After the relatively bleak years of 2022 and 2023, this year has seen further rapid growth in the cryptocurrency market, driven in large part by the admission of new exchange traded funds to the US market.
Nevertheless, the nature of cryptocurrency as a matter of law remains an area of some uncertainty.
In recent years, a number of courts have grappled with the question of whether cryptocurrency is “property” or an “asset” within the context of insolvency proceedings. Such proceedings have typically arisen from the collapse of cryptocurrency funds or virtual asset trading platforms.
In Smith v Torque Group Holdings Limited (in liquidation) (Torque Group),1 the Eastern Caribbean Supreme Court answered the question in the affirmative; confirming that, for the purposes of the BVI Insolvency Act, cryptocurrencies are to be classified as property. Courts in the United Kingdom,2 Singapore,3Canada,4and New Zealand 5 have also recognised cryptocurrencies as items of property or assets. The same conclusion was reached in Hong Kong in the recent decision of Re Gatecoin Limited (In Liquidation) (Gatecoin).6 Although the courts have been consistent in reaching this view, it has been the subject of some reasonable academic scepticism, including the view that cryptocurrency is no more than a form of information which does not confer any recognised property right.7 This article examines the decisions in Torque Group and Gatecoin and considers the lessons that can be taken from those cases for current or future investors.
BVI: Torque Group (2021)
Torque was a BVI-incorporated company that operated a cryptocurrency trading platform. Following a series of unauthorised withdrawals (which left Torque facing potential claims from approximately 14,000 users), the company’s founder applied to place Torque into liquidation and to appoint joint liquidators. Once appointed, Torque’s liquidators sought guidance from the Eastern Caribbean Supreme Court on the treatment of cryptocurrencies held within two categories of digital wallets – ‘User Trading Wallets’ and ‘User Personal Wallets’.
The User Trading Wallets contained various cryptocurrencies that were held in a commingled manner (i.e. the cryptocurrencies held in these wallets were held in common and not segregated on the basis of ownership of any particular user). Torque had exclusive control over the cryptocurrencies held within these wallets, including knowledge of the private keys required to control and administer the wallets. On the other hand, the cryptocurrencies in the User Personal Wallets were merely held via Torque as part of a hosting service provided by Torque whereby cryptocurrencies were stored within individual user wallets and were not under Torque’s control, with users retaining their own private keys.
In order for the Court to provide directions as to how the cryptocurrencies held in the two categories of wallets were to be treated, it was necessary for the Court to decide whether cryptocurrencies fell within the following definition of “asset” in section 2(1) of the BVI Insolvency Act:
“includes money, goods, things in action, land and every description of property wherever situated and obligations and every description of interest, whether present or future or vested or contingent, arising out of, or incidental to, property.”
This definition is essentially a codification of the common law meaning of the term “property” and is substantially similar to the definition of the term as contained in insolvency legislation of other common law jurisdictions.8
The Court held that cryptocurrencies were to be considered “assets” within the meaning of that term in the BVI Insolvency Act. In reaching its decision, the Court was guided by the UK Jurisdiction Taskforce’s Legal Statement on Cryptoassets and Smart Contracts 9 and, in particular, the following extract from that Statement:
“Since cryptoassets can be property at common law, we have no doubt that they can be property for the purposes of the [UK] Insolvency Act. If a particular cryptoasset is not property at common law, depending on circumstances it could still be property for the purposes of the [UK] Insolvency Act if it is, for example, within the words “obligations and every description of interest, whether present or future or vested or contingent, arising out of, or incidental to, property.”
Regarding the issue of ownership, as the cryptocurrencies stored in the User Trading Wallets were commingled across various wallets with Torque possessing exclusive control over the cryptocurrencies in these wallets (including retention of the private keys), the Court found that these cryptocurrencies were to be considered assets of the company. The same could not be said of the cryptocurrencies stored in the User Personal Wallets, since Torque had merely provided a hosting service, with users retaining control of their cryptocurrencies.
