On 8 April 2020, in the case of Ruscoe & Moore v Cryptopia Ltd (in liquidation) (the Company), the New Zealand High Court ruled on an application by the liquidators (the Liquidators) of the Company to determine the precise nature of the cryptocurrencies held by the Company.
The decision is significant because it is the first occasion that a common law court has, having heard a fully contested case, determined that cryptocurrencies are “property” at common law. Previous decisions of the courts of England, Canada and Singapore dealing with the issue were either ex parte or progressed on that assumption. It is a hugely important decision in this area because it adds significant weight to the common sense proposition that, despite their unusual features, cryptocurrencies do not sit outside of the law. The decision is of persuasive authority in the Cayman Islands and the BVI.
The Company operated a cryptocurrency exchange, allowing users to trade pairs of a range of cryptocurrencies amongst themselves, while the Company charged fees for trades, deposits and withdrawals. It was placed into liquidation in May 2019 after a serious hack and the loss of approximately US$18m of cryptocurrency from the exchange.
The Liquidators applied to the Court for a determination of:
- Whether the cryptocurrencies held by the Company were “property” as defined in the Companies Act and at common law; and
- Whether those cryptocurrencies were held on trust by the Company for the Company’s account holders.
The application was, in effect, a staging ground for a contested hearing between the creditors of the Company on one side and its accountholders (potential trust beneficiaries) on the other. If (as the Court held) the cryptocurrencies were property and subject to a trust, they would be held for the benefit of account holders and not available for division amongst the Company’s creditors.
The Court referred to the influential British Jurisdiction Taskforce paper entitled Legal Statement on Cryptoassets and Smart Contracts, published in November 2019 to ground a general definition of cryptocurrency and frequently throughout the judgment.
The Court in arriving at its judgment considered the recent decision of the Singapore Court of Appeal in Quione Pte Ltd v B2C2 Ltd which drew from the classic exposition of a property right of Lord Wilberforce in National Providential Bank v Ainsworth. Gendall J found that the criteria set out by Lord Wilberforce had been met in this instance and the cryptocurrencies could be considered property. The decision in Quoine was distinguished on the facts in that Quoine had been a market-maker, actively placing buy and sell orders, as well as lending funds to other market-makers. In the case of the Company, there was no provision in its terms of trade exposing its customers to risk if the Company became insolvent and went into liquidation.
We will continue to provide updates on this area which is the subject of increasing attention in common law jurisdictions.