Navigating Hong Kong’s Dynamic Legal Landscape of Cryptocurrencies and Digital Assets
Hong Kong's Court of First Instance made a groundbreaking decision on March 31, 2023, declaring cryptocurrencies as "property" under Hong Kong law, and hence, subject to trust laws. This latest development marks a significant milestone in Hong Kong's ambitious plan to establish itself as a global digital asset hub. Moving from the grant of interlocutory proprietary injunctions over bitcoins held in an insolvent trading platform in 2019, to recognition of the proprietary nature of cryptocurrencies albeit it being the “novel kinds of intangible assets”.
Author: Erica So, Trainee Solicitor
Why Should You Care?
The classification of cryptocurrencies as "properties" may not initially seem significant to the vast number of tech-savvy and risk-tolerant investors. However, the importance becomes evident when the question arises about the recoverability of these digital assets held in investor accounts, particularly in challenging times when the cryptocurrency firms managing these accounts face liquidation.
The crucial decision lies in determining whether cryptocurrencies qualify as property and can be held in trust for the account holders. This decision, in turn, determines whether the digital assets can be returned to the account holders or distributed among the creditors as deemed appropriate by the liquidators. Ultimately, the outcome can significantly impact the rights and interests of cryptocurrency investors during the liquidation process.
However, it is important to note that in this significant 2023 legal precedent, the Court did confirm that cryptocurrencies are indeed considered as assets and can be held in trust. Nonetheless, it is crucial to understand that the question of whether they are always held in trust is distinct and requires separate deliberation.
Are those cryptocurrencies in fact held on trust?
Linda Chan J acknowledged that, that “like other common law jurisdictions, our definition of ‘property’ is an inclusive one and intended to have a wide meaning.” Drawing from the reasoning employed in other jurisdictions, the Court determined that cryptocurrencies fulfill the requirements for being considered "property" due to their definability, identifiability by third parties, potential assumption by third parties, involvement in active trading markets, and possession of a certain degree of permanence or stability. Consequently, it is deemed appropriate to regard cryptocurrencies as subjects eligible for trust arrangements.
However, when it comes to determining whether Gatecoin Limited (“Gatecoin”), the company under liquidation, actually held such cryptocurrencies on trust. It is essential to fulfill the fundamental principles of (1) certainty of subject matter and (2) certainty of object. Additionally, the Court must ascertain the presence of an unmistakable intention to establish a trust over the cryptocurrencies held by Gatecoin. Unfortunately, Linda Chan J. ultimately concluded that the requisite certainty of intention was lacking, leading to the rejection of the notion that Gatecoin held the cryptocurrencies on trust.
The absence of trust arises from the fact that the most recent terms and conditions between Gatecoin and its customers do not establish any provisions that would create a trust for the customers regarding their cryptocurrencies. This includes a clear disclaimer of any fiduciary relationship and the absence of any obligation to separate the customers' deposited cryptocurrencies, allowing them to be transferred and combined with those already present in Gatecoin's main wallets.
How would the ruling affect the legal status of cryptocurrencies in Hong Kong?
The court's ruling that cryptocurrencies are considered "property" under Hong Kong law and can be held in trust carries significant implications for various reasons. Primarily, it provides increased legal certainty for individuals and entities involved in cryptocurrencies and digital assets, as it confirms their enforceable rights under the common law system in Hong Kong. Consequently, this grants them the ability to pursue legal remedies, such as seeking injunctions and damages, in the event of disputes or breaches of trust involving cryptocurrencies.
Furthermore, this ruling brings Hong Kong's legal framework for digital assets in line with other common law jurisdictions like England and Wales, the BVI, Singapore, Canada, the United States, Australia, and New Zealand, where courts have similarly recognized cryptocurrencies as properties. It establishes a more consistent and predictable legal structure for cross-border transactions involving cryptocurrencies and digital assets.
Lastly, the ruling sends a clear message to the global digital asset industry that Hong Kong is dedicated to providing a supportive and stable legal environment for digital assets. By bolstering the legitimacy of the industry, it has the potential to attract additional investment and talent to Hong Kong's digital asset ecosystem, thereby fostering innovation and facilitating growth in the sector.
Disclaimer: This publication is general in nature and is not intended to constitute legal advice. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.
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