Clifford Chance

A recent landmark decision of the Hong Kong Court of First Instance (the "Court"), Re Gatecoin Limited [1], has considered the nature of cryptocurrency and blockchain technology and expressly confirmed for the first time that cryptocurrency is property under Hong Kong law[2] capable of forming the subject matter of a trust despite the beneficiary not being able to identify the precise asset as it had been pooled with other customer's cryptocurrencies.

The case is also a timely reminder that clicking on the 'accept terms and conditions' button when registering on a website is legally binding and the bargain reached between the parties will be upheld by the Court even where the 'click-to-agree' involves a customer transferring their beneficial interest in cryptocurrencies to a platform provider.

Background

Founded in 2013, Gatecoin Limited ("Gatecoin") operated one of Hong Kong's first cryptocurrency exchange platforms (the "Platform") catering to both professional traders and retail investors through which its customers could open an account, deposit cryptocurrencies or fiat currencies for trading purposes and withdraw the same. Gatecoin's centralised Platform saw a customer's deposit of cryptocurrencies being transferred and mixed with the same type of cryptocurrency from other customers in a specific mother wallet. 

Unfortunately, Gatecoin's Platform was the target of a cyberattack in May 2016 and the hackers stole around US$2 million in cryptocurrencies from Gatecoin's hot wallets (at the time this represented around 15% of Gatecoin's cryptocurrency deposits). Despite recovering some of the cryptocurrencies, difficulties with its payment service providers ultimately saw Gatecoin being wound up and joint and several liquidators (Jocelyn Chi and Anson Li) (the "Liquidators")[3] appointed by the Court in March 2019.

The Liquidators applied to the Court under s.200(3) of the Companies (Winding up and Miscellaneous Provisions) Ordinance (Cap. 32) for directions on, inter alia, (1) the characterisation of the 50 types of cryptocurrencies and fiat currencies ("Currencies") held by Gatecoin; and (2) the allocation of the Currencies to Gatecoin's customers. The Court's decision focuses on whether the Currencies are held on trust for Gatecoin's customers or form part of the estate for distribution in the normal course.

A matter of trust

The Court was asked to consider 3 different sets of terms and conditions ("T&Cs") identified by the Liquidators as having been in force consecutively throughout the life of the Platform:

• the "2016 T&C", from 28 January 2015 to November 2016: "Group A" customers;
• the "Trust T&C", from November 2016 to March 2018: "Group B" customers; and
• the "2018 T&C", from 6 March 2018 to 13 March 2019: "Group C" customers.

The Liquidators' view was that despite the 2016 T&C being silent on the nature of Gatecoin's holdings of the Currencies, there was contemporaneous and other information evidencing Gatecoin's intention to hold the Currencies on trust and the fact that the Currencies were pooled together and not segregated did not negate such trust. The mutual intention of Gatecoin and the Group B customers to create a trust was then expressly set out in the Trust T&C, which also applied to Group A customers who continued to use the Platform (the 2016 T&C providing that Gatecoin could change the terms at any time without prior notice). 

The Court agreed with the Liquidators' position on the Trust T&C, however, it found that the 2018 T&C, which removed all trust language and expressly disclaimed any fiduciary obligations, superseded the Trust T&C. Accordingly, any Group A and B customers who accessed and used the Platform after March 2018 (i.e. under the 2018 T&C) must be taken to have accepted and agreed to the 2018 T&C such that their Currencies were no longer held on trust by Gatecoin. 

The Liquidators expressed their doubts as to whether an amendment, without more, was sufficient to terminate an existing trust arrangement, particularly in circumstances where there was no evidence of any notification of the change being given to customers. 

However, the Court found that to the extent Group A and B customers accepted and agreed to the terms of the 2018 T&C when they accessed and used the Platform after March 2018[4], the Court should not ignore the contractual bargain reached between the parties by allowing these customers to rely on the terms of the Trust T&C.

It is relevant that Gatecoin did not have any physical presence and all services were provided through the Platform, such that the Court found it reasonable to infer that all customers (Group A and B) must have accepted the 2018 T&C as otherwise they would not have been able to access their accounts or carry on any transactions in respect of the Currencies in their accounts.  The Court found that it is possible there may be Group A and B customers who registered their accounts before the 2018 T&C came into effect, but did not access or use the Platform from March 2018 up to the date of the liquidation of Gatecoin such that they did not accept or agree to the 2018 T&C (the so called "Non-Consenting Customers") and the Liquidators are making due inquires to identify any Non-Consenting Customers.

Cryptocurrency is "property" under Hong Kong law

The Court was invited to consider the proprietary nature of cryptocurrencies under Hong Kong law.

Having considered the statutory definition of property in Hong Kong[5] and cases from other common law jurisdictions (including England and Wales, Australia, Singapore, New Zealand, Canada, the British Virgin Islands (BVI) and the United States), the Court found that the definition is an inclusive one, intended to have a wide meaning. Adopting the reasoning in the Legal Statement on Cryptoassets and Smart Contracts published by the UK Jurisdiction Taskforce and the New Zealand case of Ruscoe v Cryptopia[6], the Court agreed with the Liquidators that cryptocurrency is a type of intangible property, which is capable of forming the subject matter of a trust.

