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13 October 2020
In April 2020 the NZ High Court issued a decision determining the status of cryptocurrency as property.(1) The court held that cryptocurrency constitutes property at common law and is therefore capable of being held on trust.
The application before the court was brought by the liquidators of Cryptopia under Section 284(1)(a) of the Companies Act. They sought directions on distributions relating to Cryptopia's property – specifically, whether digital assets in the form of cryptocurrency formed part of the company's pool of assets.
The court's determination that cryptocurrency is property means that cryptocurrencies are capable of being beneficially owned and so, in the particular circumstances, did not form part of the pool of assets for distribution to unsecured creditors.
Rob Dawson and Adam Clark formed Cryptopia in 2014. Cryptopia was formally a 'cryptocurrency trading exchange' – an online platform or exchange to allow users to trade pairs of a range of cryptocurrencies between themselves. Cryptopia would charge fees for trades, deposits and withdrawals. In order to participate, the user was first required to register with Cryptopia, open an account and make a deposit or purchase in one of the five base currencies.
A 'cryptocurrency' is a digital or virtual currency. The most well-known cryptocurrencies are bitcoin and ethereum. They are secured via cryptography, which can bring many benefits. Cryptocurrencies commonly use ledgers based on blockchain. The crucial difference from fiat currency is that cryptocurrencies are not controlled by any central authority. Distributed transaction ledgers and rules established by informal consensus are the key characteristics of cryptocurrencies.
The judgment discussed the definition of 'cryptocurrency' by referring to a UK Jurisdiction Task Force report entitled "Legal statement on cryptoassets and smart contracts". That report noted the following:
In the early years, Cryptopia had a modest membership, but it expanded exponentially from November 2017 after an explosion in bitcoin's value. The company grew to the point where it had more than 900,000 account holders, compared with 30,000 at the beginning of 2017.
The company was hacked, leading to a loss of NZ$30 million from its exchange and its liquidation in 2019. The company had resumed trading in March 2019 but, soon afterwards, the shareholders resolved by special resolution to place the company into liquidation. When placed in liquidation, the company held an estimated NZ$170 million worth of cryptocurrency.
The liquidators applied to the High Court under Section 284(1)(a) of the Companies Act for guidance and directions. The two questions on which the liquidators sought direction from the High Court were as follows:
Although it might seem trite that cryptocurrency would be considered property, legal systems worldwide have struggled to categorise cryptocurrency because it has been seen as difficult to fit within the recognised categories of property.
The decision was made in accordance with the definition of 'property' in Section 2 of the Companies Act 1993 (as well as earlier decisions which considered the categorisation of other assets):
Section 2 "property"
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.
The High Court considered different types of intangible asset which are commonly accepted as property, including:
Judgments addressing cryptocurrency as property by courts in other jurisdictions, including Singapore, England and British Columbia, were also considered.
The court held that cryptocurrency meets the four key characteristics of property, according to Lord Wilberforce's decision in National Provincial Bank Ltd v Ainsworth.(2)
Definable subject matter
Cryptocurrency's computer-readable strings of characters are "sufficiently distinct to be capable of then being allocated uniquely to an account holder on that particular network". The way cryptocurrency identification works is broadly similar to banks' records of their customers' bank accounts.
Identifiable by third parties
The combination of an account holder's public key (the code that allows a user to receive cryptocurrencies into their account) and the private key (the second code made available only to the account holder), together with the requirement that the two keys be combined to record a transfer of cryptocurrency, means that cryptocurrencies is sufficiently identifiable by third parties.
Capable of assumption by third parties
Cryptocurrency can be acquired by third parties on active trading markets.
Some degree of permanence or stability
Blockchains keep a public record of a cryptocoin's life history and a cryptocoin remains fully recognised unless it is spent through use of the private key. Cryptocurrency therefore retains some degree of permanence or stability.
As cryptocurrency is property, it is subject matter that is capable of being held on trust, provided that the elements of the trust are present.
The High Court held that the cryptocurrency remaining in Cryptopia's accounts was held on trust for the account holders. It reached its conclusion after considering:
Of particular importance was the fact that account holders bought their own currency on the platform to make it available for exchange. Cryptopia acted as a platform for exchanges but did not hold the cryptocurrencies as part of its assets.
The court held that the three certainties for constituting a valid trust were present on the facts of the case:
The consequence of the decision meant that only account holders were entitled to the remaining cryptocurrency on Cryptopia's insolvency. If the High Court had held that the cryptocurrency was not held on trust, it would have been an asset in the liquidation to be distributed among creditors.
The decision has brought welcome certainty to the legal status of cryptocurrency in New Zealand and will give more comfort to those trading in cryptocurrencies throughout the country.
The recognition of cryptocurrency as property is an important step in clarifying rights and obligations surrounding cryptocurrency. Proprietary rights are recognised worldwide and the status of cryptocurrency as property has important implications for the rules around:
For further information on this topic please contact Victoria Rea at Wilson Harle by telephone (+64 9 915 5700) or email (email@example.com). The Wilson Harle website can be accessed at www.wilsonharle.com.
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