Ruscoe v Cryptopia Ltd (in liq)
[2020] NZHC 728
•8 April 2020
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
I TE KŌTI MATUA O AOTEAROA ŌTAUTAHI ROHE
CIV-2019-409-000544
[2020] NZHC 728
BETWEEN DAVID IAN RUSCOE AND MALCOLM RUSSELL MOORE
Applicants
AND
CRYPTOPIA LIMITED (IN LIQUIDATION)
Defendant
Hearing:
Memoranda Filed:
11 – 14 February 2020
02 March 2020 – J S Cooper QC for the Creditors
04 March 2020 – P G Watts QC for the Accountholders 10 March 2020 – S A Barker for the Applicant Liquidators
Appearances:
S A Barker, M A Harris and A E Cao for the Applicant Liquidators J S Cooper QC and J A R Barrow for the Creditors
P G Watts QC and S C I Jeffs for the Accountholders
Judgment:
8 April 2020
JUDGMENT OF GENDALL J
This judgment was delivered by me on 8 April 2020 at 3:30 p.m. pursuant to Rule 11.5 of the High Court Rules
Registrar/Deputy Registrar Date:
RUSCOE v CRYPTOPIA LTD (IN LIQUIDATION) [2020] NZHC 728 [8 April 2020]
Table of Contents
Introduction [1] Background facts [5] (a) General [5] (b) What is cryptocurrency? [21] (c) How Cryptopia operated [22] (d) Cryptopia’s terms and conditions [23] (e) Cryptopia’s financial accounts [32] (f) SQL database and how Cryptopia generated income [34] (g) The hack [38] (h) Advertising and promotion [41] The law – s 284 Companies Act 1993 [43] The liquidator’s application [46] Issue 1 – the property issue [50] - An aside – what are the implications? [50] - What is “property” and why does it matter here? [63] - The authorities [70] · B2C2 Ltd v Quoine Pte Ltd [77] · Other authorities [85] - The four requirements for a “property” interest [102] (a) Identifiable subject matter [104] (b) Identifiable by third parties [109] (c) Capable of assumption by third parties [114] (d) Some degree of permanence or stability [117] - Conclusion on the four criteria [120] - Possible arguments against cryptocurrency being property [122] - Public policy arguments [129] - Conclusion [133] Issue 2 – The trusts issue [134] A. The primary issue – are the digital assets held on trust for
accountholders?
[135] Application to the facts of present case [140] · Certainty of subject matter [141] · Certainty of objects [148] · Certainty of intention [151] Additional matters [167] B. The remaining issues before the Court [188] - Question (c) What happens if there is no trust or cryptocoins
are not property?
[189] - Question (d) What are the terms of the trust(s) and when did the trust(s) come into existence? [192] - Question (e) Inability to identify individual shareholders? [199] - Question (f) Recovery of stolen digital assets [203] - Potential relevance of any fault of Cryptopia relating to the
lost digital assets
[206] Result [209] Costs [210]
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
$30 million of cryptocurrency from its exchange.
[2] Issues in the liquidation have arisen over just who owns the remaining cryptocurrency under the control of Cryptopia and what should happen now.
[3] The applicants (the liquidators) apply to the Court for directions under s 284(1)(a) of the Companies Act 1993 relating to the categorisation and distribution of assets in the liquidation.
[4] Two tasks before the liquidators are the subject of the assistance they seek from this Court. The first is in confirming just what are the assets in the liquidation. Once that matter which is the subject of the present application is determined, the liquidators say they intend to advance a further application to propose methods of distribution of the company’s assets. The present application, counsel say, is therefore part one of a two-part process before distribution of Cryptopia’s remaining assets can be achieved.
Background facts
(a) General
[5] Cryptopia is a cryptocurrency exchange. Essentially, it is an online platform or exchange designed principally, among other things, to allow users to trade pairs of a vast range of cryptocurrencies between themselves, with Cryptopia charging fees for trades, deposits and withdrawals.
[6] Cryptopia, was started by Rob Dawson and Adam Clark, essentially as a hobby. It described itself internally as: “Providing an auction house and marketplace, several stable nodes on the network, and a support framework for each coin accepted on the site.”
[7] Up to early 2017, Cryptopia’s operations were reasonably modest, having attracted some 30,000 users. The number of users, however, expanded exponentially from November 2017 as the price of bitcoin a unit of account for a popular cryptocurrency known formally as Bitcoin,1 more than trebled. Counsel have indicated that at that point the number of users would have been well in excess of 900,000, the majority being from outside New Zealand.
[8] Specifically, between November 2017 and January 2018, the value of one bitcoin had increased from approximately USD 4,350 to almost USD 20,000. The number of registered accountholders at Cryptopia grew by over 940 per cent over the same period and company revenue and staff numbers grew significantly. As at 18 October 2019, after the company was liquidated, Cryptopia had 960,143 accountholders with a positive coin balance. Of that number, 104,186 are believed to be accountholders with a “deemed nil value”, presumably because of the hack. The balance comprises a substantial number of accounts of only modest value.
[9] Cryptopia’s reach was global. New Zealand had the 26th largest number of accountholders (9,475) with 230 other countries and territories identified as accountholders by reference to internet protocol (IP) addresses. Certain problems with this IP address method of identification have been identified but, notwithstanding any anomalies, it is clear Cryptopia was operating as a global business.
[10] Cryptopia enabled accountholders to trade approximately 900 cryptocoins, more than any other exchange in the world. It is clear, however, that some 400 of these cryptocoins had been delisted by Cryptopia and could not be traded at the time it was placed into liquidation.
[11] The liquidators, as I understand it, have estimated Cryptopia currently holds cryptocurrency currently worth about NZD 170 million.
1 Lacking guidance on the correct manner to refer to cryptocurrencies from Coppard and others New Zealand Law Style Guide (3rd ed, Thomson Reuters, Wellington, 2018), I have decided to refer to them in this way: the cryptocurrency system is to be capitalised (for example “… when Bitcoin was first developed…”); but the unit of account for a cryptocurrency is not to be capitalised (for example “… at the rate of one ethereum for 0.04 of a bitcoin.”). This is consistent with the approach taken in the Associated Press Stylebook Online.
[12] In January 2019 Cryptopia’s servers were hacked. Somewhere between nine and 14 per cent of its cryptocurrency was stolen, this being valued at around NZD 30 million. Cryptopia temporarily suspended its operations before resuming them in March 2019. Soon after, in May 2019, Cryptopia’s shareholders resolved by special resolution to place the company into liquidation.
[13] As to the hack, this theft of what was about $30 million of several cryptocurrencies was effected by way of an unauthorised transfer of those cryptocurrencies to an undisclosed external exchange. It seems this transfer is irreversible.
[14] The liquidators, as I have noted, have now applied to this Court under s 284(1)(a) Companies Act for guidance and directions. Counsel advise that to the best of their knowledge this is the first occasion on which issues of this type concerning cryptocurrency have been before the courts in New Zealand.
[15] Essentially, the present application is run by the liquidators for directions on the legal status of a number of cryptocurrencies held by Cryptopia (“the digital assets”) and in particular whether those digital assets are held on trust by the company.
[16] Counsel for the liquidators make clear that the liquidators have no interest in whatever outcome is reached by the Court on the issues in the present application but simply wish to ensure the Court receives full argument on those issues.
[17] Effectively, the tussle which is before the Court is one between the creditors of Cryptopia on the one hand and the accountholders who have invested in the various digital assets (“the accountholders”) on the other.
[18] Experienced senior counsel have been appointed by the Court to represent those classes of affected interests in the application – Ms Cooper QC for the creditors and Mr Watts QC for the accountholders (who have also been described here as “the potential trust beneficiaries”).
[19] In essence, therefore, the present application concerns the legal nature and status of the digital assets and of potential equitable interests in them. These digital assets, as I have noted, have an approximate value of about NZD 170 million.
[20] The present contest over the digital assets is effectively one between the more than 800,000 accountholders holding a positive coin balance with Cryptopia, the company’s estimated 37 trade and other creditors and its 90 shareholders.
(b) What is cryptocurrency?
[21] At the outset it is useful to provide a definition of cryptocurrency generally. Counsel seem to accept that a most helpful description is found in a British report of the “UK Jurisdiction Taskforce” entitled Legal Statement on Cryptoassets and Smart Contracts.2 The report was authored by four barristers, experts in this field and considers broadly the legal status of cryptoassets and, in particular, whether the law treats them as property. In the report, the authors provide what is a useful and non- technical summary of cryptoassets or cryptocurrency. This definition follows the heading in the report “What is a Cryptoasset?” It explains:
24.In October 2008, the pseudonymous Satoshi Nakamoto published his now-famous paper Bitcoin: A Peer-to-Peer Electronic Cash System. Observing that commerce on the Internet relied almost exclusively on financial institutions serving as trusted third parties, Nakamoto proposed a new electronic payment system “based on cryptographic proof instead of trust”, with digital tokens – bitcoins – taking the place of traditional currency. The first bitcoin came into existence in January 2009, not coincidentally at the height of the global banking crisis.
25.Many other systems have been developed since then to implement commercial applications using cryptographic techniques. The market continues to expand as new applications and new techniques are explored.
26.Most applications involve dealings in assets of some kind, which therefore have to be represented digitally within the system. We use the term cryptoasset to refer generally to such a representation. However, that should not be understood as a term of art. Because of the great variety of systems in use and kinds of assets represented (ranging from purely notional payment tokens such as bitcoins to real-
2 UK Jurisdiction Taskforce Legal Statement on Cryptoassets and Smart Contracts (The LawTech Delivery Panel, November 2019) [Legal Statement on Cryptoassets and Smart Contracts] <
tangible objects) it is difficult to formulate a precise definition of a cryptoasset and, given the rapid development of the technology, that would not be a useful exercise. Indeed, there is no consistency even in the nomenclature, with virtual and digital also widely used to describe the kinds of things with which we are concerned.
27.Instead, we have set out to identify and describe, in general terms, the features of cryptoassets that may be regarded as genuinely novel or distinctive, as compared with conventional assets, so that we can then consider whether and how those features might be relevant to issues of legal and proprietary status.
28.A cryptoasset is ultimately defined by reference to the rules of the system in which it exists. Functionally, it is typically represented by a pair of data parameters, one public (in that it is disclosed to all participants in the system or to the world at large) and one private. The public parameter contains or references encoded information about the asset, such as its ownership, value and transaction history. The private parameter – the private key – permits transfers or other dealings in the cryptoasset to be cryptographically authenticated by digital signature. Knowledge of the private key confers practical control over the asset; it should therefore be kept secret by the holder. More complex cryptoassets may operate with multiple private keys (multisig), with control of the asset shared or divided between the holders.
29.Dealings in a cryptoasset are broadcast to a network of participants and, once confirmed as valid, added to a digital ledger. The main function of the ledger is to keep a reliable history of transactions and so prevent double-spending, i.e. inconsistent transfers of the same cryptoasset to different recipients. The ledger may be distributed and decentralised, that is, shared over the network with no one person having a responsibility for maintaining it, or any right to do so. A common type of distributed ledger uses a blockchain, which comprises blocks of transactions linked together sequentially, but other models are also in use.
