Last week the High Court issued its decision in Ruscoe & Moore v Cryptopia Ltd (in liquidation)  NZHC 728. The decision is notable, being the first of its kind in New Zealand to fully consider the proprietary consequences of cryptocurrency, and more specifically of digital assets. The High Court considered that cryptocurrency constitutes “property” at common law and is capable of being held on trust. The finding means cryptocurrencies were beneficially owned by the account holders, and were therefore not part of the pool of assets capable of being distributed to unsecured creditors in the liquidation.
Cryptopia was a cryptocurrency exchange; an online platform which allowed accountholders to trade pairs of cryptocurrencies between themselves, with Cryptopia charging fees for trades, deposits and withdrawals. It maintained a database listing the accountholders and digital assets that it controlled.
In January 2019 Cryptopia’s servers were hacked. Between 9-14% of the cryptocurrency stored on the exchange was stolen. The value of the cryptocurrency stolen was around $30 million. Although Cryptopia attempted to continue trading, its shareholders resolved to place the company into liquidation in May 2019.
The Liquidators applied to the Court under s 284 Companies Act 1993 for guidance and directions on two questions relating to the categorisation and distribution of assets in the liquidation:
- Is cryptocurrency “property” capable of being the subject matter of a trust?
- Was the cryptocurrency held on trust by Cryptopia for the accountholders?
Although cryptocurrencies have become widely used and are traded like traditional forms of financial property, the case is understood to be the first fully contested case in New Zealand to consider whether cryptocurrencies are “property” under common law.
Is cryptocurrency “property”?
Cryptocurrency is a form of intangible personal property; it is an identifiable thing of value. Cryptocurrencies are therefore capable of being the subject matter of a trust. Section 2 of the Companies Act 1993 defines property as “property of every kind whether tangible or intangible, real or personal, corporeal or incorporeal, and includes rights, interests, and claims of every kind in relation to property however they arise”. Courts in New Zealand have accepted that this is a wide definition and includes money.
- Gendall J considered different types of intangible entities which are commonly accepted as property, including choses in action, non-enforceable debt claims, payments through the banking system, copyright, shares, licenses and quotas, and a trustee’s right of indemnity. Following precedent, His Honour considered that the digital assets met four key criteria for constituting property: Cryptocurrency has a definable subject matter: its computer-readable strings of characters are “sufficiently distinct to be capable of then being allocated uniquely to an accountholder on that particular network”. The way cryptocurrency identification works is broadly similar to banks’ records of their customers’ bank accounts;
- The combination of an accountholder’s “public key” (the code that allows a user to receive cryptocurrencies into their account) and “private key” (the second code made available only to the holder of the account), together with the requirement that the two keys be combined to record a transfer of the cryptocurrency, means that the cryptocurrencies are sufficiently identifiable by third parties;
- Cryptocurrency is capable of being acquired by third parties on active trading markets;
- Blockchains keep a public record of a cryptocoin’s life history, and a cryptocoin remains fully recognised unless and until it is spent through use of the private key. Cryptocurrency therefore retains some degree of permanence or stability.
Were the cryptocurrencies held on trust by Cryptopia for the accountholders?
The accountholders argued that Cryptopia is a trustee for the accountholders of the cryptocurrency it held on their behalf.
The Court held that the “three certainties” for constituting a valid trust were present on the facts of the case:
- The cryptocurrencies, being the subject matter of the various trusts created, were clearly recorded in Cryptopia’s SQL database records, providing sufficient certainty of subject matter;
- There was no uncertainty as to who the beneficiaries of the relevant trusts were: they are those who had positive coin balances for the currencies in Cryptopia’s SQL database. Although the liquidators indicated that they might have some difficulties finding out the true identities of some of the accountholders and making contact with them, such evidential uncertainty would not defeat the existence of the trust;
- Cryptopia manifested its intent to hold the property on trust through its conduct in creating the exchange without allocating to accountholders public and private keys for the digital assets it held for them. The database showed that the company intended to be a custodian and trustee of the accountholders’ cryptocurrencies.
Implications of this decision
Given the novel issues at stake in the conduct of the liquidation, it was appropriate for the Liquidators to seek the Court’s direction as to the legal status of digital assets and therefore how they should carry out distributions in the liquidation.
The decision provides certainty around the legal status of cryptocurrencies which will be helpful with the increasing development and use of cryptocurrencies and other digital assets. Whether “property” is in fact held on trust will be specific in each case.
The Cryptopia liquidation is ongoing. The Liquidators have indicated that they will likely require direction from the Court before returning cryptocurrency to accountholders.
Disclaimer: The information contained in this article is current at the date of publishing and is of a general nature. It should be used as a guide only and not as a substitute for obtaining legal advice. Specific legal advice should be sought where required.