The High Court has held for the first time in New Zealand that cryptocurrencies are property under the Companies Act 1993. Justice Gendall considered that the $170 million of cryptocurrencies held by Cryptopia Limited (in liquidation) ("Cryptopia") were property and, importantly, held on trust for the accountholders of Cryptopia and not the property of Cryptopia itself. This means that the liquidators will not be able to distribute the cryptocurrencies held on trust to the creditors of Cryptopia. Creditors' expected returns accordingly dropped from a likely 85 per cent to less than 50 per cent. The case also provides useful guidance to cryptocurrency wallet holders.
Cryptopia was founded in 2014 as a cryptocurrency trading exchange (basically, an online platform for exchange and trading in cryptocurrency). It was placed into liquidation following a serious hack during which it lost a significant proportion of its cryptocurrencies.
The liquidators applied to the Court for directions as to the categorisation and distribution of the assets in the liquidation. In particular, the liquidators needed to know how to deal with cryptocurrency held in accounts for particular accountholders. If cryptocurrency was held on trust for the accountholders then it would not be a part of the assets of the company available for distribution to creditors. For that to be the case, two conditions had to be fulfilled: (1) the cryptocurrency had to be considered property; and (2) the relationship between Cryptopia and the accountholders needed to satisfy the legal requirements for a trust.
A cryptocurrency is a digital or virtual currency. The most well-known cryptocurrencies are bitcoin and ethereum. They are secured via cryptography, which brings many benefits. Many cryptocurrencies use ledgers based on blockchain. Crucially, compared to fiat currency, cryptocurrencies are not controlled by any central authority, with distributed transaction ledgers and rules established by informal consensus being key characteristics of cryptocurrencies.
Justice Gendall held that cryptocurrency was property for the purposes of the Companies Act. His Honour relied on the wide definition of that term in the Companies Act and a trend in case law treating "data" as capable of being possessed (unlike "pure information"). However, the final part of his reasoning, somewhat ironically, relied on a decision from the United Kingdom House of Lords in 1965, some 55 years ago. His Honour concluded that cryptocurrencies were property, in part, because they:
- have an identifiable subject matter;
- are identifiable by third parties;
- are capable of assumption by third parties; and
- have some degree of permanence or stability.
His Honour added the interesting conclusion that: "Cryptocurrencies are 'property' within the definition outlined in s 2 of the Companies Act and also probably more generally". A general finding that cryptocurrency is property could lead to liability for conversion, or claims for knowing receipt, restitution of property or unjust enrichment. Gendall J's comprehensive treatment of this question will be useful for later courts in New Zealand and elsewhere.
Held on trust
Having determined that the cryptocurrency was property, the judge then turned to consider whether Cryptopia held the $170m of cryptocurrency on trust for the accountholders or as part of its pool of assets available to creditors.
The Judge found that there was sufficient intention to hold the cryptocurrency on trust and sufficient certainty of what was being held and for whom (thereby satisfying the three certainties required to establish an express trust). Gendall J relied on evidence as to the nature of Cryptopia's business, its business practices, and the applicable terms and conditions, concluding that the various cryptocurrencies were held at equity on separate express trusts for all of the accountholders.
The Judge distinguished the Singaporean Court of Appeal case of B2C2 Ltd v Quoine Pte Ltd  SGCA(I) 2. That case also included a cryptocurrency exchange. The Court of Appeal found, on the facts before it, that there was insufficient intention to create a trust (for example, there was no reference to trust in the terms and conditions).
Where to from here?
Appeals may follow, as this is an important decision. Either way the liquidators have indicated they will apply to the Court for further guidance before the distribution of Cryptopia's assets to accountholders and creditors can begin. Any resolution of Cryptopia's liquidation is some way off, with the liquidators still in the process of reconciling the accounts of more than 900,000 customers across 400 different cryptocurrencies. Given the (so far unexplained) difficulties in identifying accountholders, advertisements under s 76 of the Trustee Act 1956 seem inevitable (and are discussed in Gendall J's decision).
What does it all mean?
Recognition of cryptocurrency as "property" is an important step in the continuing rise of cryptocurrencies. While the Inland Revenue already has guidance on taxing cryptocurrency related activities, recognition of cryptocurrency as property confirms that people own their cryptocurrency. In turn, it can be stolen, potentially subject to various claims (as discussed above) or have other uses such as security collateral.
The determination by a Court as to whether there was sufficient certainty of intention to create a trust will depend on the particular facts of the case. However, in the context of cryptocurrency wallet providers, this case provides some helpful guidance on factors that are likely to be relevant to a Court when assessing whether there was an intention to create a trust:
- Express terms: It is not necessary for the terms and conditions of a wallet provider to contain an express declaration of trust. Conversely, this case seems to indicate that, where a wallet provider does not intend to create a trust, a statement to that effect should be included in the terms and conditions (for example, what a customer's rights would be in a liquidation). Clearly, a wallet provider should be careful to ensure that their terms and conditions expressly state the type of relationship that is intended to be created and the terms of that relationship.
- Operational matters: Matters such as whether an internal ledger of customer cryptocurrency balances is kept and whether the wallet provider in fact holds an amount of cryptocurrency that is consistent with that ledger, will be relevant. Where a wallet provider intends to hold cryptocurrency on trust, it should be careful to ensure its operational conduct supports that assertion. In addition, where a trust exists, those operational matters will be relevant as to whether the wallet provider has complied with the terms of the trust (and has not, for example, transferred currency out of that wallet in breach of any trust).
- Private keys: It appears from this case that, if a wallet provider holds the private key for the cryptocurrency of its customers, this will be strong evidence that the cryptocurrency is held on trust.
One potential 'inequity' arising from the decision is the recognition of a number of cryptocurrency-specific trusts. As the theft of cryptocurrency was concentrated in specific cryptocurrencies, Gendall J's decision could lead to beneficiaries of certain trusts receiving low amounts or nothing. This could – potentially – mean that there is a divergence of accountholders' interests as to the trust arrangement.
This case could also have wider application. The Financial Markets Authority has indicated on its website (available here) that, in the context of debt securities, where a genuine trust arrangement exists and an entity holds customer funds, the act of holding those funds would not in of itself constitute a financial product. A number of the factors which were relevant in Ruscoe v Cryptopia would also seem to be relevant in this context.
Whether this ruling is appealed remains to be seen but either way the result of Ruscoe v Cryptopia is a watershed moment in how the law responds to cryptocurrencies. Wallet providers should continue to monitor the development of this case closely and contact one of our experts if they have any questions.
The decision is available here.