30.An important feature of some systems is that the rules governing dealings are established by the informal consensus of participants, rather than by contract or in some other legally binding way. Consensus rules (employing methods such as proof-of-work or proof- of-stake) may also determine which version of the distributed ledger is definitive. The rules are self-enforcing in practice, even if not enforceable in law, because only transactions made in compliance with them and duly entered in the ledger will be accepted by participants as valid.
31.Although not all systems possess all of them, we can therefore identify the principal novel and characteristic features of cryptoassets as being:
(a)intangibility;
(b)cryptographic authentication;
(c)use of a distributed transaction ledger;
(d)decentralisation; and
(e)ruled by consensus.
32.It is those features that have given rise to much of the debate about legal and proprietary status and on which we therefore focus our analysis.
33.Some cryptoassets are intended to represent or are linked to conventional assets external to the system, for example money or debt obligations, tangible goods or land, a share or unit in a company or fund, or a contractual right of some kind; those assets are sometimes referred to as tethered, exogenous or off-chain. Such an external asset is certainly property but what, if any, rights in it conferred on the holder of the corresponding cryptoasset will depend on the contractual structure or legal rules of the system. For the present, we are concerned only whether the cryptoasset itself (the native or on-chain asset) is property, as distinct from any other asset it might represent, although we return to the relationship between on-chain and off-chain assets below when we discuss whether cryptoassets can operate as assets of title.
34.Many dealings in cryptoassets involve intermediaries such as brokers or custodians; that is the case even in systems, such as Bitcoin, that are designed to avoid the need for intermediation. What personal and proprietary rights the principal may have against an intermediary will depend on established rules of contract, tort and agency. That is outside the scope of the present discussion.
(emphasis original, footnotes omitted)
(c) How Cryptopia operated
[22] In two affidavits one of the liquidators, David Ruscoe described how Cryptopia itself operated. In his affidavit Timothy Brocket, Cryptopia’s Director of Finance and Administration from 1 July 2018 up to the date of the company’s liquidation, also offered some insight into the company’s operations. In summary, the position seemed to be:
(a)Cryptopia provided an online platform or exchange that allowed accountholders to trade pairs of cryptocurrencies. In order to do so, a user was first required to register with Cryptopia to open an account and to make a deposit or purchase in one of the five “base currencies”.
(b)The customer’s deposit would be made into a “hot wallet” (a wallet connected to the internet) for the cryptocurrency in question. Once
deposited the currency could be left in the hot wallet to meet withdrawal requests from other users or be transferred to a “cold wallet” (a wallet not connected to the internet). Once an initial deposit was made to the exchange, the accountholder’s wallet listed a coin balance equivalent to the deposit. The accountholder would then be able to use the services offered by the exchange, including selling and buying cryptocurrency.
(c)All cryptocurrency on the exchange was stored in digital (hot or cold) wallets. The distinction between the hot and cold wallets turns upon the way in which the data in the wallets was stored:
(i)Cold wallets were held offline preventing them from being hacked (at least by outsiders). It appears that 75 per cent of the cryptocurrency held by Cryptopia (by volume) was stored in cold wallets.
(ii)Hot wallets were online, hosted on servers physically located in Phoenix, Arizona (and potentially at some point prior also in the Netherlands). The balance of the cryptocurrency held by Cryptopia (or 25 per cent by volume) was located in hot wallets.
(d)When a trade occurred between two users on the exchange, the users’ respective coin balances on the company’s internal ledger would change to reflect the trade, but the balances in the company’s digital wallets did not change.
(e)The trades and transfers that took place on the exchange did not affect the blockchain ledgers, (the general ledgers of ownership that exist for each cryptocurrency outside of the exchange). This is because at all times the coins remained held in Cryptopia’s digital wallets.
(f)Whether a wallet was cold or hot (whether it was stored online or not) was not immutable. A wallet could be made hot by bringing it online or cold by taking it offline. Coins could also be transferred between
wallets. For instance, a new user will have deposited a particular coin to a hot wallet but Cryptopia may have then transferred it to a cold wallet for safekeeping.
(g)Although Cryptopia had one hot wallet per cryptocurrency, it may have had multiple cold wallets for the same cryptocurrency. Mr Ruscoe’s evidence is that there were “separate cold wallets for supposed company holdings and customer holdings of the same currency.” Cold wallets also appeared to serve a residual purpose of topping up hot wallets depending upon the volume or withdrawal requests for a particular coin.
(h)From the account holder’s perspective, it made no difference if cryptocurrency was held in hot or cold wallets. In fact, they may have been unaware of this distinction. Each accountholder was able to transfer cryptocurrency (as reflected in their coin balance) to a privately held digital wallet, another Cryptopia account or an account hosted on another exchange.
(i)Similarly, from the account holder’s perspective, it made no difference if trades were made inside or outside Cryptopia’s exchange. There was, however, a mechanical difference to those trades resulting from how Cryptopia stored and managed the cryptocurrency traded on its platform:
(i)Trades within the exchange: a transfer of cryptocurrency between accountholders (two users of Cryptopia) was effected by corresponding adjustments to the accountholders’ coin balances. As Cryptopia held the underlying cryptocurrency it did not need to make any changes to the wallets to effect the transactions. The transactions were recorded in Cryptopia’s internal structured query language (SQL) database (or internal ledger of transactions).
(ii)Trades outside the exchange: as with an internal trade, a transaction to a wallet held outside the exchange involved an adjustment to the accountholder’s coin balance. However, Cryptopia would have to transfer cryptocurrency from a hot wallet to the recipient who in turn would transfer cryptocurrency to another Cryptopia hot wallet. That transaction would be recorded on the relevant cryptocurrency’s public ledger.
(j)Unlike transactions on the exchange which did not move coins between wallets, all cryptocurrency transactions that moved coins from one wallet (or address) to another required a private and public key. The public key is essentially the digital wallet address, and the private key is similar to a password, that is known only to the user. A new private key is generated each time cryptocurrency is transferred on the blockchain.
(k)Cryptopia exclusively held the private keys to its digital wallets that contained the cryptocurrencies traded on the exchange. As I understand it, accountholders did not have access to the private keys.
(l)Cryptopia charged a fee for each trade and a withdrawal fee. Cryptopia had its own accounts on the exchange so that when a trade took place the trade fee would be paid into Cryptopia’s account for collecting trade fees.
(m)The cryptocurrency associated with Cryptopia’s own account holdings on the exchange was held in Cryptopia’s digital wallets and pooled along with user holdings.
(n)Cryptopia also charged various fees for services such as recovering cryptocurrency that had been accidentally transferred to another user on the exchange.
(o)Significantly, as I see it, Cryptopia’s Customer Service Analyst Manual, an internal document, outlined the company’s own perspective on what accountholders received from Cryptopia. The manual explained that:
Exchange services like Cryptopia manage and maintain wallets, and provide you with the functionality to send and receive transactions as well as securely hold[ing] the balances assigned to your account.
(d) Cryptopia’s terms and conditions
[23] The earliest record of any terms and conditions for Cryptopia appears to be a version dated January 2015.Although it is unclear whether Cryptopia may have had a version available prior to January 2015, it appears not.
[24] What does seem clear is that the relationship between Cryptopia and the accountholders, especially at the outset, was not a well-documented one.
[25] Turning to the language used by Cryptopia in those earliest Terms and Conditions introduced in January 2015, these relevantly state:
Terms – Cryptopia
Terms and Conditions Website Terms of Use
This website (site) is operated by Cryptopia Limited…your use of this site is governed by these terms of use. By access and browsing this site you agree to be bound by these terms of use. We make this site available to you in order to provide information about our products and services and enable you to purchase these products and services from us online.
…
Marketplace Liability
…
Cryptopia is a service to allow anyone to offer, sell and buy items at any time. We are not involved in the actual transaction between Buyers and Sellers. We have no control over and do not guarantee the quality, safety or legality of items advertised, the truth or accuracy of listings, the ability of Sellers to sell items, the ability of Buyers to pay for items, the timeliness of deliveries, or that a Buyer or Seller will actually complete a transaction. We do not transfer legal ownership of items from the Seller to the Buyer. Unless the Buyer and
the Seller agree otherwise, the Buyer will become the item’s lawful owner
upon physical receipt of the item from the Seller.
…
Right to use site and content
You may use the site only for the purposes for which it is provided. You must not use this site for fraudulent or other unlawful activity or otherwise to do anything to damage or disrupt this site. Multiple accounts for the purpose of defrauding, circumventing bans, soliciting or abusing Cryptopia Ltd services will result in immediate termination of all related accounts, including seizure of all on-site digital property. Threats towards Cryptopia Ltd, Cryptopia Ltd Staff will result in immediate termination of all related accounts, including seizure of all on-site digital property.
…
Amendments
We may amend these terms of use from time to time, so you should check and read these terms of use regularly. By continuing to use this site after any such amendment, you are deemed to have agreed to the amended terms of use.
(emphasis added, all bold original)
[26] These original terms and conditions seemed to apply unchanged until 7 August 2018 when a new “Terms and Conditions” document was introduced by Cryptopia. It seems this was crafted with legal assistance and may have resulted because of a view taken by Cryptopia executives at the time that more detailed terms and conditions were required.
[27] These new 7 August 2018 Terms and Conditions, the parties have accepted, varied the earlier terms and conditions. Amongst other things, these varied Terms and Conditions relevantly stated:
Introduction
A. These terms and conditions of use (terms) apply to the Cryptopia website and associated applications (the platform) and the services (services) operated and provided by Cryptopia Limited.
B. These terms, the platform and the services allow you to:
(i)Buy, sell and exchange supported coins through the platform.
(ii)Use fiat pegged tokens, when available; and
(ii) Store supported coins in our hosted wallets.
C. In these terms Cryptopia, we, us or our, means Cryptopia and you or your means the person accessing or interacting with the platform and/or the services.
…
2. Understanding your risks
Trading in coins is speculative and high risk. You may lose some or all of any money or coins that you hold or transact using the platform. You should not trade coins unless you can afford to lose your investment without hardship. Please read the Cryptopia Risk Statement carefully for a summary of some of the risks that you must understand before you use the platform or services.
…
Your account
4.1Opening an account
(a)To use the platform and our services, you must open an account by completing our process through the platform. We can decline to open an account or provide a service, without notice and for any reason.
(b)We will require proof (satisfactory to us) of your identity when you open an account, to enable us to meet our obligations under the Applicable Law (in particular any anti money laundering or countering financing of terrorism requirements). In addition, we may ask for such other information as we consider is necessary or desirable…
4.2Using your Account
(a)Your account comprises your coin balances…including where applicable any fiat pegged tokens that you hold…and includes a record of all your transactions.
(b)You agree to accept responsibility for all activities that occur under your account or password.
(c)You must maintain the confidentiality and security of any information that can be used to access your account.
…
(a)You understand that anyone accessing your account will be able to enter into transactions using your coin balances and where applicable any fiat pegged tokens and we have no obligation to verify or take any
steps to verify any instruction received from you or appearing to be sent by you.
4.3We can suspend your account
(a)We may suspend, limit or restrict access to your account, the platform any service, at any time without notice if:
(i)You fail to pay any amounts owing under these terms to us or any other person when they are due.
(ii)We become aware of a dispute over either the ownership of any assets in your account or the operation of the account.