The end result of the Court’s analysis was that: (1) cryptocurrencies stored in the User Trading Wallets were assets of the company such that affected users may have corresponding claims against Torque for any associated losses; and (2) cryptocurrencies stored in the User Personal Wallets were not assets of the company and remained the property of their respective holders such that they could be returned to their respective owners.
Investors in similar platforms should take heed of what happened in Torque Group by closely scrutinising the operational and legal structures of the exchanges or investment platforms they use. This includes understanding the jurisdiction it operates in, that jurisdiction’s insolvency laws, the platform’s compliance with those laws, and how assets are held and managed on users’ behalf. Ensuring that there is a clear legal separation between users’ assets and the platform’s funds can be a critical safeguard against the risk of asset loss in insolvency situations.
Hong Kong: Gatecoin (2023)
In circumstances similar to those leading to Torque Group, the decision of the Hong Kong High Court in Gatecoin concerned the collapse of a cryptocurrency exchange. Gatecoin operated a Hong Kong-incorporated cryptocurrency exchange which, at the time of its winding up in March 2019, had over 100,000 registered customers.
Following their appointment, Gatecoin’s liquidators applied to the High Court of Hong Kong for directions as to whether the cryptocurrencies held by Gatecoin were to be classified as items of property for the purposes of the Hong Kong Companies (Winding up and Miscellaneous Provisions) Ordinance (Cap. 32) (the CWUO) and whether the cryptocurrencies were held on trust on behalf of Gatecoin’s customers.
Relevantly, section 197 of the CWUO obliged the liquidators to take into custody all items of property upon the making of the winding up order. As the CWUO does not define the term “property”, the Court examined the definition of that term within section 3 of the Hong Kong Interpretation and General Clauses Ordinance (Cap. 1) which, in terms similar to the definition of “asset” contained in the BVI Insolvency Act, provides that the term “property”:
“includes (a) money, goods, choses in action and land; and (b) obligations, easements and every description of estate, interest and profit, present or future, vested or contingent, arising out of or incident to property as defined in paragraph (a) of this definition”.
Upon reviewing relevant decisions from the courts of England and Wales, the BVI, Canada, Singapore and the United States, the Hong Kong High Court determined, with particular reliance on the UK Jurisdiction Taskforce’s Legal Statement on Cryptoassets and Smart Contracts (as the Eastern Caribbean Supreme Court did in Torque Group), that cryptocurrencies ought to be classified as items of property.
Further, the Court held that, as items of property, cryptocurrencies are capable of being held on trust (such as through Gatecoin’s platform for the benefit of Gatecoin customers). Ultimately, the Court ruled that variations in Gatecoin’s terms and conditions had the effect of splitting its customers into two groups: (1) those who had agreed to the first version of the terms and conditions (which lacked any provisions which had the effect of creating a trust) and final version of the terms and conditions (which expressly disclaimed any fiduciary relationship); and (2) those who had agreed to the second version of the terms and conditions (which expressly recognised that cryptocurrencies would be held on trust). The first group merely had a contractual claim against Gatecoin, whilst the second group had a proprietary right to the cryptocurrencies held within their accounts.
Again, as in Torque Group, Gatecoin should serve as a cautionary tale for users. The key takeaway is the importance of engaging with exchanges that are not only compliant with local regulations, but have also established clear procedures for protecting user assets in the event of insolvency. Potential users should examine the custodial arrangements and legal mechanisms in place to separate and protect user assets from the exchange’s creditors. By prioritising exchanges with a strong legal and regulatory foundation, users can enhance the security of their investments against the risk of insolvency.
The position in the Cayman Islands
To date, the Cayman Grand Court has not been required to address the question of whether cryptocurrencies are to be classified as items of property under the common law or for the purposes of the insolvency regime contained within Part V the Cayman Companies Act.
