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Cryptocurrencies – Are they an asset capable of being held on trust?

Lessons from Ruscoe v Cryptopia Ltd

A recent New Zealand High Court decision has held that cryptocurrencies, as ‘digital assets’, are a form of property that are capable of being held on trust.

Importance

This is one of the first analyses of the nature of cryptocurrencies as property in the common law world, and as such will be of crucial importance in the insolvency context as we see more personal and corporate insolvencies with cryptocurrency forming part of the assets available for realisation. It is also important to ordinary market participants concerned with the legal status of this type of asset.

Background

The dispute in Ruscoe v Cryptopia Ltd (in Liquidation) [2020] NZHC 728 arose following the liquidation of Cryptopia, a cryptocurrency trading exchange. Cryptopia was placed into liquidation following a serious hack in 2019 and the loss of $30 million in cryptocurrency. The liquidator’s application to the Court sought guidance on who owned the remaining cryptocurrency controlled by Cryptopia and what should be done with these.

A key question of the application was whether cryptocurrency is ‘property’ for the purposes of New Zealand’s Companies Act 1993 and common law, and capable of forming the subject matter of a trust.

What are cryptocurrencies?

Cryptocurrencies are a form of electronic money, stored in a ‘digital wallet’. Cryptocurrencies such as ‘bitcoin’ or ‘ether’, are digital tokens created from code using an encrypted string of data blocks known as ‘blockchain’. These can be bought and sold on an exchange platform and users have the option of remaining anonymous. However, they are not considered legal tender. Unfortunately, these platforms are also largely unregulated and there is little, if any, protection against unauthorised or incorrect debits from digital wallets, or recourse for the purchase of stolen cryptocurrency.

Are cryptocurrencies property, and are they capable of being held on trust?

The Court held that cryptocurrencies satisfied the definition of ‘property’ under the New Zealand’s Companies Act 1993.[1] More importantly for common law jurisdictions, the Court held that cryptocurrencies satisfied the common law definition of property as definable subject-matter, identifiable by third parties, capable of assumption by third parties and with some degree of permanence or stability.[2]

The Court found that cryptocurrencies, as digital assets, are property capable of forming the subject matter of a trust.[3] In the case of Cryptopia, the cryptocurrencies were held on separate express bare trusts by the Company for Cryptopia’s accountholders.[4] Importantly, all account holders for a particular type of currency were beneficiaries of the same trust and held their interests on the same terms as all other account holders of that currency.

What does the future hold?

The decision in Ruscoe v Cryptopia carries important implications:

  • Whether something is ‘property’ is the key of many transactions, including whether something is capable of being held on trust or a proprietary right of security.
  • Australian courts have yet to examine cryptocurrencies in detail, nor in an insolvency context. The decision is one of very few common law decisions on a global level which expressly deals with whether digital assets such as cryptocurrencies are property and can be the subject of a trust. It is likely that this judgement will be instructive to Australian courts charged with the task of dealing with cryptocurrency assets, given the similar legal frameworks between the jurisdictions.
  • The decision makes a distinction between ‘pure information’ and ‘digital assets’ when determining whether something is recognised a ‘property’. Although it is not yet the definitive position at common law, the Court held that cryptocurrencies were not pure information.

The Court provided some direction as to the process to be undertaken in identifying those affected by the hack, and the allocation of loss occasioned by individual account holders. However, the liquidators will need to go back to Court to obtain clarity on how to distribute the assets owned by Crytopia – watch this space for further updates!

[1] Ruscoe & Moore v Cryptopia Limited (in liquidation) [2020] NZHC 728, [133].

[2] Ruscoe & Moore v Cryptopia Limited (in liquidation) [2020] NZHC 728, [102]-[120], see also National Provincial Bank Ltd v Ainsworth [1965] AC 1175 at 1247–1248 (Wilberforce J).

[3] Ruscoe & Moore v Cryptopia Limited (in liquidation) [2020] NZHC 728, [133].

[4] Ruscoe & Moore v Cryptopia Limited (in liquidation) [2020] NZHC 728, [187].