…
(d) Subject to any applicable law, if we close your account:
…
(iii)We may at our discretion provide you with access to the platform solely to the extent necessary to access to your account for a period of 90 days to allow you to transfer your
Coins to a different digital wallet or to redeem any fiat pegged tokens.
…
5 Your Coin balances
(a) Your Coin balances form part of your account, and allow you to send, receive and store supported Coins…in accordance with instructions received by you through the platform;
…
(d)Your Coin balances are operated by us, and represent entries in your name on the general ledger of ownership of Coins maintained and held by us. This means the Coins in your deposit wallets may be pooled in our internal accounts with other users’ Coins at any time.
(e)Each user’s entry in the general ledger of ownership of Coins is held by us on trust for that user.
6.Fiat pegged tokens
(a)Where we are able to do so…we may offer fiat pegged tokens to enable you to upload fiat dollars to your account in exchange for the equivalent pegged tokens which are tradeable on our platform.
…
(e) Fiat pegged tokens are not financial products in themselves and do not give you any rights or carry any obligation. They are a digital representation of fiat dollars held on trust for you in the custodial account. Under these terms you hold the beneficial interest in these
fiat dollars and can instruct us as trustee to deliver them to you at any time, subject to these terms…
7.Trading on the platform
…
7.2Reversals, cancellations
(a) You cannot cancel, reverse, or change any transaction once it is submitted.
…
7.3Agent
You appoint Cryptopia, and Cryptopia accepts the appointment, as your agent for any transaction in Coins that you have entered into through your account on the platform in accordance with these terms.
7.4Location of transactions
All transactions through the platform are deemed to take place in New Zealand. On completion of the transaction, you are deemed to take possession of your account and the assets in your account in New Zealand.
8.Platform change and business disruptions
(a) We will use reasonable care in operating our platform, so as to limit disruptions to the platform, user accounts and their services. However, you accept that our platform will not necessarily be available uninterrupted or error-free and it may also be inaccessible from time to time while undergoing maintenance or upgrade work...
…
13.Fees and expenses
13.1You agree to pay our fees.
You agree to pay all fees and expenses associated with or incurred by you in relation to your use of our services or platform which are published on our platform.
…
14.Taxes
By using our platform, you accept that it is up to you to understand whether and to what extent, any taxes apply to any transactions you conduct through our services or platform. We accept no responsibility for, nor make any representation in respect of, your tax liability.
…
19. Glossary
In these terms:
…
Coin balance(s) means any record of Cryptopia holding funds on the Cryptopia platform on your behalf.
…
Custodial account means the bank account held by Cryptopia on behalf of users for the purpose of receiving and transmitting fiat dollar funds matched to fiat pegged tokens.
Services means any services provided by us to you or any other user whether through the platform or outside of it, including the purchase, sale and exchange of coins and the provision of the platform, your account (including any fiat pegged tokens) in any Coin wallet.
(emphasis added, all bold original)
[28] As Cryptopia’s last Director of Finance and Administration, Mr Brocket deposed before me that he had responsibility for the accounting, financial reporting, budgeting, tax compliance, investments, insurance, people and culture, and audit functions of Cryptopia.
[29] He confirmed in that affidavit that, based on his knowledge, there were only ever these two sets of Cryptopia’s terms and conditions that applied to customers. This evidence was unchallenged before me. In particular, he stated:
From an operational perspective, there were no material changes to the way the business operated that resulted from the change to the terms and conditions in August 2018. An email was sent to all customers of which there were approximately 2.3 million users when the changes were effected.
[30]Mr Brocket further deposed:
6.Cryptopia provided a trading platform…for accountholders to trade pairs of cryptocurrencies.
…
11.…Accountholders could make deposits and withdrawals of enabled coins. Any accountholder could withdraw its cryptocurrency from the exchange into a privately held digital wallet, controlled by the accountholder or alternatively transfer cryptocurrency to another exchange, if the currency in question was traded on that other exchange or the exchange agreed to host it.
12.Trades...were carried out on the Cryptopia exchange through the use of order books that listed the available buy/sell orders. When the orders matched a trade would occur…
(emphasis added)
[31] As to how Cryptopia would be paid for cryptocurrency transactions, Mr Brocket stated:
15.…Cryptopia charged a trading fee charge of 0.2 per cent of the value of the trade…the trading fee was charged to the buyer and the seller.
16.If a seller wanted to trade one bitcoin, then she would have 1.002 BTC deducted from her account, of which 0.002 BTC would go to Cryptopia as the transaction fee on the sell side. The “purchaser” would receive 0.998 BTC, with the difference of 0.002 BTC being paid to Cryptopia as the fee on the buy side…
(e) Cryptopia’s financial accounts
[32] Lastly, before the Court are a range of Cryptopia’s profit and loss statements and balance sheets for the period 1 January 2018 to 8 August 2018 and for the period around 2018/2019. What is clear from these financial accounts prepared by Cryptopia’s in-house accountant is that details of its assets do not include any cryptocurrency, other than the amounts in its platform that Cryptopia clearly held on its own account. Digital currency held on the platform for accountholders was not shown as an asset of or belonging to Cryptopia. Nor was any appropriate entry in the liabilities section of Cryptopia’s balance sheets to show advances to the company from accountholders which financed the acquisition of these digital assets.
[33] From GST returns which are before the Court, there is also no suggestion that digital trading of the large number of digital assets held for accountholders was undertaken in any way by Cryptopia on its own account.
(f) SQL database and how Cryptopia generated income
[34] The SQL database was Cryptopia’s internal database that recorded transactions carried out on the exchange and the coin balances of each account.
[35] Cryptopia charged accountholders a fee for deposits, trades, withdrawals and listing coins. The company had several accounts on the exchange into which the fees were paid. These accounts had a corresponding SQL entry.
[36] When a trade took place the trade fee would be credited to Cryptopia’s fees account which would generate a corresponding entry on the SQL database. A weekly report was prepared by Cryptopia that summarised the trading fees generated in the previous week and converted these into New Zealand dollars.
[37] The underlying holdings of Cryptopia itself were also reconciled into the company’s accounting system, Xero, and recorded in the accounts as company assets. Appropriate journal entries would be created. This was set up like a bank account in Xero.
(g) The hack
[38] As I have noted, Cryptopia was hacked, this occurring in January 2019. The parties estimate that the hackers stole approximately NZD 30 million worth of cryptocurrency from the exchange. That cryptocurrency was withdrawn from the exchange using the private keys for the currencies in question, so Cryptopia was not able to reverse the transactions. The hack is the subject of an ongoing police investigation but this is not as yet resolved.
[39] Currently the liquidators are in the process of ascertaining the amount of cryptocurrency that was stolen and the amount that is left in Cryptopia’s wallets. This process involves individually “standing up” the digital wallet for each cryptocurrency (of which there are approximately 500) and recreating each entry to protect the system from any malware that might be left over from the hack.
[40] Once that process is completed, the liquidators will be able to carry out a reconciliation exercise between the actual cryptocurrency holdings that the company controls or owns and the accountholders’ account balances recorded in the SQL database. The results of this process will assist the liquidators in determining not only what is available for distribution, but also the proportion of account balances or claims that can be distributed or paid once the present application is determined.
(h) Advertising and promotion
[41] It seems from the available evidence before the Court that Cryptopia did not actively promote its business, at least until it adopted a new marketing strategy in July 2018 by which point its user numbers had already spiked.
[42] Mr Ruscoe has confirmed that Cryptopia marketed itself through channels like Google and Trade Me advertisements and it promoted itself through banner advertisements and through some event sponsorship. The majority of this marketing seems to have been through online social media channels. On these aspects, Mr Watts for the accountholders submits that there are aspects of this advertising and promotion which support the existence of trusts being established for the holding of accountholders’ cryptocurrency. I will address this aspect further below.
The law – s 284 of the Companies Act 1993
[43] The application before me, as I have noted, is made under s 284(1)(a) of the Companies Act 1993. In terms of this provision, this Court on an application from, amongst others, a liquidator (as has happened here) has a supervisory jurisdiction to: “…give directions in relation to any matter arising in connection with the liquidation.”
[44] The authors of Heath and Whale on Insolvency, in commenting on the application of s 284 state:3
…if there is a difficulty at any stage of the administration, it is the liquidator’s clear duty to inform the court and seek directions [under s 284 of the Act].
[45] In addressing the liquidator’s principal duties engaged in the liquidation of a company, s 253 of the Companies Act describes this duty as being:
…
(a)to take possession of, protect, realise, and distribute the assets, or the proceeds of the realisation of the assets, of the company to its creditors in accordance with this Act; and
3 Paul Heath and Michael Whale (eds) Heath and Whale on Insolvency (online ed, LexisNexis) at [22.8(e)] (footnote omitted).
(b)if there are surplus assets remaining, to distribute them, or the proceeds of the realisation of the surplus assets, in accordance with section 313(4)–
in a reasonable and efficient manner.
The liquidators’ application
[46] In the liquidators’ application to this Court orders are sought which they say relate to the following questions:
As to the legal status of the Digital Assets
(a)Whether any or all of the various cryptocurrencies (digital assets) held by the liquidators of Cryptopia constitute “property” as defined in s 2 of the Companies Act 1993;
(b)Whether any or all of the Digital Assets are held on trust for any or all Account Holders (whether by way of express, implied, resulting, constructive, Quistclose Trust or otherwise);
(c)If the answer to question (a) or (b) is no, then to the extent that such digital assets are not “property” whether the applicant liquidators should satisfy claims of:
(i)Any Account Holder of the company (Account Holder) for the return of his/her/its digital assets; and
(ii)Unsecured creditors;
by conversion of such Digital Assets into fiat currency and paying such in accordance with Part 16 of the Companies Act 1993;
(d)If the answer to question (b) is yes in any respect, then:
(i)When did the Trust/s come into existence? When the company updated its terms and conditions on 7 August 2018 (Amended Terms), or at some alternative date?
(ii)What are the terms of the Trust/s?
(iii)Are the Digital Assets held on trust:
1. In an individual trust for each Account Holder, with the result that each Account Holder is the sole beneficiary of the Trust?
2. In one trust for the benefit (of) all Account Holders with the result that all Account Holders are co-beneficiaries of the same trust, or
3. In multiple trusts for the benefit of specific groups of Account Holders, with the result that Account Holders within a specific group are co-beneficiaries of same trust, or
4. On some other basis.
(e)What is the consequence of the applicant liquidators being unable to ascertain the identity of any Account Holder, and what consequences flow in relation to any Digital Assets associated with that account, specifically:
(i)Can the applicant liquidators close any such Accounts and retain any Digital Assets as assets of the company; or
(ii)Do any such Digital Assets fall to be dealt with pursuant to the Trustee Act 1956, or otherwise.
(f)If and to the extent that the applicant liquidators recover stolen Digital Assets, then are such to be dealt with by the applicant liquidators:
(i)In accordance with the determination sought above;
(ii)Pro rata according to the amounts recovered assessed against amounts stolen; or
(iii)As assets of the company.
(g)Directing that the reasonable fees and disbursements of Peter Watts QC, Jenny Cooper QC, Buddle Findlay and the liquidators shall be met, in the first instance, from the pool of realised Bitcoin holdings pursuant to paragraph 3(b) of the order of this Court dated 29 May 2019, on the basis that the fees are a necessary and reasonable expense of the liquidation, of and incidental to the protection, preservation, recovery, management and administration of the assets of Cryptopia, with the Court’s decision as to the ultimate incidence of counsel’s costs to be reserved until the originating application has been determined, or as otherwise ordered by the Court.
