Judgment handed down by the Honorable Justice Linda Chan on March 31, 2023 at Re-Gatcoin Ltd [2023] HKCFI 914 gave detailed consideration for the first time in Hong Kong to the question of whether cryptocurrency is “proprietary.” The decision is noteworthy as it is likely to have an impact in a number of legal areas.
background
Gatecoin Limited (Gatecoin) is the Hong Kong company that operates the cryptocurrency exchange platform. Gatecoin was terminated by the court, and joint and several liquidators were appointed in 2019. The liquidators applied under Section 200(3) of the Companies (Liquidation and Miscellaneous Provisions) Act (Chapter 32) (CWUMPO) for directions relating to several cases, including This includes a description of the cryptocurrencies held by Gatecoin, and whether the cryptocurrencies were held by Gatecoin for its customers and were therefore not assets available to satisfy the claims of unsecured creditors.
Problem 1: Whether cryptocurrencies retain trust by Gatecoin for the benefit of their customers
The liquidators identified the following three sets of terms and conditions that were in effect during various periods of Gatecoin’s operation:
- 2016 Terms and Conditions: From January 2015 to November 2016;
- Trust terms and conditions: from November 2016 and March 2018; And
- 2018 Terms and Conditions: From March 2018 to March 2019.
The Court decided that the issue of whether cryptocurrencies were held in trust by Gatecoin for customers should be determined primarily by interpretation of the terms of the 2018 T&C. Previous versions had no application yet Customers who originally used the Gatecoin platform pursuant to the 2016 and Trust T&C Terms and Conditions accepted and agreed to the 2018 terms and conditions, which they considered they had done when accessing and using the platform after March 2018. There were no provisions in 2018 T&C, which had an impact on the establishment of the trust. On this basis, the court ruled that a trust is not formed from the perspective of contract law.
The Court also reached the same conclusion from a trust law perspective: while the Court was satisfied that there was sufficient certainty of the subject and certainty of the object to allow the creation of trust, the Court held that there was no intention to create any trust in clients under the Terms and Conditions of 2018, as was evident from the Terms and Conditions of 2018 That cryptocurrencies were not trusted by Gatecoin.
The court agreed that customers who never accessed the platform after the 2018 Terms and Conditions came into force may have their cryptocurrency held in trust. The liquidators are tasked with determining whether any clients fall into this category.
Problem 2: Whether cryptocurrency is “proprietary”
Section 197 of the CWUMPO places an obligation on the liquidator to take all the “property” of the company into receivership. However, the meaning of “ownership” is not defined in CWUMPO, and Section 3 of the Interpretation and General Provisions (Chapter 1) is unhelpful because the meaning of ownership is too broad.
When considering whether cryptocurrency is property, the court took note of previous cases in Hong Kong where contingent ownership warrants over cryptocurrencies were granted without either party indicating that cryptocurrencies were not “property.” The court has also heard cases from other jurisdictions, such as England, Wales, Singapore and Australia that looked at the nature of cryptocurrency, and agreed with the following reasoning in New Zealand’s decision: Roscoe vs. Cryptopia [2020] NZHC 728 which considered cryptocurrency to be a property:
- A cryptocurrency can be defined as the public key assigned to a cryptocurrency wallet, easily identifiable, sufficiently distinct and able to be uniquely allocated to individual account holders;
- The cryptocurrency is identifiable by third parties in that only the holder of the private key is able to access the cryptocurrency and transfer it from one wallet to another;
- Cryptocurrency is capable of being assumed by third parties in that it can be the subject of active trading markets; And
- Cryptocurrency has a certain degree of permanence or stability as the entire life history of the cryptocurrency is available in the blockchain.
Conclusion
The decision is welcome, as it brings Hong Kong jurisprudence in line with other major common law laws on this point. It also shows how cryptocurrency is handled during insolvencies and in the growing number of fraud cases involving cryptocurrency: for example, cryptocurrency can be the subject of a court order. However, the issue of whether an exchange holds cryptocurrency in trust is a matter of contractual interpretation on a case-by-case basis.
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