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.
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