Cryptocurrency – the New Zealand High Court holds that it is property and capable of being held on trust

All cryptocurrency on the exchange was stored in digital wallets, ‘cold’ wallets, which were held offline and ‘hot’ wallets, which were hosted on servers physically located in the USA.

When a trade occurred between users of the exchange, the user’s respective coin balances on the Company’s internal ledger would change to reflect the trade, but the balances in the digital wallets did not change.

In January 2019, the Company was hacked and just under 15% of the cryptocurrency, which was worth NZ$30M, was stolen.

The Company went into liquidation in May 2019.

Issues before the New Zealand High Court

The liquidators sought guidance from the court on the following issues:

• whether the cryptocurrency was ‘property’; and
• if it was ‘property’, whether it was held on trust by the Company for the owners.

The issue was that if the cryptocurrency was not property and was not held on trust for the account holders, then it was a realisable asset of the Company.

Decision

Gendall J held that the cryptocurrency was property, being satisfied that the standard criteria outlined by Lord Wilberforce in in the English decision of National Provincial Bank Ltd v Ainsworth¹ were met by the cryptocurrency, namely it:

• had an identifiable subject matter;
• is identifiable by third parties;
• is capable of being assumed by a third party; and
• has a degree of permanence or stability.

Having held that the cryptocurrency was property, Gendall J then went on to consider in what capacity the Company held the cryptocurrency.

Gendall J held that an express bare trust came into existence for each type of cryptocurrency as soon as the Company was instructed to hold a cryptocurrency for an account holder, and the manner in which the cryptocurrency was held by the Company satisfied the three certainties required to create a valid express trust, namely, there was:

• the intention to create a trust, in that the Company did not trade, or intend to trade, the cryptocurrency itself, and the key details of those trust, and their changing subject matter following transactions was held in the company’s database;
• certainty of the subject matter, in that the cryptocurrency was held to be property; and
• certainty as to the objects of the trust, being those customers with positive cryptocurrency balances in their accounts with the Company.

Gendall J went on to say:

‘I reach the conclusion that the cryptocurrencies here situated in Cryptopia’s exchange are a species of intangible personal property and clearly an identifiable thing of value.’
‘The argument that cryptocurrency is mere information and therefore it is not property is a simplistic one and, in my view, it is wrong in the present context.’
Gendall J then set out a process for the liquidators to follow.  In summary, the loss from the security breach should be applied pro rata across the existing holdings.  The same principle would apply to any recovered cryptocurrency.

Impact of the decision

The decision follows the 2019 decision of AA v Persons Unknown² when the English High Court granted an interim proprietary injunction against a cryptocurrency exchange over bitcoin comprised the proceeds of ransom monies paid out to a hacker by the applicant insurance company.

In February of this year in the case of Quoine Pte Ltd v B2C2 Ltd³, the Court of Appeal of Singapore, Thorley IJ accepted the concession made by all parties to the dispute that cryptocurrencies were a species of ‘property’.

Lavan comment

The New Zealand High Court decision is important as it follows the global trend to move towards an acceptance of cryptocurrency as property.

It provides some certainty to those dealing in cryptocurrency that in circumstances where there is a security breach and the assets are compromised, the loss of the cryptocurrency will be treated as a loss of property.  When considered with the decision of the English High Court, the logical extension is that the property may then be the subject of a freezing order (if it can be traced).

It also means that in circumstances such as these where companies operating exchange platforms go into liquidation, the cryptocurrency held on their relevant platforms will not be available to the liquidator.

We anticipate further decisions in this important area over the next few years, but the overall trend to date for those working and trading in this space is a positive one.

The case also highlights again the importance of ensuring that your cyber security and data breach issues are under constant review.

If you have any questions in relation to this article, please contact Lorraine Madden or Iain Freeman.