The judgment given by the Honourable Justice Linda Chan on 31 March 2023 in Re Gatecoin Limited [2023] HKCFI 914 gave detailed consideration for the first time in Hong Kong to the question of whether cryptocurrency is “property”. The decision is noteworthy as it is likely to have an impact in a number of legal areas.
Background
Gatecoin Limited (Gatecoin) was a Hong Kong company which operated a cryptocurrency exchange platform. Gatecoin was wound up by the court, and joint and several liquidators were appointed in 2019. The liquidators applied under section 200(3) of the Companies (Winding up and Miscellaneous Provisions) Ordinance (Cap. 32) (CWUMPO) for directions in relation to various issues, including the characterisation of cryptocurrencies held by Gatecoin, and whether the cryptocurrencies were held on trust by Gatecoin for its customers and thus were not assets available to satisfy unsecured creditors’ claims.
Issue 1: Whether the cryptocurrencies were held on trust by Gatecoin for the benefit of its customers
The liquidators identified the following 3 sets of terms and conditions which were in force during various periods of Gatecoin’s operation:
- 2016 T&C: from January 2015 to November 2016;
- Trust T&C: from November 2016 and March 2018; and
- 2018 T&C: from March 2018 to March 2019.
The court held that the question of whether the cryptocurrencies were held on trust by Gatecoin for the customers should primarily be determined by construing the terms of the 2018 T&C. The earlier versions had no application, after customers who had originally used Gatecoin’s platform pursuant to the 2016 T&C and Trust T&C, accepted and agreed to the 2018 T&C, which they were deemed to have done when they accessed and used the platform after March 2018. There were no provisions in the 2018 T&C which had the effect of creating a trust. On this basis, the court ruled that no trust was formed from a contract law perspective.
The court also reached the same conclusion from a trust law perspective: whilst the court was satisfied that there was sufficient certainty of subject matter and certainty of object to allow for the creation of a trust, the court held that there was no intention to create any trust for the customers under the 2018 T&C, as it was clear from the 2018 T&C that cryptocurrencies were not held on trust by Gatecoin.
The court accepted that customers who had never accessed the platform after the 2018 T&C came into force may have their cryptocurrencies held on trust. The liquidators have been tasked with determining whether any customers fall into this category.
Issue 2: Whether cryptocurrency is “property”
Section 197 of the CWUMPO imposes an obligation on a liquidator to take into custody all “property” of the company. However, the meaning of “property” was not defined in the CWUMPO, and section 3 of the Interpretation and General Clauses Ordinance (Cap. 1) is unhelpful as the meaning of property is very wide in scope.
In considering whether cryptocurrency is property, the court took note of past cases in Hong Kong whereby interlocutory proprietary injunctions over cryptocurrencies were granted without any party suggesting that cryptocurrencies were not “property”. The court also looked at cases from other jurisdictions, such as England and Wales, Singapore and Australia that considered the nature of cryptocurrency, and agreed with the following reasoning in the New Zealand decision of Ruscoe v Cryptopia [2020] NZHC 728 which held that cryptocurrency is property:
- Cryptocurrency is definable as the public key allocated to a cryptocurrency wallet, is readily identifiable, sufficiently distinct and capable of being allocated uniquely to individual accountholders;
- Cryptocurrency is identifiable by third parties in that only the holder of a private key is able to access and transfer the cryptocurrency from one wallet to another;
- Cryptocurrency is capable of assumption by third parties in that it can be and is the subject of active trading markets; and
- Cryptocurrency has some degree of permanence or stability as the entire life history of a cryptocurrency is available in the blockchain.
Conclusion
The decision is a welcome one, as it brings Hong Kong’s jurisprudence in line with other major common law jurisdictions on this point. It also gives clarity on how to treat cryptocurrency during insolvency situations and in the rising number of fraud cases involving cryptocurrency: for example, cryptocurrency can be the subject of an injunction. The question of whether an exchange holds cryptocurrency on trust, however, is a matter of contractual interpretation on a case by case basis.