In Ruscoe v Cryptopia, cryptocurrency was found to have satisfied the four criteria for "property"[7], which was held as appropriate to be applied in the present case, in that:

• cryptocurrency is definable, as the public key allocated to a cryptocurrency wallet is readily identifiable, sufficiently distinct and capable of being allocated uniquely to the individual accountholder;
• it is identifiable by third parties because only the holder of the private key is able to access and transfer the cryptocurrency from one wallet to another;
• it is capable of assumption by third parties as it can be and is the subject of active trading markets where (a) the rights of the owner in that property are respected and (b) it is potentially desirable to third parties such that they want themselves to obtain ownership of it; and
• it has some degree of permanence or stability as the entire life history of a cryptocurrency is available in the blockchain.

This is the first time the Court in Hong Kong has expressly recognised the proprietary status of cryptocurrency and confirmed Gendall J's view in Ruscoe that cryptocurrency is not just information, but an item of tradeable value which affords exclusivity to its owner.[8]

Cryptocurrencies can be held on trust despite being pooled

Having decided that cryptocurrency is proprietary in nature and capable of forming the subject matter of a trust, and as there may be Non-Consenting Customers, the Court went on to consider whether the Currencies could be held on trust for such customers. The Court considered the classic three certainties test[9] and concluded that:

• there is certainty of subject matter – despite the lack of segregation of each customer's cryptocurrencies (they were all deposited in the mother wallet according to the type of cryptocurrency), there is an established line of cases which support the declaration of a trust over a part of a fungible mass without appropriation of any specific part as long as the mass is sufficiently identified and the beneficiary's proportionate share of it is certain. The present case is analogous to this line of cases so long as the right conferred upon the beneficiary does not depend on the precise identification of the asset owned;
• there is certainty of object – because there is no conceptual ambiguity or uncertainty in the definition of the class of beneficiaries, and the extent of their claim can be readily seen from Gatecoin's internal exchange ledger; and
• there is certainty of intention to create a trust – pursuant to the 2016 T&C and the Trust T&C (but not the 2018 T&C). As noted above, with respect to the 2016 T&C, the Court agreed with the Liquidators that while it was silent on the nature of Gatecoin's holding, the intention to create a trust could be inferred from the circumstances of the case. The Trust T&C contained an express provision evidencing a mutual intention to create a trust.  

Conclusion

Hong Kong now has precedent-setting guidance and clarity on the legal status of cryptocurrency on a blockchain, which aligns with the general trend of case law globally including in England and Wales, Singapore, Australia and New Zealand. The fact that cryptocurrencies are property has various legal implications including whether they can be legally and effectively transferred as property, whether security can be granted over them, and in the event of breach of trust or fraud, whether they can be traced. This case also highlights the need for businesses operating in the cryptocurrency space and investors to be aware of the terms and conditions governing relationships between parties including with customers, in particular the rights of the parties when it comes to the nature of ownership (be it contractual or proprietary).

For further analysis of these issues, please read our previous insights:

• Decoding Distress: Cryptoassets, Restructuring, and Insolvency under English Law
• English Law in the 21^st Century: Does it Need an Update to Accommodate Crypto?
• The Solana Cyberattack: What Now?
• Using Court Orders to Help Recover Stolen Cryptocurrencies
• Singapore Court of Appeal Allows Claims Against Cryptocurrency Exchange.

[1]     [2023] HKCFI 914

[2]     Whilst in earlier cases, the Hong Kong court had granted interlocutory proprietary injunctions over cryptocurrencies, there had been no discussion of cryptocurrencies as property and no express confirmation by the court.

[3]     Clifford Chance acted for the liquidators in this case.

[4]     The 2018 T&C contained 'click-to-agree' terms providing: "by visiting, accessing or using Gatecoin Platform, you confirm, represent and warrant that…you have legal capacity to accept these Terms and to agree to be bound by the Terms in their entirety."

[5]     Section 3 of the Interpretation and General Clauses Ordinance (Cap. 1) defines "property" as including: "(a) money, goods, choses in action and land; and (b) obligations, easements and every description of estate, interest and profit, present or future, vested or contingent, arising out of or incident to property as defined in paragraph (a) of this definition".

[6]     [2020] NZHC 728

[7]     As explained by Lord Wilberforce in National Provincial Bank v Ainsworth [1965] AC 1175, 1247-1248.

[8]     The Court noted that the Hong Kong Government has recently issued a policy statement signifying the possibility of the introduction of a statutory definition for digital assets as property (The Financial Services and the Treasury Bureau, "Policy Statement on Development of Virtual Assets in Hong Kong" dated 31 October 2022), but this did not impact the Court's analysis which was based upon the common law definitions of "property".

[9]     Snell's Equity, 34th ed., §22-012