(h)Leave is reserved for the applicants to apply for such further ancillary orders as are necessary.
[47] From the liquidators’ application there appear to be two main issues for determination by the Court with a number of subsidiary issues flowing from this. As to the two main issues, they seem to be:
(a)Are cryptocurrencies a type of “property” in terms of the Companies Act and, linked to this, can cryptocurrencies form the subject matter of a trust?
(b)Was Cryptopia, in providing a cryptocurrency storage and exchange service for its customers, a trustee of the currency brought onto the exchange by accountholders and held by it?
[48] In all the present circumstances, in essence the dispute before the Court, which is one between the accountholders and the creditors, simply concerns the proprietary effects of the digital assets in relation to Cryptopia, a New Zealand company in liquidation. The dispute is not one between participants in a particular cryptocurrency system. In reality, the dispute is simply between the accountholders and the creditors (and possibly also the shareholders) of a limited liability company that operates a cryptocurrency exchange.
[49] In that respect, counsel for all parties before me agreed that the law applicable to each of the issues in this case is New Zealand law. Mr Watts, counsel for the accountholders, went further and addressed the issue of applicable law relating to this case which I acknowledge and adopt. I am satisfied for present purposes, as counsel have agreed, that New Zealand law is to apply to the present issues before me.
Issue 1 - The “property” issue
An aside – what are the implications?
[50] Before me Mr Watts for the accountholders submitted that cryptocurrencies must be seen as a form of intangible personal property both at common law and within the definition contained in s 2 of the Companies Act. The liquidators and the creditors disagree with this. The creditors also contend that cryptocurrencies are not property capable of forming the subject matter of a trust at common law.
[51] The accountholder’s position, however, is that even if cryptocurrencies are not seen as personal property in the full sense, they are still assets capable of forming the subject matter of a trust.
[52] On these aspects, Mr Watts contended that any finding by this Court that cryptocurrencies are not property would have profound and unsatisfactory implications for the law in New Zealand including in particular insolvency law,
succession law, the law of restitution and commercial law more generally. Mr Watts maintained that Ms Cooper for the creditors is wrong to argue that these problems are sufficiently important that they should be left to Parliament for an appropriate remedy.
[53] Turning to this first question as to whether the digital assets have the indicia of “property” and can form the subject matter of a trust, it is important to say something first about the general background to this issue.
[54] Given that the application before the Court seeks directions as to how the liquidators should distribute the digital assets, the creditors’ position is that the digital assets, along with Cryptopia’s other remaining assets should be distributed on a pari passu basis, treating all accountholders and other unsecured creditors equally.
[55] The position taken by the accountholders here is different, however. They say that the digital assets belong to them and, if need be, are held by Cryptopia in trust for the accountholders. As such those digital assets should be divided by currency and distributed to accountholders in proportion to their holding of each particular cryptocurrency as recorded in Cryptopia’s SQL database.
[56] Leaving aside those digital assets in issue here and the money held on trust to back the New Zealand dollar tokens (NZDTs), Cryptopia’s assets on liquidation consist of:
(a)a little over NZD 686,000 held in a bank account;
(b)fixed assets with a book value of NZD 2 million but a likely realisable value as low as NZD 100,000; and
(c)344 bitcoin (having a present value of approximately NZD 4.6 million) recorded as being held by Cryptopia for its own account.
[57] It is clear, therefore, that the pool available to creditors, which I understand number about 37 different parties, if the remaining digital assets are found to be held by Cryptopia on trust, would be around NZD 5.4 million. This would mean that any creditors who were not also accountholders would recover less than 50 per cent of the
amount of their claims, given that it seems the total value of all creditors’ claims is an estimated NZD 12.7 million (including about NZD 5 million owed to the Inland Revenue Department).
[58] There may also be an issue here, according to Ms Cooper, for those accountholders who lost all their various holdings in the hack. In this regard, as I understand it, holders of ethereum cryptocurrency lost 100 per cent of their holdings in the hack. Thus, if the digital assets were divided by currency and in proportion to an accountholder’s holding of each currency, those holders would receive nothing.
[59] Ms Cooper has said that, in contrast, if the digital assets were to be available for distribution to all accountholders and creditors on a pari passu basis, the total pool of assets she estimates would be approximately NZD 217 million and the percentage recovery by each creditor would then be likely to be over 85 per cent of its total claim.
[60] I set out these matters purely by way of background information. Mr Watts has properly identified that, even if they are accurate, these possible results are not strictly relevant and have no bearing on the true legal position to be reached by this Court in making its assessment of the questions before it.
[61] I return now to consider what is the proper assessment of the Digital Assets here. Before me, all parties appeared to agree that the Digital Assets are “assets” in terms of the general definition of this word in certain sections of the Companies Act where this word appears.4
[62] On the issue as to whether cryptocurrencies are a type of “property”, however, the parties differ markedly. And, in any event, a first question must be asked why does this matter?
4 Companies Act 1993, s 253, addresses the principal duty of a liquidator to take possession of, protect, realise and distribute “assets” of the company to its creditors. Section 313 too deals with distribution of a company’s surplus “assets”.
What is “property” and why does it matter here?
[63] Sarah Green, in a chapter called “Cryptocurrencies in the Common Law of Property” in her and David Fox’s text Cryptocurrencies in Public and Private Law addresses this question:5
Property law matters both internally and externally to a cryptocurrency system. Internally – among the users of the system – property law is a justifiable ground for the recovery of coins or their value when they are stolen or transferred by fraud. The irreversibility of cryptocurrency transactions, in a purely technological sense, need not bar the reversal of their legal effect or the recognition that they are legally defective. Property law has its own systemic norms.
Essentially – to third parties dealing with users of the system – the recognition of cryptocurrencies as objects of property is no less important. It is only a matter of time before cryptocurrencies are used in transactions external to the block chain. Property is a gateway to many standard forms of transactions. A crypto-coin can never become the subject matter of a trust or a proprietary right of security, nor will it be an asset in a deceased’s person’s estate, unless it is first recognised as an object of property. The same is true of a secured creditor or trust beneficiary enforcing their claim in property to the unsecured creditors of an insolvent coin-holder. The development of a viable cryptocurrencies derivative market may sometimes require that the primary assets from which secondary claims are constructed are capable of legal recognition as property.
[64] And, in the UK Jurisdiction Taskforce’s Legal Statement on Cryptoassets and Smart Contracts, there is a specific section entitled “What is property, and why does it matter?” 6 In this section the following paragraphs are useful to note:
35.Strictly, the term property does not describe a thing itself but a legal relationship with a thing: it is a way of describing a power recognised in law as permissibly exercised over the thing. The fundamental proprietary relationship is ownership: the owner of the thing is, broadly, entitled to control and enjoy it to the exclusion of anyone else. However, ownership is just one kind of property right: property is a comprehensive term and can be used to describe many different kinds of relationship between a person and a thing.
36.Why does it matter if a cryptocurrency asset is capable of being property. It matters because in principle proprietary rights are recognised against the whole world, whereas other – personal – rights are recognised only against someone who has assumed a relevant legal duty. Proprietary rights are of particular importance in an insolvency, where they generally have priority over claims by
5 Sarah Green “Cryptocurrencies in the Common Law of Property” in David Fox and Sarah Green (eds) Cryptocurrencies in Public and Private Law (Oxford University Press, Oxford, 2019) at 141.
6 Legal Statement on Cryptoassets and Smart Contracts, above n 2.
creditors, and when someone seeks to recover something that has been lost, stolen, or unlawfully taken. They are also relevant to the questions of whether there can be a security interest in a crypto asset and whether a crypto asset can be held on trust.
37.The term property is also part of the lexicon of the law: it is widely used in statutes and cases. It is important to understand whether the many statutory and common law rules applicable to property apply also to crypto assets and, if so, how. Of particular significance are the rules concerning succession on death, the vesting of property on personal bankruptcy, the rights of liquidators in corporate insolvency, and tracing in cases of fraud, theft or breach of trust. It would, to say the least, be highly unsatisfactory if rules of that kind had no application to crypto assets.
(emphasis added)
[65]And:
41.Some take the view that the design of crypto assets means that there is no need for traditional legal rules or processes. Law is irrelevant, it is sometimes said, because dealings are effected by non-legally- binding consensus between users, because cryptographic authentication and validation using strong encryption methods makes dealings irreversible, and because decentralisation and disintermediation means that there is no responsible party who can be compelled to act at the direction of a court. We do not agree. The design of crypto assets may create some practical obstacles to legal intervention but that does not mean that crypto assets are outside the law.
(emphasis added)
[66] As I have noted above, Mr Watts suggested too that a finding that cryptocurrencies are not property would have profound and unsatisfactory implications for New Zealand’s law, including insolvency law, succession law, law of restitution and commercial law more generally.
[67] Before me, although it seems the creditors may have recently changed their position here to some extent, essentially, they now contend that cryptocurrencies are not property nor are they capable of forming the subject matter of a trust at common law. The accountholders strongly dispute this position. Mr Watts contends that it should be a reasonably straightforward exercise for this Court to find that cryptocurrencies are in general a species of intangible personal property and are capable of being the subject matter of a trust.
[68] And, before me, Mr Watts provided detailed and extensive submissions on this issue as to the status of cryptocurrencies as property for two reasons:
(a)This was given, first, the new opposition now from counsel to the creditors broadly accepted by counsel for the liquidator over this point; and
(b)Secondly, the fact that the status of cryptocurrencies as property has attracted significant attention around the common law world in recent years without, it seems, as yet receiving a definitive judicial analysis.
[69] For present purposes it will become apparent that I reach the conclusion that the cryptocurrencies here situated in Cryptopia’s exchange are a species of intangible personal property and clearly an identifiable thing of value. Without question they are capable of being the subject matter of a trust. I will now set out my reasons for this conclusion.
The authorities
[70] This first issue outlined at para [46](a)] of this judgment asked the specific question whether any or all of the digital assets held by the liquidators are “property” within the definition outlined in s 2 of the Companies Act.
[71]That section 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.
[72] Although there is a certain circularity with this definition, it is nevertheless inclusive and wide in that it extends “property” for the purposes of the Act to include “rights, interests, and claims of every kind in relation to property however they arise.”
[73] Courts in New Zealand have accepted that the definition of “property” in the Companies Act is a “wide” one and includes “money” despite money not being expressly included in the terms of the s 2 definition. This is clear from the
Supreme Court decision in McIntosh v Fisk.7 There, the Court accepted it was arguable that “the payment of money by RAM would fall within s 292(3)(a) as a transfer of property by RAM due to the wide definition of “property” in s 2 of the Companies Act.”8
[74]Further, in Chapman v Effective Fencing Ltd, Associate Judge Faire held: 9
The definition of “property” in s 2 in referring to “every kind” of property, is wide enough to cover money. Clearly money is “tangible” and “personal” property in terms of the definition.
[75] Lord Wilberforce’s opinion in the House of Lords in National Provincial Bank Ltd v Ainsworth is often cited as the classic statement of the characteristics of “property”.10 There, his Lordship said:
Before a right or an interest can be admitted into the category of property, or of a right affecting property, it must be definable, identifiable by third parties, capable in its nature of assumption by third parties, and have some degree of permanence or stability.
