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Regulatory Law Alert - February 2020
Submitted by // J Wong, Partner
14 February 2020


BITCOINS: STOP AND FREEZE

A recent English high court case1 has found that cryptocurrencies are a form of property. This is a significant ruling with a useful analysis of this issue and provides some indication of how Hong Kong courts and regulators may approach the current debate of whether, and how, cryptocurrencies fall into various financial services laws.

The case

A hacker installed malware on a company's computer systems and subsequently sent a ransom note:

"Hello [company] your network was hacked and encrypted. No free decryption software is available on the web. Email us at […] to get the ransom amount. Keep our contact safe. Disclosure can lead to impossibility of decryption..."

The company notified its insurer. Given the importance to the company to obtain access to its computer systems, the insurer agreed to pay a ransom of US$950,000 in Bitcoins (about 109 Bitcoins) in return for the decryption tool.

After the ransom was paid, the insurer hired a specialist investigation company to track the Bitcoin ransom payment. The investigation revealed that whilst some of the Bitcoins had been transferred into fiat currency, a substantial portion, namely, 96 Bitcoins, had been transferred to a specified address linked to an exchange known as "Bitfinex". The insurer issued various court applications to further trace and recover the Bitcoin ransom payment.

Injunction application

One of the applications in front of the court was a proprietary injunction application over the 96 Bitcoins held in the account with Bitfinex. As injunctions can only be granted over property, the court had to determine whether or not the Bitcoins were property.

English law traditionally views property as being only of two kinds:

1. choses in possession; and
2. choses in action.

In the judgment, the court explained that this presents a difficultly in treating Bitcoins as a form of property; they are neither a chose in possession nor are they a chose in action. They are not choses in possession because they are virtual, they are not tangible, they cannot be possessed. They are not choses in action because they do not embody any right capable of being enforced by action.

However, the court found that English law does recognise forms of property other than choses in possession and choses in action, following a discussion of the UK Jurisdictional Task Force's "Legal Statements on Crypto-Assets and Smart Contracts"
2 . The court also concluded that Bitcoin met four criteria of property : it is definable, it can be identified by third parties, it is capable in its nature of assumption by third parties and it has some degree of permanence3 .

Takeaways

Although this case is not legally binding in Hong Kong, English judgments are nevertheless persuasive, and this case is promising for companies wanting to recover stolen crypto-assets.

The Hong Kong courts
4 have also recently granted a Mareva injunction freezing the assets of a cryptocurrency trader in a dispute concerning Bitcoins held on an insolvent trading platform. In the case, the court found the plaintiff had made a good arguable case that the Bitcoin should be preserved, although there were competing claims to ownership. The Hong Kong judgment does not discuss the nature of Bitcoins, as this was not relevant to the legal test for granting the Mareva injunction.

The English judgment may also have consequential implications on other Hong Kong legislation that refers to the definition of "property", for example, "property" is defined in the Securities and Futures Ordinance as: "property includes (a) money, goods, choses in action and land, whether in Hong Kong or elsewhere; and (b) obligations, easements and every description of estate, interest and profit, present or future, vested or contingent, arising out of or incident to property as defined in paragraph (a)". This definition (which mirrors the definition of "property" in the Interpretation and General Clauses Ordinance) is inclusive, and so arguably, may include Bitcoins and other cryptocurrencies.

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[1] AA and (1) Persons Unknown Who Demanded Bitcoin On 10th And 11th October 2019 (2) Persons Unknown Who Own/Control Specified Bitcoin (3) iFINEX trading as BITFINEX (4) BFXWW INC trading as BITFINEX [2019] EWHC 3556 (Comm).
[2] The full legal statement can be found at the following link.
[3] As set out in Lord Wilberforce's classic definition of property in National Provincial Bank v Ainsworth [1965] 1 AC 1175]
[4] Nico Constantijn Antonius Samara v Stive Jean Paul Dan [2019] HKCFI 2718


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