The Hong Kong High Court ("Court") has confirmed, for the first time, that cryptocurrencies constitute "property" under Hong Kong law and can be held in trust. The historic ruling of Re Gatecoin Limited (in liquidation)Yo aligns Hong Kong with the position of several other common law jurisdictions, providing legal certainty about the enforceability of cryptocurrency transfers or loans, and the legal rights of parties in case of fraud, theft or breach of trust involving such assets. The decision is certainly a welcome development for companies operating in this rapidly developing space.
Background
Gatecoin Limited, a Hong Kong company that operated a cryptocurrency exchange, was liquidated by the Court. Its liquidators sought the Court's instructions on, among other things, (i) the characterization of the cryptocurrencies and fiat currencies held by Gatecoin ("Currency") and (ii) the allocation of the Coins to Gatecoin's customers. In particular, the Court was asked to determine whether the Coins should be deemed to be held in trust for any of Gatecoin's customers.
The liquidators had identified three different sets of terms and conditions ("T&Cs") that were in effect at different time periods: (i) the "2016 T&Cs", which was signed by the "Group A" clients; (ii) the "Trust T&C", which was signed by the clients of "Group B"; and (iii) the "T&C 2018", which was signed by the clients of "Group C". The liquidators' position was that Coins belonging to Group A and Group B clients were held in trust by Gatecoin, while Group C clients only had contractual claims against Gatecoin.
"Property"?
To establish the existence of a trust, the Court first had to consider whether the cryptocurrency constitutes "property" capable of forming the object of a trust. In its analysis, the Court extensively considered recent authorities from various common law jurisdictions, including the United Kingdom, Singapore, the United States, Canada, the British Virgin Islands, Australia, and New Zealand. Noting that "the preponderance of case law recognizes the proprietary nature of cryptocurrencies," the Court found it particularly "appropriate to apply and follow the reasoning" in the Legal Statement on Crypto Assets and Smart Contracts published by the UK Jurisdiction Task Force in 2019 ("2019 Legal Statement")I and the 2020 New Zealand case of Ruscoe vs. Cryptopiaiiiconfirming that cryptocurrencies are capable of satisfying the four criteria of "property" established in the English case of National Provincial Bank v. AinsworthIV.:
- they are definableas the public key assigned to a cryptocurrency wallet is "easily identifiable, sufficiently distinct, and capable of being uniquely assigned" to an individual account holder.
- they are identifiable by third partiessince only the holder of a private key can access and transfer the cryptocurrency from one wallet to another.
- they are susceptible to assumption by third parties because they can be the object of active commercial markets.
- They have some degree of permanence or stabilitysince the entire life history of a cryptocurrency is recorded in the blockchain.
Under Hong Kong law, “property” is currently defined in section 3 of the Interpretation and General Clauses Ordinance (Cap. 1) as “(a) money, property, shares and land; and (b) obligations, easements and any description of assets, interests and profits, present or future, acquired or contingent, arising from or inherent in the property as defined in paragraph (a) of this definition”. The Court noted that while this definition is different from those adopted in other common law jurisdictions, it is "inclusive and intended to have a broad meaning" to encompass crypto assets.
Existence of a trust?
Although the Court found that cryptocurrencies are "property" and can be held in trust, in the circumstances of the present case, it found that a trust had not been established for the majority of Gatecoin customers. To reach this conclusion, the Court considered the test of the "three certainties" to establish a trustv:
- Certainty of the subject - satisfied
Despite the fact that the Coins were placed in a pool, the Court found that there was sufficient certainty about the object. This is because the amounts of Customer Currency were clearly recorded on the private exchange ledger maintained by Gatecoin ("Exchange Ledger"), which means that claims could be made to a pro rata share of all cryptocurrencies. by reference to the interchange ledger, despite the lack of segregation.
- object certainty - satisfied
There is certainty of object as beneficiaries of the trust and the extent of your claim can be easily determined from the Exchange Ledger.