I will return to this definition shortly.
[76] But first, I turn to several recent cases where the question of cryptocurrencies as “property” has been addressed to some extent. The first is a Singaporean case, B2C2 Ltd v Quoine Pte Ltd, which Ms Cooper in particular considered to be an important decision, given its factual setting was not dissimilar to the present case. 11
B2C2 Ltd v Quoine Pte Ltd
[77] Initially this involved a 2019 first instance decision of the Singapore International Commercial Court, a new division of the High Court of Singapore created in 2015. That decision was then appealed to the Court of Appeal of Singapore and was the subject of a lengthy appeal judgment delivered this year.12 In the lower
7 McIntosh v Fisk [2017] NZSC 78, [2017] 1 NZLR 863.
8 At [55].
9 Chapman v Effective Fencing Ltd HC Auckland CIV-2004-404-5905, 21 April 2005 at [34].
10 National Provincial Bank Ltd v Ainsworth [1965] AC 1175 (HL) at 1247–1248.
11 B2C2 Ltd v Quoine Pte Ltd [2019] SGHC(I) 3, [2019] 4 SLR 17 [B2C2 (SGHC)].
12 Quoine Pte Ltd v B2C2 Ltd [2020] SGCA(I) 2 [B2C2 (SGCA)]
court, all parties accepted that cryptocurrencies were a species of “property”, a concession which the judge, Thorley IJ13 accepted was rightly made.
[78] The case concerned a Singaporean cryptocurrency exchange operated by Quoine, in many ways like Cryptopia, on which B2C2 was a trader. Some trading was set up to occur automatically through computers connected to the exchange and was pre-programmed. The transactions which led to the litigation were conducted by way of algorithms created by Quoine and by B2C2. The trades in question resulted from pre-programmed requests to exchange cryptocoins of ethereum for bitcoin. Errors occurred in the programming and an unusual set of circumstances resulted in B2C2’s computer offering ethereum for bitcoin at the rate of one ethereum for 10 bitcoin. The computer of another trader on that platform accepted that bid, seven such trades taking place (“the disputed trades”). The going rate of ethereum for bitcoin in the market at the time was one ethereum for 0.04 of a bitcoin. The effect of the automatic trading was that B2C2 sold ethereum at about 250 times its appropriate price. Quoine became aware of the mistake. It then reversed the trades which led to the litigation.
[79] B2C2 sued Quoine in the High Court for breach of the contract between it as a trader and Quoine as the operator of the exchange and for breach of trust as a result of Quoine’s having returned the bitcoin to the counterparty. A defence of mistake was raised in that Court but Thorley IJ held there was no basis for setting aside the trading and Quoine was accordingly liable to B2C2 for having wrongly reversed the trades. He upheld both B2C2’s contract claim and its claim for breach of trust.
[80] That breach of trust claim could have succeeded only if the bitcoins in question were an asset that could form the subject matter of a trust. At the lower court level, Quoine had conceded that Bitcoin was a species of “property” but it did not concede that there was any trust. Thorley IJ considered that the concession on the “property” point was rightly made and in his judgment his Honour stated:14
Cryptocurrencies are not legal tender in the sense of being a regulated currency issued by government but do have the fundamental characteristic of intangible property as being an identifiable thing of value. Quoine drew my
13 The “IJ” judicial office abbreviation refers to International Judge, an office of the Supreme Court of Singapore. Thus, references to Thorley IJ are to be read as “International Judge Thorley”.
14 At [142].
attention to the classic definition of a property right in the House of Lords decision of National Provincial Bank v Ainsworth [1965] 1 AC 1175 (HL) at 1248:
…it must be definable, identifiable by third parties, capable in its nature of assumption by third parties, and have some degree of permanence or stability.
Cryptocurrencies meet all these requirements. Whilst there may be some academic debate as to the precise nature of the property right, in the light of the fact that Quoine does not seek to dispute that they may be treated as property in a generic sense, I need not consider the question further.
[81] In the proceeding, as I have mentioned, B2C2 had alleged that Quoine’s reversal of the disputed trades was in breach of contract and breach of trust. On the trust point there were no express words in Quoine’s terms and conditions indicating an intention to create a trust. However, B2C2 argued Quoine had shown an intention to create a trust by holding traders’ cryptocurrency in separate digital wallets from Quoine’s own assets. Against that, Quoine submitted that a Risk Disclosure Statement it had provided notified customers that assets were not deposited in a trust account so customers may lose their assets in the case that Quoine was to be bankrupted or go into liquidation.
[82] The High Court, in considering the first instance claims brought by B2C2, allowed them both on the basis of breach of contract and breach of trust. In finding there was a trust, the Court there held that the “decisive factor” was that the assets were held separately as members’ assets rather than as part of Quoine’s trading assets. The decision was appealed to the Court of Appeal as I have noted. On appeal the majority upheld the High Court’s decision on the breach of contract aspect but overturned the decision on the breach of trust cause of action. On that breach of trust claim, a majority of the Court of Appeal rejected the International Judge’s view that it was a “decisive factor” that the assets were held separately rather than as part of Quoine’s trading assets. The Court of Appeal found the mere fact Quoine’s assets were segregated from its customers cannot in and of itself lead to the conclusion that there was a trust. Further discussion of this trust aspect will follow later in my judgment.
[83] On the “property” question, in its decision, the Court of Appeal also declined to decide whether Bitcoin as the cryptocurrency in question was “property” capable
of forming the subject matter of a trust. In their decision the Court of Appeal in the majority judgment, delivered by Menon CJ, commented:15
There may be much to commend the view that cryptocurrencies should be capable of assimilation into the general concepts of property. There are, however, different questions as to the type of property that is involved. It is not necessary for us to come to a final position on this question in the present case.
[84] This comment from the Court of Appeal, although not definitive, along with similar suggestions from other authorities, in my view, are of some help when considering this question as to whether the digital assets here could be regarded as “property”.
Other authorities
[85] A second case perhaps supporting this interpretation is a 2018 decision in Vorotyntseva v Money-4 Ltd.16 There, Birss J sitting in the Chancery Division of the English High Court granted ex parte a proprietary freezing order over some bitcoin and ethereum currency, stating that the defendant in that case had not suggested that “cryptocurrency cannot be a form of ‘property’”.17 No further discussion took place on the point.
[86] In a not dissimilar Canadian decision, Shair.Com Global Digital Services Ltd v Arnold, the Supreme Court of British Colombia granted an ex parte preservation order to the plaintiff company against its former chief operating officer with respect to digital currencies that might still be in the defendant’s possession.18 Without providing any reasoning the Court accepted that cryptocurrencies could be property within the rules for preservation orders, noting that in the correspondence between the parties that had been filed for the proceeding the defendant had not denied that the plaintiff had an interest to pursue.
15 B2C2 (SGCA), above n 12 at [144].
16 Vorotyntseva v Money-4 Ltd [2018] EWHC 2596 (Ch).
17 At [13].
18 Shair.Com Global Digital Services Ltd v Arnold 2018 BCSC 1512.
[87] Recently, a decision of the English High Court in AA v Persons Unknown also held that cryptocurrencies are “property”. 19 There, Bryan J granted an interim proprietary injunction against a cryptocurrency exchange over bitcoin which represented proceeds of ransom monies paid out to a hacker by the applicant insurance company. The hackers had installed malware into the insurance company’s computer system, and demanded the company pay a ransom in bitcoin, to regain access to its system. The ransom was paid in bitcoin and transferred into the exchange. The insurance company applied to the Court for an interim proprietary injunction against the exchange over the bitcoin, amongst other things.
[88] Only counsel for the applicant insurance company appeared at the hearing in that case and filed submissions. And, it seems the High Court there primarily relied on the Legal Statement on Cryptoassets and Smart Contracts, and that no other argument was addressed to the Court on the issue.20
[89] It is also useful, as I see it, to turn to consider a diverse range of types of assets that have already been recognised elsewhere as “property” at equity. These examples of “property” also illustrate that they are capable of being the subject of a trust. They include:
(a)Any simple chose in action– even an oral contract can be the subject of an orally created trust with the result that a liquidator of a corporate trustee could not pursue the chose in order to obtain a money judgment for the benefit of unsecured creditors.21
(b)Non-enforceable debt claims – for example a barrister’s claim that fees be paid by the relevant instructing solicitor was recently held in Gwinnutt v George to be part of the property belonging to a bankrupt barrister, even though the barrister had no legally enforceable right to the fees. In the circumstances of that case, in fact there was also no contract all between the barrister and the solicitors. 22
19 AA v Persons Unknown [2019] EWHC 3556, [2020] 4 WLR 35 at [57]–[59].
20 Legal Statement on Cryptoassets and Smart Contracts, above n 2.
21 See Pearson v Lehman Brothers Finance SA [2010] EWHC 2914 (Ch) at 258.
22 Gwinnutt v George [2019] EWCA Civ 656, [2019] Ch 471.
(c)Payments through the banking system – money transactions have recently ceased to involve tangible coins or banknotes and usually take the form of electronic bank payments. Equity will apply its proprietary tracing rules to payments effected by these means, even though on transfer of money from one bank account to another this does not involve the transfer of anything in the literal sense from the payer to the payee and the recipient does not hold the same asset.23
(d)Copyright – although copyright has statutory recognition, it nevertheless provides a strong example of intangible property. The subject matter of copyright turns merely on combinations of sounds or shapes in two or three dimensions (including words or drawings) that are sufficiently distinctive to justify the law preventing others from reproducing them.24 These sounds and shapes can exist in digital form. Although the resulting intellectual property needs to be identifiable, in many cases whether there has been a copyright infringement will involve an element of judgment in the tribunal called upon to adjudicate on the associated legal rights. These rights can be made the subject matter of a trust.
(e)Shares – shares in a company are another type of intangible property which typically has a more complicated existence than merely conferring a right to sue. Voting rights in relation to the appointment and removal of directors and in relation to other important company matters can be exercised. Shares are properly regarded as an item of property in equity even where they are non-transferrable or transferrable only to particular persons.25
(f)Licences/exemptions/quotas – modern statutory regulation frequently operated on the basis of blanket prohibitions coupled with defined
23 See D Fox, “Property Rights in Money” Oxford University Press, Oxford, 2008, at [1.108]
24 Section 14 Copyright Act 1994 sets out the statutory categories of recognised copyright, which are to include literary, dramatic, musical or artistic works, sound recordings, films, communication works and typographical arrangements of publicised editions.
25 Money Markets International Stockbrokers Ltd v London Stock Exchange Ltd [2002] 1 WLR 1150 (Ch).
exemptions granted to individuals that allow each individual then to trade. Such exemptions function and are recognised as intangible items as property. Their value is not derived from a right to sue but rather the opposite, namely an immunity from prosecution.26 Examples of this include export quotas, milk supply quotas, fishing quotas, petroleum exploration licences, waste disposal licences, and carbon credits. These tradeable rights can form the subject matter of a trust and where that happens the asset falls outside the estate of an insolvent trustee. There is a large body of case law that confirms such rights are a type of property and subject to normal property protections.27
(g)A trustee’s rights of indemnity – a trustee’s rights to be indemnified in respect of trust expenses has been held to confer a proprietary interest in the trust assets even though these assets are realised by self-help remedies rather than recourse to the courts: Carter Holt Harvey Woodproducts Australia Pty Ltd v Commonwealth.28 Although these rights are not choses in action, they are a species of intangible property. The breadth of the sort of interests that may be the subject of a trust is also confirmed here at [84] as follows:29
To describe [the right of indemnity] as constituting a beneficial interest in the trust assets, and so as property, thus acknowledges the characteristic blending of personal rights and obligations with proprietary interests which is the “genius” of the trust institution. Such a beneficial interest falls naturally and ordinarily within the definition of “property” in s 9 of the Corporations Act.
