Hong Kong Court Rules that Cryptocurrencies are Property in Landmark Decision
May 29, 2023
- Cryptocurrencies are classified as property under Hong Kong law and can be the subject matter of a trust
- To determine whether the cryptocurrencies are held on trust by the cryptocurrency exchanges for their customers, the Hong Kong Court will consider the terms and conditions entered into between the cryptocurrency exchange platforms and their customers and how the exchanges operate, including how the exchanges handle cryptocurrencies
In the landmark decision of Re Gatecoin Limited 1, the Hong Kong Court of First Instance has ruled that cryptocurrencies are property under Hong Kong law and therefore can be held on trust. The decision shed light on how cryptocurrencies will be dealt with when winding up cryptocurrency exchanges since the judgment touched on key questions about the relationship between cryptocurrency exchanges and their customers. In this case, the Court ruled that, based on the latest terms and conditions entered into between Gatecoin and its customers, Gatecoin did not hold the cryptocurrencies on trust and the customers were merely unsecured creditors of Gatecoin.
Gatecoin Limited, which is incorporated in Hong Kong, operated a cryptocurrency exchange platform from 2015 until going into liquidation in 2019. Gatecoin’s platform provided cryptocurrency trading and withdrawal services for customers who created accounts and deposited cryptocurrencies and/or fiat currencies; Gatecoin also traded cryptocurrencies in its own right, sometimes with its customers. Neither cryptocurrencies nor fiat currencies deposited by its customers were segregated by Gatecoin.
Gatecoin was wound up by the court on March 13, 2019, and liquidators were appointed seven days later. The liquidators applied to the Court under s.200(3) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) (the “C(WUMP)O") for directions on the characterization of cryptocurrencies and fiat currencies held by Gatecoin; and the allocation of the assets to Gatecoin’s customers. After identifying three sets of terms and conditions (the “T&C”) that were in force at various times and agreed to by Gatecoin’s customers, the liquidators took the view that some of the customers’ assets were held on trust—and could therefore stand in priority to creditors—while the remaining customers would only have a contractual relationship with Gatecoin.
Cryptocurrencies as property
To determine whether an express trust is validly established under Hong Kong law, a court needs to consider the “three certainties”, which are (i) certainty of subject matter; (ii) certainty of object; and (iii) certainty of intention. An important question in this case was whether cryptocurrencies could be the subject matter of a trust. To answer that question, the Court has to be satisfied that cryptocurrency is a “property.” After discussing the nature of cryptocurrency and blockchain technology in depth, and reviewing authorities from other common law jurisdictions (including England and Wales2, Singapore3, Australia4 and New Zealand5), the Hon Madam Justice Linda Chan applied the principles in National Provincial Bank v Ainsworth6 and concluded that cryptocurrencies are “property.” She concluded that cryptocurrency:
- is definable—the public key allocated to a cryptocurrency wallet is readily identifiable, sufficiently distinct, and capable of being allocated uniquely to individual accountholder;
- is identifiable by third parties—only the holder of a private key is able to access and transfer the cryptocurrency from one cryptocurrency wallet to another, so a cryptocurrency owner is capable of being recognized as such by any third party;
- is capable of assumption by third parties—it can be and is the subject of active trading markets, demonstrating that the proprietary rights of the owner are respected, and it is potentially desirable to third parties (i.e., their ownership is sought after); and
- has some degree of permanence or stability—the entire life history of a cryptocurrency is available in the blockchain.
Although “property” is not defined in C(WUMP)O nor is cryptocurrency included in the definition of “property” under s.3 of the Interpretation and General Clauses Ordinance (Cap 1), the Hon Madam Justice Linda Chan commented that like other common law jurisdictions, the definition of “property” is an inclusive one and intended to have a wide meaning.
Did Gatecoin hold the cryptocurrencies on trust?
As mentioned, for an express trust to be validly established, the Court needs to consider (i) the certainty of subject matter; (ii) certainty of object; and (iii) certainty of intention. First, despite the fact that the cryptocurrencies are unsegregated, the Court here was satisfied that there was certainty of subject matter—the account balance represents the proportion of the cryptocurrencies over which such a customer has a beneficial interest in the pool. Second, a trust would be valid so long as there is no conceptual ambiguity or uncertainty in the definition of the class of beneficiaries, and the Court was satisfied with the customer list kept on Gatecoin’s internal exchange ledger.
