Authored by Mr. Gurcaran S. Arora and Supported by Ms. Paridhi Gupta
Published on: April 20, 2023
Introduction
On March 31, 2023, the High Court of Hong Kong Special Administrative Region Court of First Instance, settled the matter concerning the Liquidation of Gatecoin Limited and the Companies (Winding-Up and Miscellaneous Provisions) Ordinance (Cap. 32) (“CWUMPO”).
While this judgment primarily concerns the characterisation and allocation of Currencies to the customers, it holds great significance in the modern global sphere since it acknowledged cryptocurrencies under “assets.”
While providing its readers with an overview of the issues at hand, the article focuses on how the arguments and precedents in the Court of Law led to the recognition of cryptocurrency as “property.”
Background
About Cryptocurrency and Blockchain:
Cryptocurrency is a digital asset that uses blockchain technology to record data in blocks linked together using cryptography. Any transaction cannot be altered unless all parties agree to the changes. This decentralised approach ensures that no single authority controls the blockchain, and the data stored is permanent. Features of cryptocurrency include security in terms of transfer over specific networks using specific keys (private and public), the indivisibility of units, automatic matching and selection of inbound transactions, and the inability to use inbound transactions as inputs for subsequent ones. On the other hand, blockchain technology is a public ledger recording all transactions using unique IDs and invisible wallet balances.
About Gatecoin, its operations, and, its terms and conditions (“T&Cs”):
Since January 2015, Hong Kong-based Gatecoin, controlled by Mr. Aurelien Pierre Georges Menant (“Mr. Menant“), has operated a cryptocurrency exchange platform where consumers had to register and deposit cryptocurrencies or fiat currencies for trading or withdrawal. Liquidators were appointed on March 20, 2019, after the Court dissolved the firm on March 13, 2019. The Liquidators retrieved HK$11,589,477 and over 50 cryptocurrencies worth HK$140,390,667. Only 1,132 of 102,600 creditors filed a proof of debt (“PODs”), of which 316 preferred in-kind allocations.
Gatecoin managed four wallets whose transactions were recorded, saved, and visible in the blockchain. Every consumer had a unique ID; only the platform could transfer, deposit, or withdraw cryptocurrency. The Liquidators found three sets of T&Cs, i.e., the “2016 T&C” from January 28th, 2015, to November 2016, the “Trust T&C” from November 2016 to March 2018, and the “2018 T&C” from March 6th, 2018 to March 13th, 2019.
About BlueFire and ETD Holders:
Gatecoin’s ‘market maker’ BlueFire traded and controlled most of Gatecoin’s monetary units and cryptocurrencies, yet, it did not file a POD with the Liquidators. Furthermore, Gatecoin was hacked in May 2016, stealing 90% of its ETH32 holdings. Customers received an email on August 17th, 2016, offering to withdraw and exchange 10% of their ETH holdings. Ninety percent of the client’s money was listed as “ETD” (Ethereum Debt), indicating Gatecoin’s commitment to ETD holders, backed by ETH’s market value.
Issues Raised
In the context of the first issue of discussion that whether the Currencies are held on trust for each type of “Group A”, “Group B”, and “Group C” customers (collectively “Customers”) or would the Group C customers only have a contractual claim against Gatecoin for the Currencies, the High Court of Hong Kong deliberated upon the definition of “property” inclusive of cryptocurrency.
Recognition of Cryptocurrency as an ‘Asset’
Under S. 197 of the CWUMPO, a liquidator must take up the custody of all “property” upon issuing a winding-up order.[1] However, since the statute does not lay down a definition of “property,” the liquidator’s counsel (Mr. Ho) used the interpretation under S.3 of the Interpretation and General Clauses Ordinance (Cap. 1) to raise the contention of whether cryptocurrency constitutes as “property” or not. It defines property as (a) money, goods, choses in action, and land; and (b) obligations, easements, and every description of estate, interest, and profit, present or future, vested or contingent, arising out of or incident to property as defined in paragraph (a) of this definition.[2]
Mr. Ho, through the judgment of Lord Wilberforce in National Provincial Bank v Ainsworth,[3] reiterated the requirement of “property” as definable, identifiable, and capable in its nature of assumption with some degree of stability or permanence. Furthermore, in England and Wales, the previous judgment has been the basis of the rationale behind AA v Persons Unknown[4] (also known as “AA”), wherein the Court of law had recognised Bitcoin as “property.” He also argued that cryptocurrency could be treated as property despite it not being “choses in possession” or “choses in action” since courts have never found difficulty in recognising different intangible assets as property, both in particular statutory contexts and in general, in the Legal Statement by the UK Jurisdiction Taskforce.
Several international and national precedents and case laws further supported this position. In Hong Kong, through the cases of Nico Constantijn Antonius Samara v Stive Jean-Paul Dan[5]; Yan Yu Ying v Leung Wing Hei[6]; and Huobi Asia Limited & Anor v Chen Boliang & Anor[7], interlocutory proprietary injunctions were granted over cryptocurrencies without either party contending that cryptocurrencies are not “property.” Thus, it was held that cryptocurrencies were inherently recognised as “property” in the cases mentioned above.
