Article by Eric Lip, an associate of OTP Law Corporation.
While the legal status of cryptocurrencies has always been hazy, it seems the fog around it will be cleared soon. The past year has seen a substantial growing body of case law amongst common law jurisdictions. One question that has plagued the community has been whether cryptocurrency is regarded as “property” in the eyes of the law. Thankfully, the New Zealand High Court in David Ian Ruscoe & Malcolm Russell Moore v Cryptopia Limited (in liquidation)  NZHC 718 (“Cryptopia”), which deals directly with this issue.
Cryptopia is a cryptocurrency exchange online platform. It is designed principally to allow users to trade pairs of cryptocurrencies between themselves while Cryptopia charges fees for trades, deposits and withdrawals. In January 2019, Cryptopia’s servers were hacked, with about 9 to 14 percent of its cryptocurrency, valued at around NZD 30 million, stolen. In May, Cryptopia’s shareholders resolved by special resolution to place the company in liquidation. The liquidators have estimated that Cryptopia held around NZD 170 million worth of cryptocurrency.
The liquidators then made the current application to the courts in New Zealand for directions on:
- the legal status of the cryptocurrencies held by Cryptopia, and
- whether the cryptocurrencies are held on trust by Cryptopia.
The court’s answers to these questions would, in turn, determine the legal rights of the creditors and account holders of Cryptopia respectively.
When discussing property in common terms, a distinction is typically drawn between real and personal property. Real property refers to interests in land and the fixtures upon the land. Personal property may further be split between tangible and intangible properties. The legal rights that one has over a tangible, real world physical property is also referred to as a “chose in possession”. This arises from the fact that physical possession can be taken of the thing or property in question.
In contrast, the legal rights over intangible or “incorporeal” property are typically referred to as “choses in action”. Such rights are created by law and can only be enforced through legal action. A common example of such intangible rights would be intellectual property rights, such as copyright. Another example would be bank accounts. Your deposit in a bank account, which represents the debt owed by the bank to you, is also a chose in action you have against the bank and you do not have ownership over the money in the said bank account.
As for the legal test in determining whether something can be considered as “property”, Lord Wilberforce’s definition in National Provincial Bank Ltd v Ainsworth  AC 1175 is often cited. The definition outlines four requirements for a “property” interest:
- Identifiable subject matter;
- Identifiable by third parties;
- Capable of assumption by third parties; and
- Some degree of permanence or stability.
After considering a few cases relating to cryptocurrencies, including the Singaporean case of Quoine Pte Ltd v B2C2 Ltd, the New Zealand High Court then went on to hold that that Lord Wilberforce’s definition for “property” has been met in Cryptopia’s case.
Briefly, we’ll take a look at some of the cases discussed.
Quoine Pte Ltd v B2C2 Ltd  SGCA(I) 2
While the facts of the case are complex, a brief summary is as follows:
Quoine operated a cryptocurrency exchange, on which B2C2 was trading on. B2C2 employs an algorithimic trading software to perform trades. Due to an error in the programming by Quoine, trades, which were performed automatically, were executed at a rate of 250 times its appropriate price. Quoine then became aware of the mistake and reversed the trades, which led to the litigation.
B2C2 sued Quoine for breach of contract as well as breach of trust. For a breach of trust argument to succeed, the cryptocurrencies in question must be a species of “property” that can be capable of being a subject matter of a trust. Before Thorley IJ in the Singapore International Commercial Court, Quoine did not dispute the issue of whether cryptocurrencies could be the subject of property rights. Accordingly, Thorley IJ considered that cryptocurrencies meets the requirements set out by Lord Wilberforce, but did not consider the issue further. Both the breach of contract and breach of trust arguments succeeded.
On appeal, the Court of Appeal overturned Thorley IJ’s decision on the breach of trust on the basis that the three certainties of trust had not been met. On the “property” question, the Court of Appeal suggested that the cryptocurrencies are capable of “assimilation into the general concepts of property”, although the court ultimately did not find it necessary to decide on this point.
