Amanda Lees, Suraj Sajnani and Sarah Jones look at a recent Singapore Court decision which determined that cryptocurrency is property.

Introduction

On 25 July 2023, the Singapore High Court handed down its decision in the case of ByBit Fintech Limited v Ho Kai Xin and others (ByBit Fintech),[1] providing one of the first common law decisions on a final substantive issue that cryptocurrency assets are a form of property.  More specifically, the Singapore High Court held that cryptocurrency can be classified as “[A]n incorporeal right of property recognisable by the common law as a thing in action…”[2] In this article, we will consider in detail the meaning of this decision and its practical significance for participants in the cryptocurrency market.

For the particularly interested reader, we have written several earlier posts on decisions regarding whether cryptocurrency assets are a species of property here and here.

Why is the ByBit Fintech Case Significant?

Although various common law courts have, in the past, made findings that cryptocurrency is a form of property,[3] such decisions were typically arrived at following interlocutory proceedings, which only require a good arguable case, or in proceedings which have been ex parte.

Factual Background

By way of background, the ByBit Fintech case centred around a dispute between ByBit Fintech Limited (ByBit), which owns and operates a namesake cryptocurrency exchange, and a former employee of ByBit’s payroll services provider, one Ho Kai Xin (Ms Ho). One of Ms Ho’s employment responsibilities was to maintain Microsoft Excel spreadsheets tracking cash and cryptocurrency payments made by ByBit to its employees, as well as the addresses designated by employees for the receipt of cryptocurrency transfers.

Around September 2022, ByBit discovered a number of anomalous payments in the aggregate amount of 4,209,720 Tether stablecoins[4] (USDT) into four separate addresses (the Recipient Addresses). ByBit’s investigations into these payments implicated Ms Ho.

Ms Ho claimed (outside of court) that the payments had been made by her cousin, one Jason Teo (Mr Teo), without her knowledge or consent. Purportedly, Mr Teo had misused access to the Microsoft Excel spreadsheets granted by Ms Ho when she asked Mr Teo for his assistance in checking the files. However, the weight of evidence, including certain emails deleted from Ms Ho’s work email account and the “[S]uspicious luxury spending spree”[5] she undertook, appeared to suggest that Ms Ho had facilitated the transfers herself.[6]

Subsequently, ByBit brought Singapore court proceedings against Ms Ho and others, seeking:

(a)       a declaration that Ms Ho held the USDT on trust for ByBit; and

(b)       an order for the return of the USDT or its traceable proceeds.

ByBit Fintech also considered similar issues regarding the payment by Ms Ho of SGD 117,238.6 in fiat currency into her personal bank account. However, the principal focus of this article will be the Singapore High Court’s treatment of the cryptocurrency assets.

Legal Issues

In considering whether to grant the declaratory relief sought by ByBit, the Singapore High Court needed to determine:

(a)       whether cryptocurrency is a form of property; and

(b)       if so, what kind of property it is.

This is because of the principle that a validly constituted trust, whether express, constructive or resulting, requires some property to be the subject of the trust.[7] Accordingly, the primary issue for resolution by the Singapore High Court was whether USDT is property capable of being held on trust.

Consideration

Finding #1: cryptocurrency assets are property

In order to answer the question of whether cryptocurrency is property, the natural starting point is to characterise the juridical nature of property itself. In this regard, Jeyaretnam J cited the oft-quoted dicta of Lord Wilberforce in National Provincial Bank v Ainsworth [1965] 1 AC 1175, 1248 that:

“Before a right or an interest can be admitted into the category of property, or of a right affecting property, it must be definable, identifiable by third parties, and have some degree of permanence or stability.”

Per Jeyaretnam J, cryptocurrency meets the above description: it is an identifiable asset which can be transferred for value, be recorded on a balance sheet and which can be identified and segregated from a mass of similar assets.[8] This latter characteristic is particularly significant when considering whether cryptocurrency is property which can be the subject of a trust.[9]

Implicit in Jeyaretnam J’s reasoning is the view that cryptocurrency assets carry with them a bundle of rights[10] in favour of the holder:

• they are alienable and can be transferred for value;
• they can be used, enjoyed and exploited to the exclusion of third parties; and
• the holder of a private key enjoys a “[N]arrow right to have the unspent transaction output… of a cryptoasset locked to a holder’s public address on a blockchain.”[11]

Accordingly, Jeyaretnam J arrived at the conclusion that cryptocurrency assets are a form of property.

