Suraj Sajnani, Sian Knight and Michelle Chen discuss the Hong Kong High Court’s express confirmation, for the first time ever, that cryptocurrency is “property” and can form the subject matter of a trust.  The Court’s decision in Re Gatecoin Ltd aligns Hong Kong’s approach to the legal treatment of cryptocurrency with that of other common law jurisdictions such as Singapore, England and Wales, United States, Australia, Canada and New Zealand.

The circumstances in which the High Court found that cryptocurrency is property: Gatecoin’s Liquidation

Gatecoin operated a cryptocurrency exchange platform. It was wound up by the Court in March 2019.  Individuals from Kroll were appointed as liquidators.   The liquidators sought directions under the Hong Kong Companies (Winding Up and Miscellaneous Provisions) Ordinance(Winding Up Ordinance) on how to deal with cryptocurrencies held by Gatecoin, when satisfying claims by Gatecoin’s customers.

This required the Court first to determine whether Gatecoin held the cryptocurrencies: (a) on trust for its customers, to enable the customers to raise proprietary claims; or (b) in Gatecoin’s own right.  The question was split into two sub-issues:

• firstly, whether the cryptocurrency was “property” which could form a subject matter of a trust;
• secondly, whether the relevant terms and conditions between Gatecoin and its customers created an express trust.

While novel in Hong Kong the same issue had been subject to detailed analysis by the New Zealand Court in Ruscoe v Cryptopia [2020] NZHC 728 which the Hong Kong court applied and followed in its decision.

Key features of cryptocurrency making it “property”

The Court first examined the definition of “property” in the Hong Kong legislation.   While the Winding Up Ordinance at s.197 requires a liquidator to gather in all property on the making of a winding order, the legislation is silent on what constitutes “property”.  The starting point was therefore s.3 Interpretation and General Clauses Ordinance (Cap.1), which provides a broad and inclusive definition.

The Court then considered the four-limb requirements for “property” as set out in  National Provincial Bank v Ainsworth [1965] AC 1175.  Lord Wilberforce stated that to constitute property, a right or interest must be “definable, identifiable by third parties, capable in its nature of assumption by third parties, and have some degree of permanence or stability”.  Hong Kong courts have consistently applied and followed the principles set out in Ainsworth when determining relevant questions.

The Judge, Linda Chan J, also noted that the Court has granted interlocutory proprietary injunctions over cryptocurrencies in earlier cases without any suggestion that crypto-assets should not be considered property.   Those earlier cases were a tacit rather than express recognition of the proprietary nature of cryptocurrency.

The Court also reviewed the position in other common law jurisdictions.  Courts in the UK, BVI, Singapore, Canada, US, Australia and New Zealand all recognise that cryptocurrency is property and have been prepared to grant proprietary injunctions and preservation orders over crypto-assets.

The Court applied Gendall J’s reasoning in Ruscoe v Cryptopia to determine that cryptocurrency satisfies the four Ainsworth property criteria and can be subject to a trust on the basis that:

• It is definable because the ‘public key’ allocated to a wallet is readily identifiable, sufficiently distinct and can be allocated to an individual accountholder.
• It is identifiable by third parties as only a ‘private key’ holder can do a cryptocurrency transfer.
• It is capable of assumption by third parties meaning that there is a market for it.
• There is sufficient permanence or stability as the history of the cryptocurrency is stored in the blockchain.

Linda Chan J noted that while the Hong Kong definition of property under s.3 (Cap 1) differs from the common law jurisdictions mentioned, Hong Kong does adopt an inclusive and wide meaning when defining ‘property’ and has consistently applied the Ainsworth principles.

Did Gatecoin’s T&Cs operate to create a trust of the crypto-assets in favour of customers?

The liquidators argued that an express trust was created by the terms and conditions between Gatecoin and its customers over the crypto-assets.

To understand whether this was the case, it is necessary to understand how Gatecoin’s platform operated.  The Court set this out.

