Cryptoassets Find Foundation in their Status as Property

Since the rise in use of digital currencies and smart contracts, various jurisdictions have been called on to consider how cryptoassets and related transactions should be treated as a matter of law and, consequentially, what legal protection stakeholders can expect

In the past year, there have been notable developments in this area and signs of a trending consensus towards recognition of cryptoassets as property by the judiciary in several common law jurisdictions.

Why does it matter?

The growing consensus that cryptoassets (which generally includes all cryptocurrencies as well as security and utility tokens stored on a distributed ledger) can and should be considered as property is significant, as property is the foundation of many transactions. Indeed, the term property does not describe an item itself, but a legal relationship with that item.

This distinction is important because proprietary rights are widely recognised in legislation around the world. Consequently, in the common law system, and in the absence of legislation, cryptocurrencies cannot become the subject matter of a trust or a proprietary right of security, unless they are recognised as property. It is the recognition of an item as ‘property’ that therefore provides the relevant owner of or stakeholder in that item with certain legal protections and remedies. These proprietary rights are of particular significance, for example, in an insolvency, where they will generally have priority over claims by creditors, or when seeking to recover something that has been lost, stolen or unlawfully taken (e.g. in cases of fraud and theft).

A landmark ruling by the Singapore International Commercial Court

One of the first key rulings on the status of cryptoassets was by the Singapore International Commercial Court in March 2019. The case (B2C2 Ltd v Quoine Pte Ltd [2019] SGHC(I) 03) concerned a series of cryptocurrency trades on a currency exchange platform (Quoine) which were inadvertently carried out at 250 times the market rate (in favour of B2C2), due to a fault in Quoine’s trading algorithm. The trades were subsequently unilaterally reversed by Quoine, who alleged, amongst other things, that it was right to reverse the trades because they had been entered into by mistake and were therefore void. B2C2 consequently brought proceedings against Quoine, claiming that Quoine’s decision to reverse the trades was both a breach of the contractual terms between the parties and a breach of trust.

In order to determine the dispute, the court had to address a number of novel points, including whether cryptocurrencies could be considered as property. At the time, whether cryptocurrencies could be considered as property was the subject of some debate. Potential obstacles to treating cryptoassets as property included case law indicating that information itself (as opposed to the medium in which it is recorded) is incapable of being treated as property; and difficulties fitting cryptocurrency within existing types of property, with the type of property involved often impacting on the nature of remedies available. Property is typically treated as a ‘thing in possession’, which it is generally accepted cryptoassets, being intangible, cannot be, or a ‘thing in action’.

However, in B2C2 v Quoine both parties were readily prepared to assume that the virtual currencies could be treated as property. Accordingly, the judge concluded in a landmark ruling that, while cryptocurrencies could not be considered legal tender in the sense of being a regulated currency issued by a government, they do have a fundamental characteristic of intangible property as being an identifiable thing of value.

The case was subsequently appealed to the Singapore Court of Appeal which ultimately refrained from coming to a final position on whether cryptoassets could be treated as property. It noted, however, that a number of recent Commonwealth decisions, as well as a November 2019 report by the UK Jurisdiction Taskforce titled Legal statement on cryptoassets and smart contracts, had all concluded that cryptoassets could, in principle, be treated as property. Menon CJ commented that “There may be much to commend the view that cryptocurrencies should be capable of assimilation into the general concepts of property. There are, however, difficult questions as to the type of property that is involved” (Quoine Pte Ltd v B2C2 Ltd [2020] SGCA(I) 02, para 144).

The approach taken by the English Courts

The English Courts have also moved towards recognising cryptoassets as property, with the support of the UKJT’s report.

The UKJT comprises leading lawyers, industry experts and members of the government and judiciary. Their aim was to produce a legal statement which would provide clarity as to whether that cryptoassets could be treated as property under English law. This would not be binding on any court, but it was the intention that it would be taken into account. In line with the decision in B2C2 v Quione at first instance, the UKJT concluded that the novel and unique features of cryptoassets do not disqualify them from being treated as property and, accordingly, cryptoassets should in principle be treated as property by courts applying English law.

