Understanding Crypto-assets

 

The instant contest over the digital assets is effectively between accountholders with holding a positive coin balance; and the shareholders and creditors of Cryptopia. The question before the Court was that 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. However, the accountholders were arguing that digital assets belong to them and, the same are held by Cryptopia in trust for the accountholders.

The New Zealand High Court had relied upon number of judgements and  authoritative pronouncements, as under:

Sarah Green and David Fox, in its book - Cryptocurrencies in Public and Private Law under chapter titled as "Cryptocurrencies in the Common Law of Property"  addressed this question, as under:

"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"

UK jurisdiction Taskforce's Legal Statement on Cryptoassets and Smart Contracts provide as under:

"Proprietary rights are of particular importance in an insolvency, where they generally have priority over claims by 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…………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."

International Commercial Court of Singapore in B2C2 Ltd v Quoine Pte Ltd [2019] 4 SLR 17, held that 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.

Chancery Division of the English High Court in Vorotyntseva  v Money-4 Ltd [2018] EWHC 2596 (Ch) granted an ex parte 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'.

English High Court in AA v Persons Unknown [2019] EWHC 3556 held that cryptocurrencies are "property".

Section  2  of  the  Companies  Act  of  New  Zealand  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. "Every kind" of property,  is  wide  enough  to  cover  money.  The  Court  also  cited  Lord Wilberforce's  opinion  in  the  House  of  Lords  in  National  Provincial Bank Ltd v Ainsworth[1965] AC 1175 (HL):

"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."

The NZ High Court held that the crypto-assets are definable subject matter as they are computer-readable strings of characters recorded on networks of computers established for the purpose of recording those strings, and, are sufficiently distinct to be capable of then  being  allocated uniquely to an accountholder on that particular network.  These are identifiable by third parties as this aspect has long been recognised by property lawyers that the power of an owner to exclude others from an asset provides a more important indicator of ownership than the power actively to use or benefit from that asset - the degree of control necessary for ownership (namely the power to exclude others)    is achieved for cryptocurrencies by the computer software allocating to each public key a second set of data made available only to the holder    of the account (the private key), and requiring the combination of the two sets of data. It is also capable of assumption by third parties  as  third parties respect the rights of the owner in that property and these are be subject to actions expressly devised by the law to give effect to proprietary rights if they assert their own claim to ownership without justification. It also has some degree of permanence or stability as blockchain methodology which cryptocurrency systems deploy also greatly assist in giving stability to cryptocoins.

The High Court negated the decision of the English Court of Appeal in Your Response Ltd v Datateam Business Media Ltd. [2014] EWCA Civ 281  which  held  that  the  whole  purpose  behind  cryptocurrencies  is  to create an item of tradeable value not simply to record or to impart in confidence   knowledge   or   information   in   as   much   as   a   unique relationship and system of transfer exists with respect to the relevant data  on  the  blockcha  in  that  makes  up  a  cryptocoin.  Their  Lordship also negated the reliance on Boardman v Phipps wherein Lord Upjohn stated that information is not property at all as it is normally open to all who have eyes to read and ears to hear. This statement is not true of cryptocoins where every public key recording the data constituting the coin is unique on the system where it is recorded. It is also protected by the associated private key from being transferred without consent and is therefore restricted in operation.

India position

A  three-judge  bench  of  the  Supreme  Court  in  Internet  and  Mobile Association  of  India  v  Reserve  Bank  of  India  Writ  Petition  (Civil) No.528  of  2018  set  aside  the  Reserve  Bank  of  India's  circular  dated April  6,  2018  (on  the  ground  of  proportionality),  which  prohibited entities  regulated  by  the  RBI  from  dealing  in  virtual  currencies  or providing services for facilitating any person or entity in dealing with or   settling   virtual   currencies.   The   Supreme   Court   analysed   that whether virtual currencies amounted to "money" or not. The Supreme Court  concluded  that  "what  an  article  of  merchandise  is  capable  of functioning as, is different from how it is recognized in law to be. It is as much true that virtual currencies are not recognized as legal tender, as  it  is  true  that  they  are  capable  of  performing  some  or  most  of  the functions of real currency. The Oxford English Dictionary has already included  "property  or  possessions  of  any  kind  viewed  as  convertible into  money"  within  the  definition  of  money.  The  Inter-Ministerial Committee  of  the  Central  Government  treated  virtual  currency  as  a digital  representation  of  value  that  can  be  digitally  traded  and  it  can function as a medium of exchange and/ or a unit of account and / or a store of value, thought it is not a legal tender.

Interestingly, the Supreme Court has observed that the  governments and money market regulators throughout the world have  come  to  terms with the reality that virtual currencies are capable of being used   as real money, but all of them have gone into the denial mode by claiming that virtual currencies do not have the status of a legal tender, as they are not backed by a central authority. Incidentally, the Supreme Court has treated cryptocurrencies to be money (i.e. tradeable in exchange of goods and services) and on this basis upheld the power of the Reserve Bank of India to issue the impugned guidelines / circular (thought the said circular was set aside on another constitutional ground).

From the standpoint of the marketplace or trading exchange, the above decision as well as guidance will be of much persuasive value.