Very significant in his Honour’s judgment appeared to be the fact that, since 2021, there has been express legislative recognition in Singapore that cryptocurrency assets are property. Order 22 of the Rules of Court 2021 provides for the enforcement of judgments and orders against “movable property”, which is defined to include “[C]ash, debt, deposits of money, bonds, shares or other securities… and cryptocurrency or other digital currency [emphasis added].”[12]

Finding #2: cryptocurrency assets are choses in action

Jeyaretnam J then turned to consider where cryptocurrency assets fall within the taxonomy of property interests. Clearly, cryptocurrency is not an asset capable of physical possession. However, there has been much debate regarding whether, if cryptocurrency assets are property, they are a chose in action or something else entirely.

His Honour cited with approval the dictum of Fry LJ in Colonial Bank v Whinney (1885) 30 Ch D 261, 285 that “All personal things are either in possession or action. The law knows no tertium quid between the two.” On his Honour’s view, the category of things in action is sufficiently broad and flexible as to encompass new forms of intangible property, without the need for creation of a third category. Per Jeyaretnam J, the category of things in action has, over recent years, expanded to include such rights as copyright and documents of title to intangible property rights, although these do not fall within the traditional category of rights enforceable by action against an individual counterparty.

Accordingly, Jeyaretnam J held that the holder of USDT has in principle an intangible property right of property, recognisable by the common law as a thing in action and so enforceable in court.[13] The holder’s contractual right to redeem USDT for an equivalent amount in fiat may constitute an additional chose in action in favour of the holder, but this was not necessary to the conclusion that USDT is, itself, a thing in action.

Ultimately, Jeyaretnam J was willing to make a declaration of constructive trust over the 4,209,720 USDT misappropriated by Ms Ho and tracing orders in respect of the parts thereof which had been mixed with Ms Ho’s personal property or converted into another form.

In ByBit Fintech, it was not disputed that ByBit was the rightful “holder” of the USDT.  However, Jeyaretnam J appeared to indicate that the “holder” of cryptocurrency will be the person who holds the private key which is required to access and authorise transfers from the address at which the relevant cryptocurrency is stored. In cases where the identity of the holder is in dispute, there will need to be a factual investigation to uncover the rightful holder of the private key.

6          Key Implications

• The rights represented by cryptocurrency are rights in rem, meaning they are enforceable against the world at large rather than just an individual counterparty.
• When cryptocurrency assets are misappropriated, proprietary equitable remedies including constructive trusts and tracing[14] may be available. The key benefit of a proprietary remedy (as opposed to, for example, an award of damages) is that the property itself (or its traceable proceeds) may be returned to the plaintiff.
• In insolvency, the holder of cryptocurrency assets subject to custody or trust arrangements (for example) may try to claim ownership of such assets. This may elevate the claimant above the pools of secured and unsecured claimants.

 

 

[1]           [2023] SGHC 199.

[2]           Ibid [36].

[3]           See, for example, Nico Constntijn Antonius Samara v Stive Jean Paul Dan [2019] HKCFI 2718

[4]           USDT is a type of “stablecoin” whose value is pegged to the US dollar. The name stablecoin is based on the theory that cryptocurrency assets which are pegged to fiat currency are likely to exhibit less volatility that other cryptocurrency assets.

[5]           ByBit Fintech (n 1) [25].

[6]           Following the commencement of proceedings by ByBit, further compelling evidence that Ms Ho owned and controlled each of the wallets associated with the Recipient Addresses was obtained by way of a disclosure order against the service provider of one of these wallets.

[7]           Knight v Knight (1840) 3 Beav. 148 at 172.

[8]           See Monetary Authority of Singapore. “Response to Public Consultation on Proposed Regulatory Measures for Digital Payment Token Services”, 3 July 2023, cited in ByBit Fintech (n 1) [29].

[9]           Typically, the identification and segregation of particular property is a feature which may tend towards establishing certainty of intention to create a trust.

[10]          See, for example, Yanner v Eaton (1999) 201 CLR 351, in which the High Court of Australia held that, for an asset to be property, it must be made up of a core bundle of rights.

[11]          Kelvin FK Low, “Trusts of Cryptoassets” (2021) 34(4) Trust Law International 191, cited in ByBit Fintech (n 1) [31].

[12]          Rules of Court 2021, O 22, r 1 definition of “movable property”, cited in ByBit Fintech (n 1) [30].

[13]          ByBit Fintech (n 1) [36].

[14]          Strictly speaking, tracing is not a remedy but is merely a process which is followed to identify trust property which has been substituted by another asset. The remedy sought by the plaintiff is a proprietary claim which vindicates their continuing beneficial interest in the substitute property.