In a recent English High Court decision, Tulip Trading Limited v Bitcoin Association for BSV [2022] EWHC 2 (Ch) and [2022] EWHC 141 (Ch), the Court refused the claimant's request for security for costs to be paid in Bitcoin. This is the first English case where a party to litigation has sought to provide security in the form of cryptocurrency and provides helpful guidance on the interaction between cryptocurrency and security for costs. Tulip Trading Limited discusses the considerations the Courts may take into account to determine whether Bitcoin or other forms of cryptocurrencies will be accepted as an alternative form of security for costs. It will be interesting to see how the Hong Kong Courts may approach this issue if a similar request is made in the future.
Background: The English decision in Tulip Trading Limited
The Defendants applied for, and obtained, an order for security for the costs of the jurisdiction application. The Claimant sought to provide the security in the form of Bitcoin, by transferring the relevant cryptocurrency to its solicitors, who would give written confirmation to the Court and the Defendants that they held the Bitcoin (see the earlier blog post on the English decision here).
The Court set out the principles in Infinity Distribution Ltd (in administration) v Khan Partnership LLP [2021] EWCA Civ 565 to determine the form of security to order where a claimant proposes an alternative form of security, namely that the Court shall:
- have regard to all the relevant circumstances;
- seek to give effect to the overriding objective of the English Civil Procedure Rules, including "ensuring that the parties are on an equal footing and ensuring that the matter is dealt with fairly";
- strike a fair balance between the interests of the parties; and
- where two forms of security would provide equal protection, all else being equal, order the form that is least onerous to the Claimant.
The Court also cited Monde Petroleum SA v Westernzagros Ltd [2015] 1 Lloyd's Rep. 330, which requires that security "should be in a form which enables the defendant to recover a costs award made in its favour at the trial from funds which are readily available, such that there is little risk of delay or default in enforcement" (emphasis added).
The Court took notice of the high level of volatility in the value of Bitcoin (a position which was accepted by the claimant) and held that Bitcoin did not meet the criteria in Monde Petroleum. Providing security in the form of Bitcoin would not result in protection for the Defendants equal to a payment into court or first class guarantee. The highly volatile nature of Bitcoin will expose the Defendants to a risk to which they would not be exposed with the usual forms of security. In other words, this was not a case where all other things are equal.
Will Hong Kong Courts allow cryptocurrency as an alternative form of security for costs?
Under Order 23 rule 2 of the Rules of the High Court (Cap. 4A), where an order is made requiring any party to give security for costs, the security shall be given in such manner, at such time, and on such terms (if any) as the Court may direct. The usual form of security provided in Hong Kong is by way of payment into Court or a bank guarantee. The rules have not expressly prescribed what other forms of security is acceptable. The Court of First Instance in Sunni International Ltd v Kao Wai Ho Francis [2021] 1 HKLRD 841 has considered a request for an alternative form of security, namely, an undertaking to charge shares in a private company in lieu of security for costs. The Court similarly referred to Monde Petroleum (above) and held that the undertaking offered was not sufficient as the security could not be realised with relative ease.
At present, there are currently no Hong Kong authorities dealing with a request to provide cryptocurrency as security for costs. Nevertheless, in view of the principle in Monde Petroleum (above) that was applied in both Tulip Trading in the English Court and Sunni International in the Hong Kong Court, we believe the decision in Tulip Trading will provide helpful guidance to the Hong Kong Court on such request.
In addition, the following considerations may also be relevant if the Hong Kong Court is faced with a request to provide cryptocurrency as security for costs in the future:
- the decision in Tulip Trading only concerns payment of Bitcoin as security for costs but does not deal with the general question of whether payment of other cryptocurrencies as security for costs may be permitted. The considerations may be different if, for example, a relatively non-volatile cryptocurrency is offered, such as stablecoin (being a cryptocurrency designed to peg with the value of a particular fiat currency such as the US Dollars) or even yield-bearing stablecoin tokens deposited in a Decentralised Finance (DeFi) protocol (being a token whose value is supposed (though not guaranteed) to stably increase over time as interests accrues over the underlying stablecoin tokens);
- further, if a plaintiff owns substantial amount of stablecoin or yield-bearing stablecoin tokens, this may be relevant to the question of whether the plaintiff will be unable to pay the defendant's costs, and hence, whether security for costs should be ordered in the first place; and
- apart from the issue on volatility, accessibility of the cryptocurrency may also be relevant. In practice, transfers and realisations of cryptocurrency are complicated by the fact that ownership of digital assets are attributed by control of "private keys" (i.e. cryptographic passwords used to authorise blockchain transactions), which can potentially be stolen, exposed, compromised or lost. This will induce extra risk of delay or default in enforcement to enable the defendants to recover costs. The parties may have to consider appointing a trustworthy custodian to mitigate this risk.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