• More than 45 types of cryptocurrencies were traded through the platform.
• Each customer was required to register and open an account to deposit fiat currencies or cryptocurrencies to trade or withdraw.
• Separately, Gatecoin also traded in cryptocurrencies on its own right through a ‘market maker’.
• Transactions were recorded and shown in the blockchain for ‘external’ transfers / deposits. Internal movements of cryptocurrency through the platform would only be recorded in Gatecoin’s internal exchange ledger as ‘in house movements’.
• Gatecoin controlled the cryptocurrency once deposited with cryptocurrency deposits being mixed in Gatecoin’s platform wallets.
• Gatecoin also had three different sets of terms and conditions with its customers. Only one set of these terms included provisions which had the effect of creating a trust over the fiat and digital assets deposited on the platform.

Creation of an express trust requires certainty of subject matter, object and intention.  The Court found as follows:

• Certainty of subject matter

The subject matter of the claimed express trust is cryptocurrencies held by Gatecoin.   Although they are intangibles and not segregated when deposited by the customers, certainty of subject matter can be derived from a claim to a proportionate share of an undivided bulk.  Therefore, the test on certainty of subject matter was satisfied.

• Certainty of object

The test on certainty of object was also satisfied.  Customers, as beneficiaries of the claimed trust, can be identified by the exchange ledger where all transactions of cryptocurrencies were recorded.

• Certainty of intention

The test on certainty of intention depends on the construction of the terms and conditions between Gatecoin and its customers.   The difficulty here was to identify which of the three potential terms and conditions applied to respective customers.

Gatecoin entered into three sets of terms and conditions with its customers from 2015 (the “2016 T&Cs”), 2016 (the “Trust T&Cs”) and 2018 (the “2018 T&Cs”).

The first set, the 2016 T&Cs did not include provisions which had the effect of creating a trust over currencies deposited.

When the latter, Trust T&Cs, were adopted, they superseded the 2016 T&Cs automatically because the 2016 T&Cs provided that no prior notice was required if Gatecoin intended to change the terms.  Unlike the 2016 T&Cs, the Trust T&Cs did contain provisions which intended to create a trust over the currencies deposited.

Further, different from the Trust T&Cs, the 2018 T&C did not automatically supersede the Trust T&Cs.  They contained an express term that if the customers intended to continue to use Gatecoin’s service, they must accept the 2018 T&Cs by clicking an acknowledgement on the website.

Therefore, for customers who continued to use Gatecoin’s service, the newer 2018 T&C superseded the Trust T&C and applied.  For customers who had not used Gatecoin’s website since the 2018 T&C came into effect, the earlier Trust T&C applied.

The Court held that the Trust T&C did create an express trust by using the words “beneficial ownership”, “custodian” and “holding in trust”, etc.   On the contrary, the 2018 T&C did not contain similar words and failed the test on certainty of intention.  Therefore, for customers who accepted the 2018 T&C, no trust arises.   For customers to whom the Trust T&C applies, Gatecoin held the cryptocurrencies for them on trust.

Why is this case significant and who should pay attention?

1. Re Gatecoin is the first time that the Hong Kong Court has expressly recognised that the cryptocurrency is property and can form the subject matter of a trust.  This decision has far reaching ramifications.  Immediately, it means that crypto-assets can be injuncted in fraud claims and in commercial disputes.  In appropriate cases, they can be traced for equitable relief.  It also means that crypto-assets are treated as property in liquidations, and can act as the claimed subject matter in actions.
2. It casts a spotlight on the importance of understanding whether assets deposited with exchanges are held on trust for customers or whether they form part of the exchange’s asset pool.
3. It brings Hong Kong’s jurisprudence in line with other leading common law jurisdictions in which Courts are dealing with cryptocurrency issues.  The judgment is a welcome indication that the Hong Kong Courts are well-equipped to deal with crypto-disputes.

Exchanges, investors, liquidators and asset managers with a crypto-assets as a part of their portfolio would be well advised to take note of this development.