Although a number of the examples outlined above do involve statutory licences and quotas and are within broad statutory definitions of the word “property” in the respective jurisdictions, the types of interest capable of forming the subject matter of a trust at equity, as I see it, are no less broad. A similar point was made by Mr Stephen
26 Armstrong DLW GmbH v Winnington Networks Ltd [2012] EWHC 10 (Ch), [2013] Ch 156.
27 See by way of example Attorney General of Hong Kong v Nai-Keung [1987] 1 WLR 1339 at 1342 (export quotas); Swift v Dairywise Farms Ltd [2000] 1 WLR 1177 at 1185 (milk quota) and Commonwealth of Australia v WMC Resources Ltd (1998) 194 CLR 1 (petroleum exploration licences, not being an interest in land).
28 Carter Holt Harvey Woodproducts Australia Pty Ltd v Commonwealth [2019] HCA 20, (2019) 368 ALR 390.
29 Carter Holt Harvey, above n 28, at [84] (footnotes omitted).
Morris QC sitting as a deputy High Court judge in Armstrong DLW GmbH v Winnington Networks Ltd:30
Whilst the cited case law concerned the meaning of “property” as specifically defined in various statutes, in my judgment, the reasoning of Morritt LJ (in Celtic Extraction) applies equally to the characteristics of property at common law. Indeed, Morritt LJ himself relied upon National Provincial Bank v Ainsworth.31 Moreover the terms used in statutory definitions are themselves derived from common law concepts.
[90] At this point it is useful also to interpolate three recent New Zealand cases which might be seen to be at the boundaries of the legal concept of “property”. The first is Dixon v R.32 In this case, which adopted a broad approach to the concept, the Supreme Court held that a digital copy of CCTV footage was “property” within the broad definition found in s 2 of the Crimes Act 1961. The defendant had downloaded a copy of certain footage without the consent of the owner of the computer on which the footage had been recorded. The Court held that computer data can be “property” and that making a copy of it involves a taking, even when the data is not protected by a password. The Supreme Court appeared to endorse the view that computer data would meet general definitions of property including that within s 4 of the Property Law Act 2007. Arnold J, writing the judgment of the Court, stated :33
We consider that interpreting the word “property” as we have is not only required by the statutory purpose and context but is also consistent with the common conception of “property”.
[91] The second case, a decision of Thomas J in the High Court is Henderson v Walker.34 In that case Thomas J was prepared to apply the principles of Dixon in a private law setting and to extend the tort of conversion to purely personal digital information, including the content of private emails. However, her Honour also concluded merely making a copy of emails and other personal data would not amount to conversion. Refusing access to them or destroying them would be, nevertheless.
30 Armstrong DLW GmbH v Winnington Networks Ltd, above n 26 at [59] (citation omitted, footnote added).
31 Ainsworth, above n 10.
32 Dixon v R [2015] NZSC 147, [2016] 1 NZLR 678.
33 At [51] (footnotes omitted).
34 Henderson v Walker [2019] NZHC 2184.
[92] In that case, Mr Walker in his capacity as liquidator of subsidiary companies of Property Ventures Limited (PVL) came into possession of a laptop belonging to PVL and of a tape drive that was a backup of PVL’s server. There were a lot of personal, non-company emails sent by and to Mr Henderson, a principal of PVL, and some personal photographs on those devices. Mr Walker distributed at least some of these or allowed them to be distributed to third parties who should not have received this material. Mr Henderson sued Mr Walker, pleading some seven causes of action including breach of confidence, invasion of privacy and conversion. Thomas J held that in principle the common law action in conversion was available with respect to some of the actions which had occurred involving the computer data.
[93] In my view, it is reasonable to conclude that the reasoning of Thomas J that this data was effectively “property” capable of being converted, could be properly extended to wrongful interferences with cryptocurrency or digital assets. Any person who gained unauthorised access to the private key attached to cryptocoins and used it would permanently deprive the proper possessor of the cryptocoins of that property and its value.
[94] Another recent High Court decision in New Zealand, Commissioner of Police v Rowland, is also usefully noted here.35 In that case this Court approved a settlement under the Criminal Proceeds (Recovery) Act 2009 that included quantities of two cryptocurrencies – bitcoin and ethereum. The question whether the cryptocurrencies were “property” that was amenable to forfeiture under that legislation, however, was not raised in the proceeding. An assumption was made that they did fall within the definition in terms of that legislation. The definition of “property” in the Criminal Proceeds (Recovery) Act at s 5 provides:
property—
(a)means real or personal property of any kind—
(i)whether situated in New Zealand or a foreign country; and
(ii)whether tangible or intangible; and
(iii)whether movable or immovable; and
35 Commissioner of Police v Rowland [2019] NZHC 3314.
(b)includes an interest in real or personal property
[95] Turning back to the decisions noted above in Dixon and Henderson, in those cases the New Zealand courts involved have accepted that the orthodox position that information is not “property” does not attach to cases involving digital assets. There, digital files were seen as “property” by distinguishing them from “pure information”.
[96] So far as the Supreme Court was concerned in Dixon v R, in the context of the Crimes Act 1961, this was because the files (the digital footage) there:
(a)could be identified;
(b)had a value;
(c)were capable of being transferred; and
(d)had a physical presence, albeit one that could not be detected by means of unaided sensors.
[97] In Thomas J’s decision in this Court in Henderson, in the context of the tort of conversion, this was because it was possible to control and therefore possess the digital files (a large number of documents, emails and images). Possession required cognitive control and manual control. While traditionally the tort of conversion requires physical control and therefore tangibility, physical control is only one example of manual control. The two fundamental elements of manual control are excludability and exhaustibility – whether others can be excluded from the thing’s control and when the thing’s value can be deprived from others. In her decision Thomas J considered both were satisfied on the facts because:
(a)An intention to create a trust is not to be inferred “simply because a court thinks it is an appropriate means of protecting or creating an interest”. [144];
(b)The mere fact that assets are segregated by a trustee from other assets held by the trustee does not lead to the conclusion that there was a trust. [145];
(c)There was in fact no segregation since the evidence was that the amount of currency recorded in the database did not necessarily match what the company held in its wallets. [146] – [147]; and
(d)A term in the company’s Risk Disclosure Statement providing as it did that if the company went bankrupt it would not be able to return customer assets and customers may suffer losses, was not consistent with the normal position of a trustee who becomes insolvent. [148].
[163] Properly, Ms Cooper did acknowledge before me that the High Court and Court of Appeal decisions in Quoine were based on the particular facts of that case and its terms and conditions which did not refer to a “trust” in any way. This was quite unlike Cryptopia’s terms and conditions. But, she maintained that factors such as first, Quoine operating a system where it had a database showing coins allocated to individual customer accounts but holding those digital assets in unsegregated wallets and, secondly, the need for Quoine to procure coin if a customer wanted to purchase a cryptocurrency were similar to Cryptopia’s operations and provided close parallels. Accordingly, Ms Cooper, while acknowledging that Quoine is not binding on this Court, suggested that it provides some authority for a finding that no trust existed here over the cryptocurrency held in Cryptopia’s wallets and that these digital assets should form part of the company’s assets available for distribution to creditors.
[164] It is clear that the construction of contractual and trust arrangements between parties must always remain a matter for the decision-making court in question. I do take into account the decision in Quoine in this light, and note also that I will leave on one side suggestions from Mr Watts that the Court of Appeal’s judgment is open to criticism here in a number of respects.
[165]Looking to the facts prevailing in Quoine:
(a)It appears that Quoine operated its platform in a different and much more active way than is in evidence here in relation to Cryptopia. Quoine was a major “market-maker”. It was actively placing buy and sell orders on the system. It was the principal market-maker estimated to be responsible for around 98 per cent of the market-making trades on its platform. In addition, Quoine lent funds, including cryptocurrency, to other market-makers and did not attempt to ensure there was actual cryptocurrency in its wallets to match the loans. As a result, buyers contracted to deliver to B2C2 more than 3000 bitcoins on various automated arrangements when they had only 13.52 bitcoins in their account with Quoine.
(b)In addition, Quoine was also engaged in futures trading which necessarily was trading not matched by actual currency.
(c)Customers of Quoine were also involved in transactions like the one in question as market-makers and not investors. In marked contrast there was no provision in the present case in Cryptopia’s terms of trade that attempted to make customers subject to the risk of Cryptopia becoming insolvent and going into liquidation – quite the contrary.
(d)As I amplify below, in contrast to Quoine there were a number of other factors here pointing to Cryptopia being a trustee for its customers’ cryptocurrency:
(i)The express trust provisions in the amended terms and conditions;
(ii)Other indicators of a trust both before and after August 2018 from the evidence;
(iii)Cryptopia’s internal financial accounts and GST returns demonstrated that it did not assert any ownership in the
cryptocurrency beyond its beneficial interest in its own personal cryptocurrency as an accountholder.
(iv)The agency clause noted in cl 7.3 of the variation terms together with material in the customer service manuals and a legal opinion on these issues which is before the Court.
[166] Overall, I am satisfied here that Quoine is readily distinguishable from the facts in the case before me. The factual arrangements in Quoine are different, as I see it, from the position that prevailed in Cryptopia’s business undertakings here.
Additional matters
[167] Cryptopia, it seems, operated for nearly five years. There is little evidence before the Court directed at how during this time Cryptopia managed to attract the many accountholders it did to its platform.
[168] Nevertheless, I confirm again that I am satisfied there is sufficient evidence before me to conclude that in the course of Cryptopia’s operations a series of express trusts in favour of accountholders arose in respect of their respective digital assets. Key details of those trusts and of their changing subject matter and membership were held in the SQL database maintained throughout by Cryptopia.
[169] Cryptopia confirmed throughout and operated on the basis that its whole purpose in establishing the cryptocurrency exchange was to provide a platform to enable accountholders to store their currency from which they could trade in cryptocurrency amongst themselves should they so wish. Generally, Cryptopia was not in the business of selling cryptocurrency but was rather just an exchange that charged fees for a service. This applied other than for a short period in relation to the cryptocurrency NZDT which it seems Cryptopia engaged in from about May 2017 until about 9 February 2018. With the exception of NZDT through this period, it is clear accountholders as customers of Cryptopia brought their own cryptocurrency onto Cryptopia’s exchange, as I note at [22] above from the evidence of Mr Brocket.
[170] In establishing what is frequently described throughout as an “exchange”, Cryptopia and all other parties with whom it was connected no doubt had in mind that Cryptopia would be operating as an “exchange broker” in a legal sense. It is interesting to note that in Black’s Law Dictionary, “exchange broker” is defined as “someone who negotiates money or merchandise transactions for others” (emphasis added). 56
[171] Issues of agency, as I see it, also arise here. Indeed in some of the documentation before me, Cryptopia is described as an “agent” for accountholders with regard to transactions entered into on their behalf.
