Hong Kong Court Defines Cryptocurrency As "Property"

The Court in Hong Kong said that cryptocurrencies are "property" under their law. This is the first time they have confirmed it. Other places around the world have said this too. It means that transfers and loans of cryptocurrencies are legal. And if someone steals or does something bad with them, people have legal rights. This is good news for businesses in this area.

A company in Hong Kong called Gatecoin Limited had a platform for trading cryptocurrency. It has been closed by the Court. The people who are taking care of the closing asked the Court some questions about how to deal with the Currencies that Gatecoin had. The Court needs to decide if the Currencies should be given to Gatecoin's customers. They also need to decide whether the Currencies should be seen as trust money for customers.

The liquidators found three different sets of T&Cs: 2016, Trust, and 2018. Group A signed the 2016 T&C, Group B signed the Trust T&C, and Group C signed the 2018 T&C. Liquidators stated that Gatecoin held the currencies of Group A and Group B on trust. However, Group C only had contractual claims against Gatecoin.

To prove there was a trust, the Court checked if cryptocurrency is "property" for a trust. They studied cases from UK, Singapore, USA, Canada, British Virgin Islands, Australia and New Zealand. Most cases say crypto is property. They followed the reasoning in a UK legal statement and a NZ case. This confirms that crypto fits the four criteria for property in an English case.

Hong Kong law defines "property" as money, goods, land, obligations, easements, and other types of estate and interests. This definition is meant to be inclusive and covers crypto-assets. It is different from other common law jurisdictions but has a wide meaning. The Court in Hong Kong noted this difference.

Is there a trust?

The Court said that cryptocurrencies are considered "property." They can be held with trust. But in this case, most of Gatecoin's customers didn't have a trust. The Court used a "three certainties" test to figure this out.

Even though the Currencies were put together, the Court said they could still figure out who owned what. This was because Gatecoin kept a record of how much currency each customer had in a private Exchange Ledger. So even though the Currencies weren't separated, customers could still claim their fair share based on what was in the Exchange Ledger.

We can easily find out who the beneficiaries of the trust are and how much they can claim from the Exchange Ledger.

The Court checked the T&Cs. They found that the older T&Cs were replaced by the 2018 T&C. Gatecoin made all of their customers agree to the new T&C. Customers had to do this to use Gatecoin's website. So, the 2018 T&C is the one that matters. This T&C explains if Gatecoin will hold customers' Currencies on trust.

The Court said the 2018 T&C did not create a trust for customers. The T&C said Gatecoin did not have to be responsible. All cryptocurrencies were mixed together. Gatecoin could use them for anything, even for their own trading. Financial records showed the cryptocurrencies were Gatecoin's property. Customer deposits were listed as debts.

The Court said that some customers might not have agreed to the new T&C in 2018 and so didn't use the platform. They are still customers though. The Court said that Gatecoin had to keep their Currencies safe because of the Trust T&C. These said that Gatecoin had to keep the Currencies in trust for the customers. This was written in clearer language than the 2016 T&C.

Hong Kong Courts gave preliminary injunctions before on digital assets. But now they confirmed the proprietary nature of cryptocurrency. This puts Hong Kong in line with other common law jurisdictions. These jurisdictions have already made rulings on the issue.

Courts around the world view cryptocurrency as a new type of property. In the UK, recent cases have confirmed this view, and the government is planning to regulate cryptocurrencies under existing financial services laws. This shows a need to adapt laws and regulations to recognize and protect digital assets.

Cryptocurrency exchanges have been collapsing recently which raises legal uncertainties around cryptocurrencies in Hong Kong but a recent decision provides clarity on how they will be treated in winding-up scenarios. The Hong Kong Courts are willing to be flexible in applying existing legal principles to new technological issues. Hong Kong wants to be a global virtual asset hub but disputes will become increasingly common. Another legal issue is likely to make its way to the courts and we look forward to following these developments.

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