Despite the term “property” being widely used throughout Part V of the Cayman Companies Act, it is not generally defined for the purposes of that Part.10 However, the term is defined by s. 3(1) of the Cayman Interpretation Act to include:
“money, goods, things in action, land and every description of property, whether real or personal; also obligations, easements and every description of estate, interest and profit, present or future, vested or contingent, arising out of or incident to property as above defined.”
In the absence of a definition of “property” specifically applicable to Part V of the Cayman Companies Act, the above definition will apply unless there is something in the subject or context inconsistent with such construction.11 As this definition is substantively the same as those which were examined in Gatecoin and Torque Group, it may be that the Cayman Grand Court would take the same approach as the courts in those (and other) cases.
Lessons for Investors
The classification of cryptocurrencies as “property” or an “asset” has significant bearing upon users of cryptocurrency exchanges in the event of insolvency. Investors should consider the benefits of cryptocurrencies being held under their direct control or on trust for their benefit. This will often involve careful consideration of the exchange’s terms and conditions. Alternatively, investors should consider transferring assets to a private wallet, which the user alone controls, when not actively trading. Such approaches should prevent an investor’s tokens from being treated as part of the exchange’s assets in the event of liquidation.
[1] BVIHC (COM) 0031 of 2021.
[2] For example, in Tulip Trading Ltd v Bitcoin Association for BSV [2023] EWCA Civ 83; [2023] 4 WLR 16 at [24].
[3] For example, in ByBit Fintech Limited v Xin & Ors [2023] SGHC 199 at [36], the Singapore High Court held that the holder of a crypto asset has “in principle an incorporeal right of property recognisable by the common law as a thing in action and so enforceable in court”. Note also that the Singapore Rules of Court 2021 have been updated to expressly include “cryptocurrency or other digital currency” as “moveable property” capable of being the subject matter of an enforcement order.
[4] For example, in Shair.com Global Digital Services Ltd v Arnold, 2018 BCSC 1512 at [24], the Supreme Court of British Columbia held that cryptocurrency and related wallet information were “digital assets” in the context of an application for a Mareva injunction and preservation order. However, note that in Cicada 137 LLC v Andean Medjedovic, 2021 ONSC 8581 at [6], the Supreme Court of Ontario made no finding as to the nature of digital assets as property and left it open for the law to “determine in due course whether the digital tokens are a specie of property”.
[5] For example, in Ruscoe v Cryptopia Ltd (in Liquidation) [2020] NZHC 728.
[6] [2023] HKCFI 914.
[7] See Professor Robert Stevens, Professor of Law at the University of Oxford, “Crypto is Not Property” (2023) 139 LQR 615. However, even proponents of that view point out that liquidators should be able to require access to any crypto assets, and realise them for the company’s benefit, by virtue of ongoing fiduciary obligations of directors and other office holders who hold valuable information of the relevant company.
[8] For example: (1) the definition is (unsurprisingly) identical to that in section 436 of the UK Insolvency Act 1986; (2); section 2 of the Canadian Bankruptcy and Insolvency Act 1985 defines “property” as “any type of property, whether situated in Canada or elsewhere, and includes money, goods, things in action, land and every description of property, whether real or personal, legal or equitable, as well as obligations, easements and every description of estate, interest and profit, present or future, vested or contingent, in, arising out of or incident to property”; and (3) section 9 of the Australian Corporations Act 2001 (Cth) defines “property” as “any legal or equitable interest (whether present or future and whether vested or contingent) in real or personal property of any description and includes a thing in action”.
[9] Available at https://ukjt.lawtechuk.io/.
[10] Section 91J (within Part V) of the Cayman Companies Act, which includes provisions for facilitating reconstruction and amalgamation of companies, includes a definition of “property” only for the purposes of that section as “includes property, rights and powers of every description”. Section 87 (not within Part V) of the Cayman Companies Act includes an identical definition.
[11] Section 3(1) of the Cayman Interpretation Act.
Eliot Simpson is a partner and Group Head of Appleby’s Dispute Resolution department in Hong Kong.
Damon Booth is a Counsel in Appleby’s Hong Kong office and a member of the dispute resolution department.
