The Hong Kong High Court ("Court") has, for the first time, confirmed that cryptocurrencies constitute "property" under Hong Kong law and are capable of being held on trust. The landmark ruling of Re Gatecoin Limited (In Liquidation)1 aligns Hong Kong with the position of various other common law jurisdictions, providing legal certainty over the enforceability of transfers or loans of cryptocurrencies, and parties' legal rights in the event of fraud, theft or breach of trust involving such assets. The decision is certainly a welcome development for businesses operating in this rapidly developing space.
Gatecoin Limited, a Hong Kong company which had operated a cryptocurrency exchange platform, was wound up by the Court. Its liquidators sought the Court's directions on, among other things, (i) the characterisation of cryptocurrencies and fiat currencies held by Gatecoin ("Currencies") and (ii) the allocation of the Currencies to Gatecoin's customers. In particular, the Court was asked to determine whether the Currencies should be regarded as being held on trust for any of Gatecoin's customers.
The liquidators had identified three different sets of terms and conditions ("T&Cs") which were in force at different periods of time: (i) the "2016 T&C", which was signed by "Group A" customers; (ii) the "Trust T&C", which was signed by "Group B" customers; and (iii) the "2018 T&C", which was signed by "Group C" customers. The liquidators' position was that the Currencies belonging to Group A and Group B customers were held on trust by Gatecoin, whereas Group C customers only had contractual claims against Gatecoin.
In order to establish the existence of a trust, the Court had to first consider whether cryptocurrency constitutes "property" capable of forming the subject matter of a trust. In its analysis, the Court considered extensively the recent authorities of various common law jurisdictions, including the UK, Singapore, the United States, Canada, the British Virgin Islands, Australia and New Zealand. Noting that "the preponderance of jurisprudence recognises the proprietary nature of cryptocurrencies", the Court found it particularly "appropriate to apply and follow the reasoning" in the Legal Statement on Cryptoassets and Smart Contracts published by the UK Jurisdiction Taskforce in 2019 ("2019 Legal Statement")2 and the 2020 New Zealand case of Ruscoe v Cryptopia3, which confirm that cryptocurrencies are capable of satisfying the four criteria for "property" as laid down in the English case of National Provincial Bank v Ainsworth4:
- They are definable, as the public key allocated to a cryptocurrency wallet is "readily identifiable, sufficiently distinct and capable of being allocated uniquely" to an individual account holder.
- They are identifiable by third parties, since only the holder of a private key can access and transfer the cryptocurrency from one wallet to another.
- They are capable of assumption by third parties because they can be the subject of active trading markets.
- They have some degree of permanence or stability, as the entire life history of a cryptocurrency is recorded on the blockchain.
Under Hong Kong law, "property" is currently defined under section 3 of the Interpretation and General Clauses Ordinance (Cap. 1) as "(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". The Court noted that whilst this definition is different from those adopted in other common law jurisdictions, it is an "inclusive one and intended to have a wide meaning" so as to encompass crypto-assets.
Existence of a trust?
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. In reaching this conclusion, the Court considered the "three certainties" test for establishing a trust5:
- Certainty of subject matter – satisfied
Notwithstanding the fact that the Currencies were placed into a common pool, the Court found there to be sufficient certainty of subject matter. This is because the customers' amounts of Currencies were clearly recorded in the private exchange ledger maintained by Gatecoin ("Exchange Ledger"), which means claims could be made to a proportionate share of all cryptocurrencies by reference to the Exchange Ledger, despite the lack of segregation.
- Certainty of object – satisfied
There is certainty of object as the beneficiaries of the trust and the extent of their claim can be readily ascertained from the Exchange Ledger.
- Certainty of intention – not satisfied
Upon reviewing each set of the T&Cs, the Court concluded that the earlier versions of the T&Cs (i.e. 2016 T&C and Trust T&C) were superseded by the 2018 T&C, on the ground that all of Gatecoin's customers were required to acknowledge and accept the 2018 T&C when it came into force in order to continue accessing and using Gatecoin's website. Therefore, the question of whether Gatecoin intended to hold the Currencies on trust for its customers should be determined by construing the terms of the 2018 T&C.
