsworth. 2
As it held that B2C2’s claim for a breach of trust would in any event have failed for lack of certainty of intention to create a trust, the Court of Appeal stopped short of ruling on the threshold issue of whether cryptocurrency is a species of property capable of being held on trust. However, it opined that there was much to commend the view that cryptocurrencies should be capable of assimilation into the general concepts of property, citing authorities in the Commonwealth that have implicitly accepted this and the Legal Statement on Cryptoassets and Smart Contracts released by the UK Jurisdiction Taskforce.
Ruscoe v Cryptopia
Ruscoe v Cryptopia concerned the determination of assets in the liquidation of a cryptocurrency exchange. At its peak, Cryptopia had over 900,000 accountholders in 230 countries. In January 2019, it fell victim to a serious hack resulting in a loss of NZD 30 million worth of cryptocurrency from its exchange. As a result, Cryptopia was placed in liquidation.
The liquidators sought assistance from the New Zealand High Court relating to the distribution of the cryptoassets in the liquidation. Lawyers were appointed to represent the classes of affected interests in the liquidation, namely the creditors of Cryptopia and the accountholders.
Like the Court of Appeal in Quoine v B2C2, Gendall J was faced with the question: Are cryptocurrencies a type of property, and can they form the subject matter of a trust?
Cryptocurrency – a specie of property?
In concluding that cryptocurrency is a specie of intangible personal property of identifiable value, Gendall J applied the Ainsworth test of the characteristics of “property” to cryptocurrency:
| Cryptocurrency had a public key which was a series of computer readable strings of characters, sufficiently distinct to be capable of then being allocated to an accountholder on the particular network. |
| Cryptocurrency had a private key which is made available only to the accountholder, which gives him control over the cryptocurrency and the power to exclude others from use. A combination of the public key and private key is required to record a transfer of cryptocurrency. |
| There is value in cryptocurrency and if stolen, the accountholder is deprived of that value. |
| Cryptocurrencies stay in existence and are stable unless it is “spent” through the use of the private key. Standard cryptocurrency systems do not provide for its arbitrary cancellation. |
Cryptocurrency – subject to a trust?
Having concluded that cryptocurrencies are a type of property and can be subject to a trust, Gendall J held that Cryptopia was acting as a bare trustee under a separate trust for each individual cryptocurrency held on its platform, where all the accountholders for that one particular currency were co-beneficiaries under each separate trust.
On the facts, he found that there was an intention on the part of Cryptopia to create a trust. Critically, Cryptopia’s internal financial accounts and database demonstrated that it did not assert ownership over the cryptocurrencies of the accountholders, whilst Its terms and conditions for use contained express trust provisions. He also found that there was certainty of object as the beneficiaries of the trusts could be identified from the list of accountholders.
The effect of Gendall J’s findings is that the loss of cryptocurrency resulting from the hack would be borne pari passu by the accountholders who were co-beneficiaries under each trust, and any recoveries of misappropriated cryptocurrency would enure to the benefit of those accountholders. While this was an equitable outcome for other accountholders, the accountholders of Ethereum received nothing as the hackers had stolen all the Ethereum held by Cryptopia.
Concluding thoughts
“Honest commercial developments may very well be hindered by a failure of the general law to recognize cryptoassets as property”, Gendall J stated in his decision in Ruscoe v Cryptopia.
Indeed, around the globe, courts and regulators have been playing catch-up with commercial reality in this fast-evolving area of cryptoassets. Rightly so, courts in multiple jurisdictions are gravitating towards the view that cryptoassets should be recognized as property, including the Singapore Court of Appeal in Quoine v B2C2. It remains to be seen how this area of jurisprudence will progress. How will courts rule on the precise nature of the property rights in cryptoassets i.e. are cryptoassets choses in possession, choses in action or a new category of property? What rights attach to them? What is certain is that the law must recognize cryptoassets as property.
Practically, the decisions in Quoine v B2C2 and Ruscoe v Cryptopia demonstrate the importance of well drafted terms of use and conduct of operations in defining the relationship between a cryptocurrency exchange and its users. It is a myth to believe that cryptoassets are secure and infallible. Both an exchange and its users should pay close attention to what the terms of the relationship provide for in the event of theft of cryptoassets or insolvency of the exchange.
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Disclaimer: The material in this article is prepared for general information only and is not intended to be a full analysis of the points discussed. This article is also not intended to constitute, and should not be taken as, legal, tax or financial advice by Wee Swee Teow LLP. Any illustrations used in this article may not be applicable or suitable for your specific circumstances or needs and you should seek separate advice for your specific situation. Any reference to any specific local law or practice has been compiled or arrived at from sources believed to be reliable and Wee Swee Teow LLP does not make any representation as to the accuracy, reliability or completeness of such information.
1See our legal update, Quoine v B2C2: Applying Conventional Legal Principles to the Brave New World of High Frequency Cryptocurrency Trading through Computer Algorithms.
2[1965] 1 AC 1175 at 1248