Elena Vorotyntseva v Money-4 Ltd t/a Nebeus.Com, Sergey Romanovskiy, Konstantin Zaripov  EWHC 2596 (Ch)
Here, Nebeus, a trading platform, was holding cryptocurrency worth an aggregate of 1.5 million GBP for the claimant Vorotyntseva. When risk of dissipation of the cryptocurrency arose, the claimant then applied for a worldwide freezing order against Nebeus and its directors. The issue of whether cryptocurrency could be a form of property was not raised and thus was not a matter before the court. However, the case is noteworthy for the willingness of the court to grant a proprietary order over the cryptocurrency.
AA v Persons Unknown  EWHC 3556
More recently, the English High Court in AA v Persons Unknown recognised cryptocurrencies as “property” by granting an interim proprietary injunction. This injunction was against a cryptocurrency exchange over cryptocurrencies, which represented proceeds of ransom monies worth USD$950,000.00, paid out to a hacker in exchange for the decryption tool. In this case, only the claimant, who was the English insurer of a Canadian insurance company, was represented at the hearing. As such, no issues on the legal status of cryptocurrencies was properly canvassed. Nevertheless, the court carefully considered the legal statement by the UK Jurisdiction Task Force on Crypto assets and Smart contracts (“UKJT”) and adopted a similar view in arriving at the conclusion that (1) cryptocurrencies meet the four criteria set out by Lord Wilberforce; and (2) cryptocurrencies do not fall neatly within the traditional categories of choses in possession or choses in action.
Application in Cryptopia
Applying Lord Wilberforce’s definition, the court in Cryptopia then held the following on cryptocurrencies:
“They are a type of intangible property as a result of the combination of three interdependent features. They obtain their definition as a result of the public key recording the unit of currency. The control and stability necessary to ownership and for creating a market in the coins are provided by the other two features – the private key attached to the corresponding public key and the generation of a fresh private key upon a transfer of the relevant coin.”
The court further went on to deal with two common counter-arguments against characterising cryptocurrencies as “property”
- Cryptocurrencies are neither choses in action or choses in possession.
The traditional dichotomy between choses in action and choses in possession was regarded to be a “red herring” argument. The court opined that cases discussing this dichotomy should not be regarded as setting limits as to what can be recognised as “property”, but rather as an attempt to categorise all examples of property into one of the two categories. As such, this was not an impediment to the recognition of “property” that do not fit squarely into the traditional dichotomy.
- Information is typically not recognised as “property”
While it has been previously stated that “information is not property at all” as it is “normally open to all who have eyes to read and ears to hear”, a distinction should be drawn between such mere information which may be infinitely duplicated, and cryptocurrencies, which functions as an item of tradeable value and not to simply record or impart information. Notwithstanding the fact that cryptocurrencies are essentially intangible computer code, this data on the blockchain making up cryptocurrencies give rise to a relationship and system of transfer, which also has an element of exclusivity. As such, the argument that cryptocurrency is mere information incapable of being property was dismissed as simplistic.
Having concluded that cryptocurrencies can be regarded as “property”, the court in Cryptopia then went on to discuss the question of whether cryptocurrencies were held on trust for the account holders. The court held that the three certainties of a trust were met on the facts of the case and answered the question in the affirmative.
The world of cryptocurrencies is constantly evolving and presents new regulatory and legal challenges. Cryptocurrencies defy blanket definitions as there are often unique or distinctive features. For instance, some cryptocurrencies may require multiple signatures and the control over these assets are shared by a number of private key holders. Even if property rights are attached to cryptocurrencies, there may also be practical difficulties arising from, for instance, the anonymity or pseudoanonymity and traceability issues from the ownership of cryptocurrencies.
Nevertheless, Cryptopia has provided a clear and direct indication that the prevailing opinion in the common law world is that cryptocurrencies are to be treated as “property”. This is important in establishing legal certainty that cryptocurrencies are capable of being the subject matter of a trust while also being particularly relevant for the insolvency regime. However, the precise nature of this property right requires further clarifications, given that traditional categorisations are clearly inadequate to fully accommodate cryptocurrencies.