Shortly thereafter, the English High Court gave considerable weight to the UKJT’s legal statement and provided detailed reasoning for defining cryptoassets as property in a developing area of law. In this case (AA v Persons Unknown – [2019] EWHC 3558; [2020] 4 WLR 35), the Court considered whether Bitcoin could be considered as property for the purpose of granting a proprietary injunction. The Bitcoin in question was paid as part of a ransom following a cyberattack on a Canadian company. After the ransom had been paid the company’s insurance company was able to track the Bitcoin payments to a specific address. In order to prevent the assets from further dissipation, the insurance company applied to the English Court for a proprietary injunction over them.

The Court noted that, due to their virtual nature, cryptocurrencies could not be considered an item that was capable of being possessed in a tangible sense. However, it found the UKJT’s detailed analysis of the Court’s treatment of novel kinds of intangible assets (including patents and EU carbon emissions allowances) compelling. The Court therefore concluded that the Bitcoin was capable of being treated as property and granted the injunction in respect of the Bitcoin in question, indicating that ownership rights relating to cryptoassets are likely to be considered by English law as legal and enforceable against third parties.

Growing consensus that cryptoassets should be treated as property

The trend towards recognising cryptoassets as property continues to gather speed, with the recent New Zealand High Court ruling in Ruscoe v Cryptopia Limited (in liquidation) providing yet another example.

This case concerned a cryptocurrency trading exchange platform, Cryptopia, that had been hacked in January 2019. As a result, Cryptopia lost approximately NZD 30 million in cryptocurrency, with the company consequently being placed into liquidation. During the liquidation proceedings, the High Court in New

Zealand had to determine whether cryptocurrencies could be considered as property, capable of being held on trust. The implications of this question were important: if the cryptoassets were considered to be held on trust, it would mean that the account holders on Cryptopia’s platform would have priority over creditors in the liquidation proceedings.

In line with the UKJT’s legal statement, the Court determined that while it was difficult to formulate a precise definition, cryptoassets could be treated as property for the purposes of the New Zealand Companies’ Act and “probably more generally” (Ruscoe v Cryptopia Limited (in liquidation) [2020] NZHC 728, paragraphs 120 to 121, 133). Gendall J also noted support for treating cryptoassets as property from across common law countries, including Canada (Shair.Com Global Digital Services Ltd v Arnold, 2018 BCSC 1512) and England (Citing Vorotyntseva v Money-4 Ltd [2018] EWHC 2596 (Ch) and AA v Persons Unknown [2019] EWHC 3556, [2020] 4 WLR 35 at [57]–[59]) (although it is notable that, in many cases, neither party appeared to advance the argument that cryptoassets might not be property). The Court also firmly rejected any argument that cryptoassets could be considered as mere ‘information’ (which is generally not accepted as property), before finally noting that there were strong public policy arguments in favour of recognising cryptoassets as property.

What next?

As the market for cryptoassets continues to grow, along with associated cybersecurity and other security risks, there is increasing focus from market participants regarding how cryptoassets can be protected. The willingness of judges in common law jurisdictions to apply traditional legal principles to novel circumstances, in order to provide protection to the stakeholders of these assets, is therefore to be welcomed.

Looking to the future, if the principle that cryptoassets should be treated as property continues to gain widespread acceptance, then it is possible that security could be validly taken by way of a charge or mortgage over a cryptoasset, or cryptoassets could be treated as property for the purposes of custody arrangements, making them a useful asset for companies/individuals seeking to raise capital.

However, questions remain, including as to the type of property constituted by cryptoassets, something which can still impact on the availability of certain remedies. The continued development of the treatment of cryptoassets in jurisdictions around the world therefore continues to be a key issue to follow closely.

About the Author

poses for a portrait on Thursday, October 23, 2014 in Moscow, Russia.

Steven Baker is a partner at White & Case. White & Case is a global law firm with longstanding offices in the markets that matter today. Our on-the-ground experience, our cross-border integration and our depth of local, US and English-qualified lawyers help our clients work with confidence in any one market or across many.

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