The emergence of cryptocurrency as an investment asset, alongside the proliferation of blockchain technology, has raised important legal questions, particularly regarding the legal status of cryptocurrency. Jurisdictions like Hong Kong have grappled with defining the legal nature of cryptocurrency, though a landmark decision has shed new light on the matter.
On 31 March 2023, Justice Linda Chan in Re Gatecoin Limited  HKCFI 91 (Re Gatecoin) held that cryptocurrency exhibits all the characteristics of property and could therefore be held on trust in the context of a liquidation (although it was ultimately found that the cryptocurrencies in question were not held on trust).
In this Legal Update, we look at the key considerations underpinning the decision in Re Gatecoin.
Gatecoin Limited was a cryptocurrency exchange platform established in Hong Kong in 2015 which allowed customers to deposit, transfer and withdraw both cryptocurrencies and fiat currencies, and engage in cryptocurrency trading.
Gatecoin itself was also engaged in cryptocurrency trading, including with its own customers. The company was wound up on 13 March 2019, with liquidators appointed on 20 March 2019. By 31 October 2022, over 50 types of cryptocurrencies valued at over HK$140 million were recovered by the liquidators. The liquidators contacted 102,600 creditors, though only 1,132 of them submitted their proof of debt. These creditors were customers with positive account balances on Gatecoin. It was acknowledged that the total value of the cryptocurrencies recovered by the liquidators would not be sufficient to fully reimburse all customers.
Three sets of Terms & Conditions (T&Cs) were relevant to the case: the T&Cs effective:
- Between 28 January 2015 – November 2016 (2016 T&Cs);
- From November 2016 – March 2018 (Trust T&Cs); and
- From 6 March 2018 – 13 March 2018 (2018 T&Cs).
Customers who signed up with the platform during the period when the 2016 T&Cs were in effect referred to as "Group A". Those who signed up when the Trust T&Cs were in place were known as "Group B", while customers who agreed to the 2018 T&Cs were classified as "Group C".
While the 2016 T&Cs did not include provisions to the effect of creating a trust, Gatecoin reserved the right to modify the terms "without prior notice" to customers. In November 2016, Gatecoin introduced the Trust T&Cs, which explicitly stated that customers would have a beneficial ownership interest in the digital assets, and Gatecoin would act as a custodian holding the digital assets in trust. Gatecoin was also obliged to inform customers before making material changes to the terms, and customers were asked to agree to these changes. Starting from 6 March 2018, and continuing until the winding-up order, Gatecoin adopted the 2018 T&Cs, which stated that Gatecoin was not a fiduciary, and customers should not expect to receive additional cryptocurrencies created by any blockchain forks.
Cryptocurrency as Property
The first key question was whether the liquidators even had the authority to realise and distribute the cryptocurrencies in the winding-up process. While Section 197 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) (CWUMPO) stipulates that liquidators must take custody of all "property" upon a winding-up order, "property" is not defined in the CWUMPO. Accordingly, it was necessary for the court to examine the statutory definition of "property" pursuant to section 3 of the Interpretation and General Clauses Ordinance (Cap. 1); as well as the criteria outlined by Lord Wilberforce in National Provincial Bank v Ainsworth  1 AC 1175 (Ainsworth), which include being "definable, identifiable by third parties, capable in its nature of assumption by third parties, and having some degree of permanence or stability”.
The court also reviewed the approach taken by common law jurisdictions such as England and Wales, the British Virgin Islands, Singapore, Canada, the United States, Australia and New Zealand. Justice Chan particularly relied on the New Zealand High Court decision of Ruscoe v Cryptopia  NZHC 728 (Ruscoe), which shared similar facts with the present case.
In Ruscoe, liquidators of a cryptocurrency trading exchange sought directions from the court regarding the nature of cryptocurrency and whether it could be subject to a trust. After considering the criteria discussed in Ainsworth, the court concluded that a cryptoasset is a form of property.
Justice Chan agreed with the analysis in Ruscoe, and held that the definition of property is broad enough to include cryptocurrency, even if it cannot be strictly classified as either a chose in possession or a chose in action.
In particular, the court relied on the following reasoning in reaching its decision (at ):
“(1) It is definable as the public key allocated to a cryptocurrency wallet is readily identifiable, sufficiently distinct and capable of being allocated uniquely to individual account holder (§§104-108).
(2) It is identifiable by third parties in that only the holder of a private key is able to access and transfer the cryptocurrency from one wallet to another (§§109-113).
