Introduction

In April 2020 the NZ High Court issued a decision determining the status of cryptocurrency as property.(1) The court held that cryptocurrency constitutes property at common law and is therefore capable of being held on trust.

The application before the court was brought by the liquidators of Cryptopia under Section 284(1)(a) of the Companies Act. They sought directions on distributions relating to Cryptopia's property – specifically, whether digital assets in the form of cryptocurrency formed part of the company's pool of assets.

The court's determination that cryptocurrency is property means that cryptocurrencies are capable of being beneficially owned and so, in the particular circumstances, did not form part of the pool of assets for distribution to unsecured creditors.

Background

Rob Dawson and Adam Clark formed Cryptopia in 2014. Cryptopia was formally a 'cryptocurrency trading exchange' – an online platform or exchange to allow users to trade pairs of a range of cryptocurrencies between themselves. Cryptopia would charge fees for trades, deposits and withdrawals. In order to participate, the user was first required to register with Cryptopia, open an account and make a deposit or purchase in one of the five base currencies.

A 'cryptocurrency' is a digital or virtual currency. The most well-known cryptocurrencies are bitcoin and ethereum. They are secured via cryptography, which can bring many benefits. Cryptocurrencies commonly use ledgers based on blockchain. The crucial difference from fiat currency is that cryptocurrencies are not controlled by any central authority. Distributed transaction ledgers and rules established by informal consensus are the key characteristics of cryptocurrencies.

The judgment discussed the definition of 'cryptocurrency' by referring to a UK Jurisdiction Task Force report entitled "Legal statement on cryptoassets and smart contracts". That report noted the following:

• A 'cryptoasset' is ultimately defined by reference to the rules of the system in which it exists. Functionally, it is typically represented by a pair of data parameters: one public (disclosed to all participants in the system) and one private.
• The public parameter contains or references encoded information about the asset, such as its ownership, value and transaction history.
• The private parameter – the private key – permits transfers or other dealings in the cryptoasset to be cryptographically authenticated by digital signature.
• Knowledge of the private key confers practical control over the asset, so it should be kept secret by the holder.
• Although not all systems possess all of them, the principal and novel characteristic features of cyrptoassets are: 
  -  intangibility;
  -  cryptographic authentication;
  -  the use of a distributed transaction ledger;
  -  decentralisation; and
  -  the rule by consensus.

In the early years, Cryptopia had a modest membership, but it expanded exponentially from November 2017 after an explosion in bitcoin's value. The company grew to the point where it had more than 900,000 account holders, compared with 30,000 at the beginning of 2017.

The company was hacked, leading to a loss of NZ$30 million from its exchange and its liquidation in 2019. The company had resumed trading in March 2019 but, soon afterwards, the shareholders resolved by special resolution to place the company into liquidation. When placed in liquidation, the company held an estimated NZ$170 million worth of cryptocurrency.

The liquidators applied to the High Court under Section 284(1)(a) of the Companies Act for guidance and directions. The two questions on which the liquidators sought direction from the High Court were as follows:

• Does cryptocurrency qualify as property?
• If so, was the cryptocurrency held in Cryptopia held on trust for its account holders?

Should cryptocurrency be defined as 'property'?

Although it might seem trite that cryptocurrency would be considered property, legal systems worldwide have struggled to categorise cryptocurrency because it has been seen as difficult to fit within the recognised categories of property.

The decision was made in accordance with the definition of 'property' in Section 2 of the Companies Act 1993 (as well as earlier decisions which considered the categorisation of other assets):

Section 2 "property"
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.

The High Court considered different types of intangible asset which are commonly accepted as property, including:

• choses in action;
• non-enforceable debt claims;
• payments through bank systems;
• copyright;
• shares;
• licences and quotas; and
• a trustee's right to indemnity.

Judgments addressing cryptocurrency as property by courts in other jurisdictions, including Singapore, England and British Columbia, were also considered.

The court held that cryptocurrency meets the four key characteristics of property, according to Lord Wilberforce's decision in National Provincial Bank Ltd v Ainsworth.(2)

Definable subject matter
Cryptocurrency's computer-readable strings of characters are "sufficiently distinct to be capable of then being allocated uniquely to an account holder on that particular network". The way cryptocurrency identification works is broadly similar to banks' records of their customers' bank accounts.

Identifiable by third parties
The combination of an account holder's public key (the code that allows a user to receive cryptocurrencies into their account) and the private key (the second code made available only to the account holder), together with the requirement that the two keys be combined to record a transfer of cryptocurrency, means that cryptocurrencies is sufficiently identifiable by third parties.

Capable of assumption by third parties
Cryptocurrency can be acquired by third parties on active trading markets.

Some degree of permanence or stability
Blockchains keep a public record of a cryptocoin's life history and a cryptocoin remains fully recognised unless it is spent through use of the private key. Cryptocurrency therefore retains some degree of permanence or stability.

As cryptocurrency is property, it is subject matter that is capable of being held on trust, provided that the elements of the trust are present.

Was the cyprtocurrency held on trust?

The High Court held that the cryptocurrency remaining in Cryptopia's accounts was held on trust for the account holders. It reached its conclusion after considering:

• Cryptopia's operating practices;
• how it had marketed itself to account holders; and
• the terms and conditions of its operation.

Of particular importance was the fact that account holders bought their own currency on the platform to make it available for exchange. Cryptopia acted as a platform for exchanges but did not hold the cryptocurrencies as part of its assets.

The court held that the three certainties for constituting a valid trust were present on the facts of the case:

• The cryptocurrencies, being the subject matter of the various trusts created, were clearly recorded in Cryptopia's SQL database records, providing sufficient certainty of subject matter.
• There was no uncertainty about the identity of the beneficiaries of the relevant trusts; they were those who had positive coin balances for the currencies in the Cryptopia SQL database. Although the liquidators indicated that they might have some difficulties finding out the true identities of and contacting some of the account holders, such evidential uncertainty did not defeat the trust's existence.
• Cryptopia manifested its intent to hold the property on trust through its conduct in creating the exchange without allocating account holders public and private keys for the digital assets that it held for them. The database showed that the company intended to be a custodian and trustee of the account holders' cryptocurrencies.

The consequence of the decision meant that only account holders were entitled to the remaining cryptocurrency on Cryptopia's insolvency. If the High Court had held that the cryptocurrency was not held on trust, it would have been an asset in the liquidation to be distributed among creditors.

Comment

The decision has brought welcome certainty to the legal status of cryptocurrency in New Zealand and will give more comfort to those trading in cryptocurrencies throughout the country.

The recognition of cryptocurrency as property is an important step in clarifying rights and obligations surrounding cryptocurrency. Proprietary rights are recognised worldwide and the status of cryptocurrency as property has important implications for the rules around:

• succession on death;
• the vesting of property on personal bankruptcy;
• liquidators' rights; and
• cases of fraud, theft and breach of trust;

For further information on this topic please contact Victoria Rea at Wilson Harle by telephone (+64 9 915 5700) or email ([email protected]). The Wilson Harle website can be accessed at www.wilsonharle.com.

Endnotes

(1) Ruscoe v Cryptopia Limited (in Liquidation)
(2) [1965] AC 1175 (HL) at 1247–1248.