- certainty of intent – No satisfied
After reviewing each set of T&Cs, the Court concluded that the previous versions of the T&Cs (i.e., the 2016 T&C and Trust T&C) were superseded by the 2018 T&Cs, on the basis that all Gatecoin customers were required to acknowledge and agree to the T&C of 2018 when it came into force to continue accessing and using the Gatecoin website. Therefore, the question of whether Gatecoin intended to hold the Currencies in trust for its clients must be determined by interpreting the terms of the 2018 T&Cs.
The Tribunal concluded that, as regards the 2018 T&Cs, there was clearly no intention to build trust for customers. In fact, the 2018 T&Cs contained express disclaimers of any fiduciary duty on Gatecoin's part. Furthermore, all cryptocurrencies were bundled together with other coins, and Gatecoin was able to use them however it saw fit, including for the purpose of transacting in its own right. Gatecoin's financial statements also treated cryptocurrencies as the company's own assets, while "customer deposits" were labeled as liabilities.
However, the Court noted that there may be pre-existing customers who never accessed the platform after the 2018 T&Cs came into force (and as such did not consent to its terms). To the extent such a class of customers exists, the Court found that Gatecoin held the Currencies in trust for them, as the Trust Terms and Conditions (which replaced the 2016 Terms and Conditions) contained express trust language.
Discussion
While Hong Kong courts have previously granted interlocutory ownership injunctions on digital assets, this is the first time they have expressly confirmed the proprietary nature of cryptocurrency, bringing Hong Kong in line with other key common law jurisdictions whose courts They have already spoken on the matter.
As noted in the ruling, recent decisions by courts in various jurisdictions have pointed to a broader common law trend of treating cryptocurrency as a new form of intangible property. For example, in the UK, following the publication of the 2019 Legal Statement, English courts upheld the view that crypto assets constitute property in a number of cases: AA against unknown personssaw; Ion Science Limited and Duncan Johns v. Persons Unknown, Binance Holdings Limited and Payment Ventures Inc.viii; Zi Wang in Graham Darbyviii. The UK government also recently announced plans to regulate cryptocurrencies under its existing financial services regime (see our recent customer alert here for more information), further solidifying the consensus that existing laws and regulations need to be adapted to ensure the recognition and protection of digital assets.
In light of the recent high-profile crashes of some major cryptocurrency exchanges, this decision provides useful clarity on the legal treatment of cryptocurrencies in Hong Kong, particularly in a liquidation scenario. It also demonstrates the willingness of Hong Kong courts to apply existing legal principles flexibly to emerging issues at a time of technological growth and innovation. As Hong Kong pushes to position itself as a global hub for virtual assets, disputes surrounding crypto assets and associated technologies will become increasingly common. We hope it will only be a matter of time before another unprecedented legal issue in this area hits Hong Kong courts, and we look forward to following these exciting developments.
Yo Re Gatecoin Limited (in liquidation) [2023] HKCFI 914. The ruling is available at: https://legalref.judiciary.hk/lrs/common/search/search_result_detail_frame.jsp?DIS=151622&QS=%2B%7C%28HCCW%2C18%2F2019%29&TP=JU.
ISee our previous 2019 Legal Disclosure Customer Alert at: https://www.akingump.com/en/insights/alerts/landmark-legal-statement-on-cryptoassets-and-smart-contracts.
iiiRuscoe vs. Cryptopia [2020] NZHC 728.
IV. National Provincial Bank v. Ainsworth [1965] CA 1175.
v knight against knight (1840) 49 IS 58.
saw AA against unknown persons [2019] EWHC 3556 (Communication).
viii Ion Science Limited and Duncan Johns v. Persons Unknown, Binance Holdings Limited and Payment Ventures Inc. (not reported, December 21, 2020). See pages 30-33 of our previous customer alert for a summary of the decision at: https://www.akingump.com/a/web/nL41KJryDTWGz5UDHMPKxx/3BPtUX/2021-year-in-review-civil-fraud-4875-4720-5645-1.pdf.
viii Zi Wang in Graham Darby [2021] EWHC 3054 (communication). See pages 30-33 of our previous customer alert for a summary of the decision at: https://www.akingump.com/a/web/nL41KJryDTWGz5UDHMPKxx/3BPtUX/2021-year-in-review-civil-fraud-4875-4720-5645-1.pdf.