Third, the Court ruled that the latest T&Cs in 2018 superseded the previous two T&Cs, since Gatecoin customers were required to click to acknowledge and accept the T&Cs before they started or continued to access their Gatecoin accounts. Combined with the factual operations of Gatecoin, the Court relied on the following terms in the T&Cs in 2018 to conclude that there was no intention to establish a trust. The terms of the T&Cs in 2018:
- expressly disclaim any fiduciary relationship between Gatecoin and its customers;
- did not segregate the customers’ assets from Gatecoin’s assets and mixed them (both cryptocurrencies and fiat currencies);
- entitled Gatecoin to cryptocurrencies created by forks, or any accretions to the cryptocurrencies as a result of tokens and/or Airdrops, which is consistent with Gatecoin being the beneficial owner of the cryptocurrencies; and
- treated Gatecoin’s cryptocurrencies as “assets,” while it treated customer deposits as liabilities in its audited financial statements.
The Court did acknowledge that there would be a small set of customers who might have registered their accounts prior to the 2018 T&Cs coming into force and never clicked to accept the 2018 T&Cs. The relationship between Gatecoin and those non-consensual customers would be governed by the previous two T&Cs, and the Court found that a trust relationship existed between them and Gatecoin. The Court invited the non-consensual customers to notify the liquidators so the liquidators could adequately address their claims.
Conclusion and Commentary:
This decision clarifies how cryptocurrencies will be treated in a winding-up: Cryptocurrencies are to be considered property equal to other intangible properties such as shares and stocks, which subjects cryptocurrencies to a variety of proprietary remedies and removes some doubts about the certainty and legal protection afforded to cryptocurrencies. The Hong Kong Court has previously granted interlocutory proprietary injunctions7 to freeze cryptocurrencies but without expressly stating that cryptocurrencies were property. The decisions also reiterates the importance of terms and conditions in winding-up procedures. Viewing cryptocurrencies as property also affirms the potential of cryptocurrencies’ role in all kinds of commercial and financing transactions including acting as collaterals to provide security.
This ruling aligns Hong Kong with other common law jurisdictions on the treatment of cryptocurrencies. When considered along with the Hong Kong Government’s support8 to boost Hong Kong to become the Asian cryptocurrency hub, market practitioners can have more confidence in operating or establishing cryptocurrencies operations in Hong Kong.
Readers may also be interested in our notes on how the U.S. Bankruptcy Court determines ownership of virtual assets among a virtual asset management firm and its customers. and the proposed licensing regime for virtual asset trading platforms in Hong Kong.
1. Re Gatecoin Limited  HKCFI 91
2. AA v Persons Unknown  EWHC 3556 (Comm)
3. B2C2 Ltd v Quoine Pte Ltd  4 SLR 17
4. Australian Federal Police v Bigatton  NSWSC 245
5. Ruscoe v Cryptopia  NZHC 728
6. National Provincial Bank v Ainsworth  AC 1175
7. Nico Constantijn Antonius Samara v Stive Jean Paul Dan  HKCFI 2718
8. Policy Statement on Development of Virtual Assets in Hong Kong—Financial Services and the Treasury Bureau, October 31, 2022
This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Edwin Kwok, an O’Melveny partner licensed to practice law in Hong Kong, William K. Pao, an O'Melveny partner licensed to practice law in California, Ke Zhu, an O’Melveny partner licensed to practice law in Hong Kong and New York, AnnaLou Tirol, an O’Melveny partner licensed to practice law in California, Wenting Yu, an O’Melveny partner licensed to practice law in New York and California, Evan M. Jones, an O’Melveny partner licensed to practice law in California and District of Columbia, Denis Brock, an O’Melveny partner licensed to practice law in Hong Kong (Solicitor-Advocate), England & Wales (Solicitor-Advocate), Ireland, Australia, New Zealand, and New York, and Kieran Humphrey, an O’Melveny counsel licensed to practice law in Hong Kong, England & Wales, and Australia, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.
© 2023 O’Melveny & Myers LLP. All Rights Reserved. Portions of this communication may contain attorney advertising. Prior results do not guarantee a similar outcome. Please direct all inquiries regarding New York’s Rules of Professional Conduct to O’Melveny & Myers LLP, Times Square Tower, 7 Times Square, New York, NY, 10036, T: +1 212 326 2000.