Insights

Cryptoassets as Property – Where are we now? A Short Update

10/11/2020

As cryptoassets continue to be used and exchanged, their ownership inevitably continues to be the subject of litigation in the Courts.  In this article we take a look at how cryptoassets are being treated by the Courts and the practical implications for owners and users.

In November 2019, the United Kingdom Jurisdictional Taskforce (UKJT) concluded in their Statement (click here for commentary) that there was no reason why Cryptoassets could not be treated as property under English law.

The Statement isn’t legislation and so is not legally binding. However, the statement has been followed and endorsed in the courts, perhaps most notably in the UK judgment of Bryan J in AA v Persons Unknown. Relying heavily in his judgment on the UKJT’s Statement, he considered that cryptoassets such as Bitcoin were to be classified as property for the purposes of granting an injunction and ‘freezing’ the stolen Bitcoins.

Have there been any developments since?

The consensus that cryptoassets are to be treated as property continues to grow, particularly in common law jurisdictions. In New Zealand earlier this year, the question was considered in Ruscoe v Cryptopia Limited (in liquidation) CIV-2019-409-000544 [2020] NZHC 728. This case involved what is widely regarded as the biggest single theft in New Zealand’s history.

Cryptopia was a cryptocurrency exchange. Such exchanges are commonly used to exchange cryptocurrencies for fiat currency (i.e. US Dollars, GBP etc) or for other cryptocurrencies. The exchange was hacked in January 2019, resulting in the loss of approximately NZD $30 million worth of cryptocurrency from its users’ wallets. Its shareholders subsequently placed Cryptopia into liquidation.

The court determined that the liquidators had to assess the value of each affected user’s cryptoassets and apply any loss caused by the theft pro rata to these holdings, if the entire amount could not be returned.

What does this mean for users of cryptoassets?

It means that should you be a victim of a hacking or fraud, which are unfortunately common in the sphere of cryptoassets, courts can impose proprietary or freezing injunctions over them.

Significantly in Ruscoe, the court deemed cryptoassets as capable of forming the subject matter of a trust. As such, the cryptocurrencies were held by Cryptopia on express trusts for the users. In other words, the users were the beneficiaries under this trust with Cryptopia as the trustee. This should be taken with slight caution, as in B2C2 Ltd v Quoine Pte Ltd, a case heard in the Singapore Court of Appeal, the mere fact that Quoine held the account holders' assets in separate digital wallets from the platform's own trading assets, was deemed insufficient to persuade the court that there was a trust. However, it is another example of a court’s readiness to assign cryptoassets proprietary characteristics.

On a practical level, the courts’ trajectory should be considered positive for owners of cryptoassets, as it provides a layer of legal protection over assets that are subject to relatively little regulation. However, we still await the English courts to properly define the nature of the proprietary right and/or for this to be embodied into legislation. Until then it appears, at least in common law jurisdictions like the UK, that cryptoassets will be treated as property.

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On a practical level, the courts’ trajectory should be considered positive for owners of cryptoassets, as it provides a layer of legal protection over assets that are subject to relatively little regulation.

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