The Court found that, insofar as the 2018 T&C is concerned, there was clearly no intention to create any trust for customers. In fact, the 2018 T&C contained express disclaimers of any fiduciary obligations on the part of Gatecoin. Further, all cryptocurrencies were pooled together with other currencies, and Gatecoin was able to use them in any way it saw fit, including for the purpose of carrying on trades in its own right. Gatecoin's financial statements also treated the cryptocurrencies as the company's own assets, whilst "customer deposits" were labelled as liabilities.
However, the Court noted that there may be pre-existing customers who never accessed the platform after the 2018 T&C came into effect (and as such did not consent to its terms). Insofar as such class of customers exists, the Court found that Gatecoin held the Currencies on trust for them, as the Trust T&C (which superseded the 2016 T&C) contained express trust language.
Whilst Hong Kong Courts had previously granted interlocutory proprietary injunctions over digital assets, this is the first time that it expressly confirmed the proprietary nature of cryptocurrency, bringing Hong Kong in line with other key common law jurisdictions whose courts have already ruled on the issue.
As noted in the judgment, recent decisions of courts from various jurisdictions have pointed to a wider common law trend of treating cryptocurrency as a new form of intangible property. For example, in the UK, following the publication of the 2019 Legal Statement, the view that crypto-assets constitute property has been backed by English courts in a series of cases: AA v Persons Unknown6; Ion Science Limited and Duncan Johns v Persons Unknown, Binance Holdings Limited and Payment Ventures Inc.7; Zi Wang v Graham Darby8. The UK government has also recently announced its plans to regulate cryptocurrencies under its existing financial services regime (see our recent client alert here for more information), which further solidifies the consensus that existing laws and regulations need to be adapted to ensure the recognition and protection of digital assets.
In light of the recent high-profile collapses of some major cryptocurrency exchanges, this decision provides helpful clarity on the legal treatment of cryptocurrencies in Hong Kong, particularly in a winding-up scenario. It also demonstrates Hong Kong Courts' willingness to apply existing legal principles with flexibility to novel issues in a time of technological growth and innovation. As Hong Kong pushes to position itself as a global virtual asset hub, disputes surrounding crypto-assets and associated technologies will only become increasingly common. We expect it is only a matter of time before another unprecedented legal issue in this area makes its way to the Hong Kong courts, and we look forward to tracking these exciting developments.
1. Re Gatecoin Limited (In Liquidation)  HKCFI 914. The judgment is available at: https://legalref.judiciary.hk/lrs/common/search/search_result_detail_frame.jsp?DIS=151622&QS=%2B%7C%28HCCW%2C18%2F2019%29&TP=JU.
2. See our previous client alert on the 2019 Legal Statement at: https://www.akingump.com/en/insights/alerts/landmark-legal-statement-on-cryptoassets-and-smart-contracts.
3.Ruscoe v Cryptopia  NZHC 728.
4. National Provincial Bank v Ainsworth  AC 1175.
5. Knight v Knight (1840) 49 ER 58.
6. AA v Persons Unknown  EWHC 3556 (Comm).
7. Ion Science Limited and Duncan Johns v Persons Unknown, Binance Holdings Limited and Payment Ventures Inc. (unreported, 21 December 2020). See pages 30 to 33 of our previous client alert for a summary of the decision at: https://www.akingump.com/a/web/nL41KJryDTWGz5UDHMPKxx/3BPtUX/2021-year-in-review-civil-fraud-4875-4720-5645-1.pdf.
8. Zi Wang v Graham Darby  EWHC 3054 (Comm). See pages 30 to 33 of our previous client alert for a summary of the decision at: https://www.akingump.com/a/web/nL41KJryDTWGz5UDHMPKxx/3BPtUX/2021-year-in-review-civil-fraud-4875-4720-5645-1.pdf.
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