[172] I am satisfied too from material which is before the Court, that Cryptopia’s web-based instruction pages and live customer interfaces clearly implied that accountholders would be depositing, buying, selling and owning their own cryptocurrency. Frequently, as I note at [27] above there is reference in the documentation to “your coin balances” (emphasis added). At [176] - [178] below there are also references to “you” and “your” relevant to matters of the ownership of the cryptoassets and their being traded (emphasis added). Although it is not altogether clear when these web-based instructions first went live, the evidence before me indicates they were certainly operating by April 2016. Those instructions might possibly have misled accountholders into thinking that they directly held the cryptocurrency in question rather than perhaps being only beneficial owners. But what is clear to me is that those instruction pages certainly do not suggest that accountholders were to have nothing more than a mere contract under which they would be unsecured creditors of Cryptopia with Cryptopia having the power to dispose of the cryptocurrency without an accountholder’s consent. If Cryptopia was indeed holding these digital assets, then it was cryptocurrency that it had acquired only by virtue of the trust which accountholders had placed in it as custodian for them.
[173] “Custodian” language has also featured with some prominence in this case. On this, Black’s Law Dictionary describes a “custodian of property” as:
56 Bryan A Garner Black’s Law Dictionary (10th ed, Thomson Reuters, Eagan, 2014).
A custodian responsible for managing real or personal property. The custodian’s duties generally include securing, safeguarding and maintaining the property in the condition received and accounting for any changes in it.
[174] The Cryptopia Risk Statement also speaks of customers “owning” their own cryptocurrency. In addition, it warns customers of the many risks of their owning cryptocurrency and of using Cryptopia’s platform. But it did not in any way suggest that one of the risks to be run by account holders was that Cryptopia would itself own the cryptocurrency legally and beneficially, let alone that this would be the position if Cryptopia were, as has happened, to go into liquidation.
[175]Additionally, by the Risk Statement:
(a)Clause 28 informed accountholders that Cryptopia may hold its own digital currencies on the platform, which indeed happened. There was no suggestion made that in fact Cryptopia beneficially owned all the digital currency on the platform.
(b)Clause 29 addressed fees payable for using the platform. This did not suggest that any capital gains in the cryptocoins would enure to Cryptopia, which would have been the normal position had Cryptopia been the legal and beneficial owner of them.
[176] I turn now to Cryptopia’s “marketing strategy” of July 2018, details of which are before me. This was a strategy promoted by Cryptopia, which stated that Cryptopia was providing: “A trading platform for global cryptocurrency investors
who want to trade safely”, and that the company was “dedicated to ensuring you can deposit, trade and withdraw your cryptocurrency coins securely whilst offering world class service” (emphasis added).
[177] Significantly here, customers were also referred to as “users” and not as “buyers”. The strategy referred also to Cryptopia’s “high level security” stating: “Rest easy: knowing your cryptoasset investments are securely protected” (emphasis added).
[178] The accompanying fact sheet also contained the following statement: “Our mission is to enable the widespread adoption of digital currencies to give people control back of their money through faster, cheaper, and more efficient financial services” (emphasis added).
[179] I turn now to say something more about the amended terms and conditions updated from 7 August 2018. Those terms, and in particular cls 5(d) and 5(e), and cls6(e)– (g) and (k) in respect of “fiat pegged tokens”, contain express recognition that the cryptocurrencies held by Cryptopia for accountholders are held on trust for those accountholders. It is those accountholders it seems who retain the beneficial ownership throughout. Ms Cooper for the creditors has endeavoured to make something of the specific wording of cl 5(e) which, to repeat, states:
(e)Each user’s entry in the general ledger of ownership of coins is held by us, on trust, for that user.
Ms Cooper contends that on its face this provision states that it is the “entry” in the ledger of ownership which is held “on trust” rather than the cryptocurrency itself. As I see it, this interpretation is wrong. It would lead to a nonsensical situation. Although that wording in cl 5(e) is not ideal, I am satisfied there can be no doubt that what was intended by the provision was that it is the cryptocurrency or coins themselves which are held by Cryptopia “on trust for” the particular accountholder.
[180] Before me, Mr Barker for the liquidators pointed out that the evidence before the Court shows that approximately 536,662 accountholders did not engage with Cryptopia’s exchange after the updated terms and conditions of 7 August 2018 were advised. Mr Barker went on to suggest that these amended terms, if anything, simply resulted in a variation of trust for the accountholders or, alternatively, created a new trust that operated only in favour of those accountholders who engaged with the exchange after the amended terms came into effect. On this, Mr Barker noted that any finding that some users or accountholders are beneficiaries of trusts and some are not could also pose potential prejudice to non-trust accountholders for the future. He was quick to point out that these issues were raised simply so that the consequences of any particular outcome could be clearly understood by the Court.
[181] On these aspects, I disagree with Mr Barker’s interpretation here. I have confirmed above that I am satisfied no variation of trust was involved in the amended terms. Those terms merely confirmed what were the existing trusts in operation. As I have noted, Mr Brocket, the only employee of Cryptopia to give evidence before me, this evidence also being uncontested, said the amended terms did not change the way the company had always operated. It was clear too, which Mr Barker for the liquidator accepted, that even if the amended terms improved the position of existing accountholders then the amendment must be seen as unobjectionable from their perspective.
[182] As I see it, the amended terms on their face took immediate effect for all existing accountholders and it was therefore not necessary for an accountholder actively to use the Cryptopia platform post-August 2018 in order to get the benefit of those terms.
[183] It must follow, therefore, that at no point in time were there separate sets of trust assets on the one hand, for accountholders under the historic terms and, on the other, for accountholders who had accepted the amended terms. Again, Mr Brocket in his evidence I have noted above confirmed as much. Nor, in my view, was it necessary to reach a position where individual trusts were seen as arising for each individual accountholder. I am satisfied that all accountholders by currency held their interests on exactly the same terms as other accountholders of that particular currency. That said, on all the evidence before me I conclude that Cryptopia acted as a bare trustee under a separate trust for each individual cryptocurrency held on its platform. All the accountholders for that one particular currency were simply beneficiaries under that one trust.
[184] Ms Cooper for the creditors has endeavoured (unsuccessfully) to question this conclusion. I find that Cryptopia’s principal duty under each of these respective trusts was to hold the relevant pool of currency, in many cases which the accountholders had brought onto the platform, on behalf of those accountholders (which might include Cryptopia itself as a beneficiary accountholder if it had personally acquired certain of those pool assets). As part of this Cryptopia as trustee was required to deal with each accountholder member’s share in the pool as directed by the member.
[185] In this respect, the powers and immunities given to Cryptopia in the terms and conditions which I have outlined at para [27] above, as I see it, are all proper provisions in trusts of this type.
[186] And I confirm my conclusion finally that the amended terms and conditions of 7 August 2018 did not effect any particular variation of the trusts. Those amended terms applied automatically to all accountholders in the respective cryptocurrencies from 7 August 2018. And, indeed the standard trust arrangements for each cryptocurrency had related back to the original inception of Cryptopia.
[187] In answer to the question raised at [46](b) I conclude that the various cryptocurrencies were at equity held on separate express trusts by Cryptopia for all of the accountholders.
B. The remaining issues before the Court
[188]I now need to turn to the remaining questions posed at para [46]:
Question (c) – What happens if there is no trust or cryptocoins are not “property”?
[189]Question (c) of this paragraph, as it reads in the application, states:
If the answer to Question (a) is No, then to the extent that such digital assets are not “property” whether the applicant liquidators should satisfy claims of:
(i)Any accountholder of the company (accountholder) for the return of his/her/its digital assets; and
(ii)Unsecured creditors,
By conversion of such digital assets into fiat currency and paying such in accordance with Part 16 of the Companies Act 1993.
[190] Given the answers I have given to questions (a) and (b) to the effect that the various digital assets held by the liquidators do constitute “property” as defined in s 2 of the Companies Act, and those digital assets here are held on trust for the accountholders, this question (c) does not arise.
[191] But in any event, I note that even if I had found the digital assets were not “property” within s 2 of the Companies Act and were not held on trust for the accountholders, then those digital assets would be an “asset” of the company as that word is used in ss 253 and 313 of the Companies Act. In those circumstances the assets should be realised by the liquidators and the proceeds distributed in the ordinary way under pt16 of the Companies Act. In that event, accountholders’ claims would rank with ordinary unsecured creditors of Cryptopia. Given my findings noted above, however, that is not the case here.
Question (d) – What are the terms of the trust/s and when did the trust/s come into existence?
[192] For the reasons I have outlined above, I am satisfied that an express trust came into existence for every different type of currency here which Cryptopia acquired as a result of a dealing with an accountholder. The precise dates on which this may have occurred were not in evidence before me.
[193] Nevertheless, once such a trust came into existence it applied to any currency of the relevant type subsequently acquired by Cryptopia as part of the running of its cryptocurrency platform whether or not the currency was in hot wallets or cold wallets.
[194] In most cases the trusts in question will have pre-dated the varied terms in August 2018. But in any event as I see it, trusts arose in respect of each parcel of digital assets when they were acquired and the amended terms made no difference. Any new kinds of cryptocurrency acquired after the amended terms came into existence in August 2018, as I see it, from the time of acquisition will have become subject to trusts on the same basis.
[195] As to what were the terms of the trust or trusts, in my view, it is not necessary or practicable at this point comprehensively to list all the terms that might govern the trusts in question. As Briggs J’s judgment in Pearson v Lehman Brothers Finance SA stated:57
…the law commonly recognises the creation of a trust as a necessary consequence of an intention that parties should share property beneficially in
57 Pearson, above n 53, at [245].
circumstances where the parties themselves have given no thought at all to the terms of the consequential trust, if indeed they even recognised its existence. In all such cases the law fills the consequential gaps by implication, and by importation of generally applicable principles.
[196] As I see it here, Cryptopia essentially fulfilled the role of a bare trustee in relation to the accountholders. Cryptopia’s trust duties therefore were somewhat confined. Its principal role was to hold each group of digital assets as trustee for the accountholders, to follow their instructions, and to let individual accountholders then increase or reduce their beneficial interest in the relevant trusts in accordance with the system Cryptopia had created for that purpose.
Question (d)(iii) – Separate trust for each accountholder – or one trust for all accountholders – or multiple trusts for specific groups?
[197] As I have outlined above, I have found that Cryptopia here is a trustee of separate trusts, one for each cryptocurrency with the beneficiaries being all accountholders holding currency of the relevant type.
[198] It follows that I reject alternatives 1 and 2 in Question (d)(iii) and uphold alternative 3 noted above at [46].
Question (e) – Inability to identify individual accountholders?
[199]Question (e) outlined at para [46] above states:
What is the consequence of the applicant liquidators being unable to ascertain the identity of any accountholder, and what consequences flow in relation to any digital assets associated with that account, specifically:
(i)Can the applicant liquidators close any such accounts and retain any digital assets as assets of the company; or
(ii)Do any such digital assets fall to be dealt with pursuant to the Trustee Act 1956 or otherwise?
[200] In my view, the appropriate course of action here where the liquidators find themselves unable to identify particular accountholders is the second alternative, namely for the digital assets that would otherwise fall to be allocated to that accountholder to be dealt with in accordance with s 76 of the Trustee Act 1956.