(3) It is capable of assumption by third parties in that it can be and is the subject of active trading markets where (a) the rights of the owner in that property are respected, and (b) it is potentially desirable to third parties such that they want themselves to obtain ownership of it (§§114-116).
(4) It has some degree of permanence or stability as the entire life history of a cryptocurrency is available in the blockchain (§§117-119)”,
The court therefore concluded that cryptocurrencies were a form of property that could be held on trust.
Construction of Terms & Conditions
Notwithstanding the court’s determination that cryptocurrencies could be held on trust, the second question was whether Gatecoin had in fact held the cryptocurrencies on trust for its customers, giving customers a proprietary claim over the cryptocurrencies.
Whether a trust has been created turns on whether the “three certainties” have been fulfilled – subject matter, object and intention.
The court found there was certainty of subject matter by likening cryptocurrencies to shares – where the absence of a beneficiary’s ability to appropriate a specific part of the fungible mass would not invalidate a trust as long as the proportionate share of the beneficiary is able to be clearly demarcated, such as a ledger used to record a customer's corresponding contribution.
Similarly, the court found that certainty of object was similarly fulfilled by the same ledger which recorded the list of beneficiaries and their claim over the trust assets.
The biggest issue lay with the certainty of intention, and whether the 2018 T&Cs, which expressly disclaimed a trust arrangement, applied.
The liquidators argued that both the assets in the accounts of Group A and B customers were held on trust since:
- The Trust T&Cs superseded the 2016 T&Cs that Group A customers had agreed to, and hence applied in place of the 2016 T&Cs;
- Group B customers opened their accounts when the Trust T&Cs was in effect;
- The digital assets of Group A and Group B customers were considered trust property when the Trust T&Cs were in effect;
- The Trust T&Cs explicitly stated that customers would have a beneficial ownership interest in the digital assets; and
- Gatecoin was obliged under the "Trust T&Cs" to inform customers before making material changes to the terms, but Gatecoin failed to do so before it implemented the 2018 T&Cs.
However, the court focused on the intention of the parties as "ascertained by an objective assessment of the terms of the agreement or relationship (between the parties) with reference to that property", and found that both Group A and Group B customers must have agreed to the 2018 T&Cs in order to continue their access to the Gatecoin platform.
Accordingly, the court held that the “contractual bargain reached between the parties” (i.e. 2018 T&Cs) should not be ignored, and that Group A and B customers should not be allowed to rely on the terms of the Trust T&Cs.
In essence, all three groups of customers, save for those who did not access or use the platform during the period when the 2018 T&Cs were implemented up to the date of liquidation, were therefore governed by the 2018 T&Cs. Since the 2018 T&Cs expressly disclaimed a trust arrangement, Group A, B and C customers were only found to have contractual claims against Gatecoin.
Comments and Takeaways
The case highlights the attempt by Hong Kong courts to fit cryptocurrencies into the framework of traditional property law through the application of existing legal principles. Although cryptocurrencies may not fit neatly within the traditional classification of "property", they possess characteristics of intangible property similar to stocks and shares, which was reflected in their treatment in Re Gatecoin.
Additionally, the case demonstrates the court's willingness to recognise cryptocurrency exchange platforms as trustees, and impose fiduciary duties on them.
This development aligns with the recent recommendations by the Hong Kong Securities and Futures Commission for virtual asset exchanges to protect client assets by holding them on trust, and to separate these assets from their own property.
Platform users, potential investors of cryptocurrency platforms, and cryptocurrency platform operators should therefore take note of how the Terms & Conditions of the cryptocurrency platforms are drafted and carefully consider the ramifications on their rights in relation to cryptocurrencies held by the platform or debts owed by the platform.
Furthermore, while not directly in issue, the court, in finding that the Group A and Group B customers had accepted the 2018 T&Cs by “click[ing] to acknowledge and accept the 2018 T&C before they could continue to access and use [the Platform]”, affirmed the enforceability of clickwrap contracts in Hong Kong.
Re Gatecoin has provided valuable clarity on the legal status of cryptocurrency as property, and the implications for trust arrangements surrounding cryptocurrencies. The case sheds light on the evolving legal landscape surrounding cryptocurrencies, and sets a precedent for future cases in Hong Kong and beyond.
The authors would like to thank Sabrina Chow, Trainee Solicitor at Mayer Brown, for her assistance with this Legal Update.