From Re Gatecoin to ByBit: The solidification of the nature of crypto assets as “property”
By Kartikey Mahajan, Bhavya Chengappa, and Aayushi Singh (Khaitan and Co)
Background
The Courts of both Hong Kong and Singapore have declared cryptocurrency as a “property” in 2023, in the landmark cases of Re Gatecoin Limited (In Liquidation) [2023] HKCFI 914 and ByBit Fintech Ltd v Ho Kai Xin and others [2023] SGHC 199, respectively. A recognition of cryptocurrency as property is important because when a person suffers a wrong, a proprietary remedy can be claimed for enforcement against a specific property. For instance, it can entail an injunction preventing any interaction with designated property, regardless of its transfer to a third party. This characteristic renders proprietary remedies notably resilient compared to personal remedies. However, the scope of a proprietary remedy is contingent upon the classification of the subject as "property." If an entity does not meet this qualification, the claimant's pursuit of a proprietary remedy in relation to it is precluded.
These rulings, therefore, clarify the legal nature of crypto assets and confirm that parties in cases involving crypto assets may apply traditional common law doctrines to protect their assets. These decisions are also consistent with the position taken in other common law jurisdictions.
Judgments
In Re Gatecoin, Justice Linda Chan applied the principles in National Provincial Bank v Ainsworth [1965] AC 1175 and concluded that cryptocurrencies are “property.” The court made the following conclusions about the nature of cryptocurrency:
(1) It is definable as the public key allocated to a cryptocurrency wallet is readily identifiable, sufficiently distinct and capable of being allocated uniquely to individual account holders;
(2) It is identifiable by third parties in that only the holder of a private key is able to access and transfer the cryptocurrency from one wallet to another;
(3) It is capable of assumption by third parties in that 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;
(4) It has some degree of permanence or stability as the entire life history of a cryptocurrency is available in the blockchain.
Whilst the Court determined that cryptocurrencies are “property” and can be held on trust, in the circumstances of the present case, it found that a trust had not been established for the majority of Gatecoin’s customers by applying the threefold test of considering (i) the certainty of subject matter; (ii) certainty of object; and (iii) certainty of intention. While, according to the court, the first two criteria had been satisfied, it found that insofar as the 2018 T&C is concerned, there was clearly no intention to create any trust for customers.
In Singapore, prior to the ByBit case, courts had only granted interlocutory injunctions (e.g., CLM v. CLN [2022] SGHC 46, B2C2 Ltd v Quoine Pte Ltd [2019] 4 SLR 17), indicating a serious question regarding whether crypto assets could be held on trust. However, they had not conclusively determined if crypto assets were choses in action or a new form of intangible property. In the ByBit decision, the court went further, confirming that the crypto assets in question were indeed capable of being held on trust and could be classified as choses in action, which are personal properties enforceable through legal proceedings. Similar to the reasoning in Re Gatecoin, the High Court found that cryptocurrency met the common law requirements for "property" as outlined in the locus classicus of Ainsworth.
Ultimately, the Court declared a constructive trust over the USDT, establishing the Claimant as the legal and beneficial owner. This landmark decision in ByBit solidifies the principle that holders of crypto assets possess legally enforceable property rights, recognized under common law as choses in action, despite the prior ambiguity surrounding the treatment of crypto assets in Singapore.
Practical implications
While the identification of the notional holder of a cryptocurrency remains clear, including when it's held by a trustee as the legal owner, the unique characteristics of cryptocurrency present challenges in trust administration. The inherent volatility of its value can complicate management, particularly concerning valuation for tax purposes or distributions. Firstly, the ability to invest depends on trust terms and permissible investments. Secondly, trustees are held to a standard of care akin to that of an ordinary prudent person acting for the benefit of others they're morally obligated to protect. Given cryptocurrency's volatility, trustees may hesitate to view it as a viable asset class without explicit settlor direction, raising concerns about investment decisions, even amid unforeseen value fluctuations. Moreover, the uncertain longevity of many cryptocurrencies complicates long-term trust planning, while the potential for anonymous transactions adds another layer of difficulty in monitoring and controlling trust assets.
Further, although ByBit and Gatecoin recognize crypto assets as trustable property, this domain is rapidly evolving, potentially leading to future legal changes affecting trust administration. Currently, Bitcoin, Ether, and stablecoins can firmly be classified as property. However, for other cryptocurrencies with less clearly defined holder rights, forthcoming court decisions may contest their property status or relegate them to mere contractual obligations devoid of proprietary interest. Such outcomes would strip victims of proprietary remedies like tracing and following. Despite cryptocurrency's recognition as a property interest, the fundamental question persists: what does cryptocurrency holding represent substantively? This query hinges on issuer definitions and the validity of established legal structures, if any, designed to uphold those definitions.
Additionally, despite the acceptance of cryptocurrency as property across several common law jurisdictions, the approach to its treatment for accounting and taxation remains unsettled. The unique features of cryptocurrency, notably its extreme volatility, pose challenges in aligning all accounting treatments with its legal classification as property. Conversely, crypto transactions are subject to diverse tax treatments, especially concerning profits tax, capital gains tax, and transaction tax, contingent upon the characterization of the transaction's nature.
Conclusion
The landmark rulings in ByBit and Re Gatecoin bring much-needed clarity, affirming that holders of cryptocurrencies possess legally enforceable property rights recognised as choses in action. In addition to providing litigants with wider jurisdictional gateways, more remedies are likely to be available to litigants if cryptocurrencies are authoritatively determined to be property under the two jurisdictions. This decision marks a significant advancement in legal protection for cryptocurrency owners, establishing that crypto assets can be held on trust, whether expressly or implicitly. As demonstrated in ByBit, this recognition enables tracing, a crucial mechanism for pursuing further remedies, thereby enhancing the overall legal landscape for cryptocurrency transactions. Additionally, the cases demonstrate the courts’ willingness to recognise cryptocurrency exchange platforms as trustees and impose fiduciary duties on them.
* The authors would like to thank Nupur Barman, NALSAR University of Law, Hyderabad for her research assistance.