Analysis
The defendant company was formed as a cryptocurrency trading exchange platform based in New Zealand in 2014. It enabled users to register as account holders, make deposits and carry out trades of various types of digital assets for which the company charged fees. The initial deposit would be made into a ‘hot wallet’ connected to the internet for which there was a public key. When not required to meet withdrawal requests, the deposit would be transferred to a ‘cold wallet’ which was not connected to the internet and for which there was a private key, similar to a password, known only to the account holder. When a trade occurred between two users on the exchange, their respective balances on the company’s internal ledger would change to reflect the trade and the transactions were recorded in its internal structured query language database (‘SQL database’).
The defendant’s operations were initially reasonably modest, having attracted some 30,000 users in the period up to early 2017. The number of users expanded exponentially when the price of bitcoins – a unit of account for a popular cryptocurrency known formally as Bitcoin – more than trebled between November 2017 and January 2018. At that point in time, the number of users were well in excess of 900,000, most of whom were from outside New Zealand. Unfortunately, as a result of a successful hacking of the servers used by the defendant, 14% of its cryptocurrency was stolen, valued at around NZ$30m. Soon afterwards, the defendant’s shareholders resolved to place the company into liquidation, in May 2019. It was estimated that the defendant was left with cryptocurrency worth about NZ$170m. Questions arose as to the legal status of the digital assets held by the defendant and in particular whether those digital assets were held on trust for the account holders. In order to resolve what was essentially a tussle between the creditors of the company on the one hand and the account holders on the other, the applicant liquidators applied to the court for directions pursuant to s284(1)(a) of the New Zealand Companies Act 1993.
Held (providing answers to the questions raised by the liquidators):
There was no doubt that the digital assets held on the company’s exchange constituted a species of intangible personal property within the meaning of s2 of the Companies Act 1993. This was supported to some extent by existing authority and there was a wide range of types of assets which by way of analogy had been recognised elsewhere as ‘property’, such as choses in action, debt claims, electronic bank payments, copyright, shares, licences and quotas, and rights of indemnity. The digital assets met the standard four criteria to be considered a species of ‘property’ as outlined by Lord Wilberforce in National Provincial Bank Ltd v Ainsworth [1965]: the cryptocurrency data recorded in the computer network was sufficiently distinct to be capable of being allocated uniquely to an account holder and therefore its subject matter was definable; the degree of control necessary for ownership meant that the assets were identifiable by third parties through the computer software system of public and private keys; the assets were capable of assumption by third parties through trading on the platform; and they had the necessary degree of permanence or stability through the use of private keys.
Since the digital assets had been found to constitute ‘property’, there was similarly no doubt that they were capable of forming the subject matter of a trust. In particular, the three certainties required to create a valid trust – of subject matter, objects and intention – existed. The SQL database clearly recorded each relevant cryptocurrency for which a single trust had been created when the first deposit was accepted on the platform. The beneficial co-ownership of the relevant currency was shared by the account holders in proportion to the numbers of relevant cryptocoins that they had each contributed (either initially when new coins were acquired or as a result of trades between account holders). Although it was true that there could be difficulty in identifying some of the account holders, this degree of evidential uncertainty could not defeat a trust once it was established, as in this case, who the beneficiaries of the relevant trusts were as a matter of principle. The defendant had manifested its intention to create valid express trusts through its conduct in creating the exchange. The SQL database that the company had created showed that the defendant was a custodian and trustee of the digital assets. Apart from this, the terms and conditions (as amended) issued by the defendant expressly referred to the company holding the digital assets as bare trustee for the account holders. Authorities such as Re Goldcorp Exchange Ltd (in receivership) [1994] and Quoine Pte Ltd v B2C2 Ltd [2020] were readily distinguishable from the facts in the present case.
In the event that the liquidators were unable to ascertain the identity of any particular account holder, the relevant digital assets fell to be dealt with in accordance with s76 of the New Zealand Trustee Act 1956. In the event that the liquidators recovered stolen property, this should be dealt with pro rata within each specific trust for the relevant digital asset according to the amounts recovered assessed against the amounts stolen.
JUDGMENT GENDALL J: Introduction [1] Cryptopia Ltd (in liquidation) (Cryptopia) was formed in 2014 as a cryptocurrency trading exchange. It had a short but tumultuous history. It was placed into liquidation in May 2019 after suffering a serious hack and the loss of some $30m of cryptocurrency from its exchange. [2] Issues in the liquidation …Continue reading "Ruscoe & anr v Cryptopia Ltd [2021] WTLR 965"