In the British Virginia Islands, through the judgment of AA, cryptocurrencies were recognised as assets for liquidation purposes under S. 2(1) of the BVI Insolvency Act, 2003, in the case of Joint Liquidators of Torque Group Holdings Ltd (In Liquidation) v Torque Group Holdings Ltd (In Liquidation)[8]. Similarly, in Singapore, the Court has recognised cryptocurrencies as “property” capable of giving rise to the proprietary right, which could be protected through a proprietary injunction since it met all the requirements of “property” as discussed in the case of Ainsworth (§142).[9]
Meanwhile, in Canada, proprietary status and incidental rights were accorded to cryptocurrencies through the cases of Copytrack Pte Ltd v Wall[10] and Shair.Com Global Digital Services Ltd v Arnold[11][10] and Shair.Com Global Digital Services Ltd v Arnold[11], proprietary status and its incidental rights were accorded to cryptocurrencies. Moreover, people were entitled to have their cryptocurrencies traced and recovered, and suits against their misappropriation and conversion could also be instituted. Correspondingly in the case, of BDI Capital v Bulbul Investments LLC[12] of the USA, the Court relying on the decision made in Kleiman v Wright[13] determined that Bitcoins can be considered “specific intangible property” that is identifiable enough to be subject to a conversion action under Florida law.
Additionally, Australia’s Australian Federal Police v Bigatton[14] case ruled that there were justifiable reasons to believe that the defendant had been involved in “dealing with property reasonably suspected of being proceeds of crime,” which is against s.400.9 of the Criminal Code (§59). Consequently, the Court granted a freezing order and custody and control orders over the defendant’s property, including the Bitcoins and ETH in the wallets under its effective control (§§60, 64-66, 79).
However, the most significant and comprehensive judgment concerning the same has been the Ruscoe v Cryptopia[15] of New Zealand, wherein the Court of law not only recognised cryptocurrency as “property” but also answered the question to whether the cryptocurrencies held by Cryptopia are held in trust for the account holders (§§46-47). While the account holders argued that a cryptocurrency is a form of intangible personal property under common law falling under “property” in S.2 of the Companies Act, the creditors that despite cryptocurrency being considered as “assets” under the Companies Act (§61), it cannot form the subject matter of a trust under common law (§§50-51).
In the aforementioned case law, Judge Gendall determined that cryptocurrency meets the four criteria for “property” outlined in Ainsworth (§142), making it a form of intangible property. He made the following observations:
- It is identifiable by its public key,
- It is only accessible by its private key,
- Third parties can assume it through trading, and
- It has permanence and stability as its history is recorded in the blockchain.
He also recognised cryptocurrencies as an item of tradeable value that affords exclusivity to its owner (§§127-128) and with actual proprietary status (§§127-128) because it invites no public policy objections (§§129-132).
Thus, intending to have a more comprehensive definition inclusive of the definitions observed in other jurisdictions, the High Court of Hong Kong recognised cryptocurrency as “property” capable of forming the subject matter of trust.
Impact on the Indian Jurisprudence
While the Union Government has delayed the introduction of the much-awaited Cryptocurrency Bill in the budget of 2022-2023, the 30% taxation policy concerning the transfer of virtual digital assets has indirectly recognised cryptocurrencies, rendering the Indian population susceptible to the perils of such emerging technologies. Therefore, until a statute is formalised and passed by the Indian Parliament, the Indian judiciary must take it upon itself to ensure the citizens are secure.
Until now, India’s judiciary has not recognised cryptocurrencies as “property.” However, it is common to see the Indian judiciary draw conclusions and rationales from the British, American, Canadian, and Australian Judicial decisions and Common Law resonances, either owning their shared colonial history or due to the persisting British influence on the Indian legislature and the Constitution. To this day, several landmark British judgments, such as Airedale NHS Trust v. Bland[16] in the Aruna Shanbaug Case[17] and others, continue to be applicable in the Indian scenario. Hence, analogically, the application of the judgment of Lord Wilberforce in National Provincial Bank v Ainsworth[18] could also become possible, and coherently present judgment would also be valid and legitimate in India.
Nevertheless, it is imperative that when making decisions related to Indian law, the language of the relevant statute, the context and circumstances in which it was enacted, and the unique Indian conditions must be given top priority.[19]
Conclusion
With the advent of Web 3.0., the popularity, scope, and application of cryptocurrencies have proliferated to the extent that cryptocurrencies have become the basis of several businesses and companies. Therefore, it has become all the more significant that cryptocurrencies no longer be construed as abstract concepts unrecognised in the Court of Law but be identified as an intangible form of property ascertained with all the ancillary rights.
“I see Bitcoin as ultimately becoming a reserve currency for banks, playing much the same role as gold did in the early days of banking. Banks could issue digital cash with greater anonymity and lighter weight, more efficient transactions.”- Hal Finney
Bitcoin, like other cryptocurrencies, is unique in its function and application, distinct from the traditional form of gold-based currencies. Therefore, while its existence may pose doubt and distress in the minds of traditional consumers and economists, people must adapt and accustom themselves to such technological advancements to maintain our relevancy.
[1] Companies (Winding-Up and Miscellaneous Provisions) Ordinance (1933) Cap. 32, §197 (H.K.).
[2] Interpretation and General Clauses Ordinance (1996) Cap. 1, §3 (H.K.).
[3] [1965] AC 1175, 1247-1248
[4] [2019] EWHC 3556 (Comm) [2020] 4 WLR 35, §§55-61
[5] [2021] HKCFI 1078
[6] [2021] HKCFI 3160
[7] [2020] HKCFI 2750
[8] [2021] BVIHC (Com) 0031
[9] B2C2 Ltd v Quoine Pte Ltd [2019] 4 SLR 17; [2019] SGHC(I) 03 & CLM v CLN & Ors [2022] SGHC 46
[10] [2018] BCJ 3325
[11] [2018] BCJ 3114
[12] [2020] 446 F.Supp.3d 1127
[13] [2018] US Dist. LEXIS 216417
[14] [2020] NSWSC 245
[15] [2020] NZHC 728
[16] [1993] All E.R. 82) (H.L.)
[17] [1988] (Supp) SCC 734
[18] [1965] AC 1175, 1247-1248
[19] State of West Bengal v. B.K. Mondal and Sons, AIR 1962 SC 779