[201]Section 76 of the Trustee Act provides:
76 Distribution of shares of missing beneficiaries
(1)Where any property is held by a trustee and the property or any part thereof cannot be distributed because the trustee does not know whether any person who is or may be entitled thereto is or at any material date was in existence, or whether all or any of the persons who are members of any class who are or may be entitled thereto are or at any material date were in existence, or because the trustee does not know whether any such person is alive or dead or where he is, the trustee may publish such advertisements (whether in New Zealand or elsewhere) as are appropriate in the circumstances calling upon every such person and every person claiming through any such person to send in his claim within a time to be specified in the advertisements, not being less than 2 months in any case from the date on which the advertisement is published. Where the trustee is in doubt as to what advertisements should be published under this subsection, he may apply to the court for directions in that regard.
(2)Where the trustee has received (whether as a result of the advertisements or not) any claim to be a person to whom any such advertisement relates, or any notice that any person may claim to be such a person, but the trustee is not satisfied that the claim is or would be valid, the trustee may serve upon the claimant or the person of whom the trustee has notice as aforesaid, a notice calling upon him, within a period of 3 months from the date of service of the notice, to take legal proceedings to enforce the claim, if he wishes to pursue it, and to prosecute the proceedings with all due diligence; and advising him that, if he fails to do so, his claim may be disregarded and application may be made to the court without further notice for an order authorising the distribution of the property. Nothing in this subsection shall make it necessary for the trustee to serve such a notice on any such person; and the court may make an order under this section, whether or not such a notice has been served on any such person, if it is satisfied that the information supplied to the trustee by that person or otherwise in the possession of the trustee indicates either that the person is not one of the persons specified in the advertisements or that he is not likely to be one of those persons.
(3)Upon proof by affidavit of the circumstances, and of the inquiries that have been made, and of the results of inquiries and advertisements, and of the claims of which the trustee has received notice, and of the notices that the trustee has given to claimants under subsection (2), and of the action (if any) which the claimants have taken to enforce their claims, the court may order that the trustee may distribute the property or part thereof, subject to such conditions as the court may impose,—
(a)as if every person and every member of any class of persons specified in the order (being all or any of the persons specified in the advertisements) is not in existence or never existed or has died before a date or event specified in the order; and
(b)where as a consequence of the order it is not possible or practicable to determine whether or not any condition or requirement affecting a beneficial interest in the property or any part thereof has been complied with or fulfilled, as if that condition or requirement had or had not been complied with or fulfilled (as the court may determine).
(4)In making any order under subsection (3), the court may—
(a)disregard (without express reference thereto in the order) the claims of any persons who do not appear to the court to be, or to be likely to be, any of the persons specified in the advertisements:
(b)disregard (without express reference thereto in the order) the claim of any person to whom the trustee has given notice under subsection (2) and who has failed to take legal proceedings to enforce the claim or to prosecute any such proceedings with all due diligence:
(c)exclude from the operation of the order any person to whom the trustee has not given notice under subsection (2) and who in the opinion of the court may be one of the persons specified in the advertisements, or any person whom the court considers should for any reason be excluded from the operation of the order:
(d)provide that the order shall not be acted on for such period or except on such conditions as may be specified in the order or that the effect of the order shall during a period so specified be advertised in such manner and form as may be specified in the order, or that the order be served upon such person or persons as are specified therein; and in the event of the court exercising the jurisdiction conferred by this paragraph it may in the order direct that the same shall be of no effect in respect of any person specified therein in the event of that person instituting proceedings in New Zealand to enforce his claim and serving the proceedings upon the trustee within such period as is specified in the order.
(5)Any such order may be made notwithstanding that there has not been strict compliance with any directions as to advertisements previously given by the court, or that an error has been made in any advertisement (whether or not any directions have previously been given by the court) if the court considers that the error would not be likely to have prejudiced or misled the persons to whom the advertisement relates.
(6)Where the court makes an order under this section that the trustee may distribute any property or part thereof as if every person and every member of any class of persons specified in the order (not being a person expressly excluded from the operation of the order) is not in existence or never existed or has died before a date or event specified in the order, and the trustee distributes in accordance with the order, the trustee shall be exonerated from any further liability to any such person or to any member of any such class:
provided that nothing in this subsection shall prejudice any remedy which any person may have against any person other than the trustee, including any right which he may have to follow the property and any money or property into which it is converted.
(7)The court may make 1 or more orders under this section in respect of the same property.
(8)Any order made under this section may direct how the costs of the order and of advertising under or for the purposes of the order shall be borne.
(9)It shall not be necessary to serve notice of an application for an order under this section upon any person, unless the court otherwise orders.
(10)Nothing in this section shall prejudice the right of the trustee (if he so desires) to distribute under any other law or statutory provision or prejudice the protection thereby afforded when he makes distribution pursuant to any such law or provision.
[202] This s 76 process needs to be undertaken here where appropriate. It must follow, therefore, that alternative 1 (suggesting that the digital assets be retained as assets of Cryptopia) is not appropriate here.
Question (f) – Recovery of stolen digital assets
[203]Question (f) outlined at [46] states:
If and to the extent that the applicant liquidators recover stolen digital assets, then are such to be dealt with by the applicant liquidators:
(i)in accordance with the determination sought above;
(ii)pro rata according to the amounts recovered assessed against amounts stolen; or
(iii)as assets of the company.
[204] Here, I have accepted submissions advanced to me for the accountholders that there are separate trusts for each type of cryptocurrency held by Cryptopia. There is one such trust for each type of cryptocurrency held. As such, it necessarily follows that only those accountholders who hold types of cryptocurrency that were stolen would have suffered a loss as a result of that misappropriation. Those losses, as I see it, should be borne pari passu by those accountholders alone.58 It must follow
58 Pearson, above n 53 at [244].
therefore, in my view, that any recoveries of misappropriated cryptocurrency should enure to the benefit of those same accountholders.
[205] To determine the position as between the accountholders who are beneficiaries of the relevant trusts relating to the particular misappropriated cryptocurrency is somewhat more difficult, however. The appropriate process as I see it is:
(a)as at the date of the theft, the liquidators should determine the accountholders affected and their relative shares in any trust of the digital assets which are the subject of the theft. The liquidators should then apply the loss from the theft pro rata to those existing holdings. It should not therefore be necessary for the liquidators otherwise to discriminate amongst those accountholders, although the default position might be seen as pari passu distribution of the loss;
(b)to the extent that subsequent to the theft any accountholder acquired digital assets of the type that suffered the theft and those assets were added to the relevant trust assets, no reduction for the theft should be applied to that accountholder’s share in the trust assets; and
(c)any recoveries of cryptocurrency lost as a result of the theft should be applied pro rata to make up the loss suffered by such accountholders as were affected by it under the principles I have outlined above.
Potential relevance of any fault of Cryptopia relating to the lost digital assets
[206] I have not been asked in the current application to address the relevance of any questions which might arise relating to the potential that Cryptopia may be legally culpable for lost digital assets here. This issue potentially arises if the digital assets were held on trust as I have found and Cryptopia is now holding fewer digital assets than were transferred to it by accountholders and not withdrawn by them. The losses may have occurred from the hack and theft, but there may be other causes of this shortfall.
[207] It may be useful, however, to provide some brief comments on this aspect. In principle, where a trustee is one of the beneficiaries of the trust (as Cryptopia says is the case here) and there is a shortfall in the trust assets, the trustee cannot share in any distribution of assets among beneficiaries where the trustee is found to be legally culpable in respect of that shortfall to the extent of the shortfall.59
[208] These comments are, however, by way of an aside as the issue of trustee-fault is not strictly before the Court here. This may be a matter for further consideration later.
Result
[209]As to the questions posed by the liquidators in their application as outlined at
[46] above, the answers to those questions are:
(a)On the question whether any or all of the digital assets held by the liquidators constitute “property” as defined in s 2 of the Companies Act, the answer is yes, all of the digital assets constitute “property”.
(b)On the question whether any or all of these digital assets are held on trust for accountholders, the answer is yes, they are all held by way of express trusts.
(c)Question (c) raised issues only if the answer to question (a) or question
(b) was, no. That is not the case here, given that those questions were both answered yes. Nothing further is required, therefore, with respect to this question (c).
(d)Given that the answer to question (b) above is yes, then the following questions arise under Question (d), and their answers are:
(i)Question (i): When did the trusts come into existence? The answer is that, in each case when the first tranche of a specific
59 Finnigan v Yuan Fu Markets Ltd (in liq) [2013] NZHC 2899 at [46]; and Russell-Cooke Trust v Prentis [2003] EWHC 1206 (Ch) at [6].
cryptocurrency was accepted onto Cryptopia’s platform, one trust was established for that particular cryptocurrency and came into existence (and this was the case either before or after 7 August 2018 when the company updated its terms and conditions).
(ii)Question (ii): What are the terms of the trusts? The answer is that these are those terms which are implied into a particular trust by law.
(iii)Question (iii): On what basis are the digital assets held on trust? The answer is as set out at as offered at subpara (iii) of this question. This means that the digital assets are held in multiple trusts for the benefit in each case of specific groups of accountholders who hold that particular group or type of digital asset with the result that accountholders within a specific group are co-beneficiaries of the same trust.
(e)On this question (e) which relates to the consequence of the liquidators being unable to ascertain the identity of any particular accountholder and what consequences should follow in relation to digital assets associated with that account, The answer is that these digital assets fall to be dealt with pursuant to s 76 of the Trustee Act. The requirements set out in that provision are to apply here.
(f)Question (f) asks if, and to the extent that the applicant liquidators recover stolen digital assets, how are these to be dealt with by the liquidators? The answer is as outlined at para (f)(ii) to the effect that they are to be dealt with pro rata within each specific trust for the digital asset concerned according to the amounts recovered assessed against the amounts stolen.
Costs
[210] Outlined at para (g) of the liquidators’ application specified at para [46] above, is a request, effectively from all parties, for a direction that their reasonable fees and disbursements on this application should be met in the first instance from the pool of realised bitcoin holdings pursuant to [3(b)] of the order of this Court dated 29 May 2019.
[211] This is on the basis that these fees and disbursements are a necessary and reasonable expense of the liquidation of, and incidental to the protection, preservation, recovery, management and administration of, the assets of Cryptopia.
[212] On this costs question, I am satisfied that the costs of counsel for the liquidators, counsel for the accountholders and counsel for the creditors should be met from the bitcoin holdings pool as sought on the basis outlined. All counsel at this point provided detailed and helpful submissions for the resolution of these issues and their costs are properly met from this pool.
[213] A direction is now made that the reasonable fees calculated on an indemnity basis and disbursements of counsel for the liquidators, counsel for the accountholders and counsel for the creditors are to be met from the pool of realised bitcoin holdings pursuant to para [3(b)] of this Court’s order dated 29 May 2019.
[214]Insofar as it may be necessary here I certify for second counsel in each case.
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Gendall J
Solicitors:
Buddle Findlay, Wellington for Applicant Liquidators
Copies to:
Jenny Cooper QC, Barrister, Auckland, for Creditors Jane Barrow, Barrister, Auckland, for Creditors
Peter Watts QC, Barrister, Auckland, for Accountholders Samuel Jeffs, Barrister, Auckland, for Accountholders
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