Ruscoe & anr v Cryptopia Ltd [2021] WTLR 965

WTLR Issue: Autumn 2021 #184

1. DAVID IAN RUSCOE

2. MALCOLM RUSSELL MOORE

V

CRYPTOPIA LTD (IN LIQUIDATION)

Analysis

The defendant company was formed as a cryptocurrency trading exchange platform based in New Zealand in 2014. It enabled users to register as account holders, make deposits and carry out trades of various types of digital assets for which the company charged fees. The initial deposit would be made into a ‘hot wallet’ connected to the internet for which there was a public key. When not required to meet withdrawal requests, the deposit would be transferred to a ‘cold wallet’ which was not connected to the internet and for which there was a private key, similar to a password, known only to the account holder. When a trade occurred between two users on the exchange, their respective balances on the company’s internal ledger would change to reflect the trade and the transactions were recorded in its internal structured query language database (‘SQL database’).

The defendant’s operations were initially reasonably modest, having attracted some 30,000 users in the period up to early 2017. The number of users expanded exponentially when the price of bitcoins – a unit of account for a popular cryptocurrency known formally as Bitcoin – more than trebled between November 2017 and January 2018. At that point in time, the number of users were well in excess of 900,000, most of whom were from outside New Zealand. Unfortunately, as a result of a successful hacking of the servers used by the defendant, 14% of its cryptocurrency was stolen, valued at around NZ$30m. Soon afterwards, the defendant’s shareholders resolved to place the company into liquidation, in May 2019. It was estimated that the defendant was left with cryptocurrency worth about NZ$170m. Questions arose as to the legal status of the digital assets held by the defendant and in particular whether those digital assets were held on trust for the account holders. In order to resolve what was essentially a tussle between the creditors of the company on the one hand and the account holders on the other, the applicant liquidators applied to the court for directions pursuant to s284(1)(a) of the New Zealand Companies Act 1993.

Held (providing answers to the questions raised by the liquidators):

There was no doubt that the digital assets held on the company’s exchange constituted a species of intangible personal property within the meaning of s2 of the Companies Act 1993. This was supported to some extent by existing authority and there was a wide range of types of assets which by way of analogy had been recognised elsewhere as ‘property’, such as choses in action, debt claims, electronic bank payments, copyright, shares, licences and quotas, and rights of indemnity. The digital assets met the standard four criteria to be considered a species of ‘property’ as outlined by Lord Wilberforce in National Provincial Bank Ltd v Ainsworth [1965]: the cryptocurrency data recorded in the computer network was sufficiently distinct to be capable of being allocated uniquely to an account holder and therefore its subject matter was definable; the degree of control necessary for ownership meant that the assets were identifiable by third parties through the computer software system of public and private keys; the assets were capable of assumption by third parties through trading on the platform; and they had the necessary degree of permanence or stability through the use of private keys.

Since the digital assets had been found to constitute ‘property’, there was similarly no doubt that they were capable of forming the subject matter of a trust. In particular, the three certainties required to create a valid trust – of subject matter, objects and intention – existed. The SQL database clearly recorded each relevant cryptocurrency for which a single trust had been created when the first deposit was accepted on the platform. The beneficial co-ownership of the relevant currency was shared by the account holders in proportion to the numbers of relevant cryptocoins that they had each contributed (either initially when new coins were acquired or as a result of trades between account holders). Although it was true that there could be difficulty in identifying some of the account holders, this degree of evidential uncertainty could not defeat a trust once it was established, as in this case, who the beneficiaries of the relevant trusts were as a matter of principle. The defendant had manifested its intention to create valid express trusts through its conduct in creating the exchange. The SQL database that the company had created showed that the defendant was a custodian and trustee of the digital assets. Apart from this, the terms and conditions (as amended) issued by the defendant expressly referred to the company holding the digital assets as bare trustee for the account holders. Authorities such as Re Goldcorp Exchange Ltd (in receivership) [1994] and Quoine Pte Ltd v B2C2 Ltd [2020] were readily distinguishable from the facts in the present case.

In the event that the liquidators were unable to ascertain the identity of any particular account holder, the relevant digital assets fell to be dealt with in accordance with s76 of the New Zealand Trustee Act 1956. In the event that the liquidators recovered stolen property, this should be dealt with pro rata within each specific trust for the relevant digital asset according to the amounts recovered assessed against the amounts stolen.

JUDGMENT GENDALL J: Introduction [1] Cryptopia Ltd (in liquidation) (Cryptopia) was formed in 2014 as a cryptocurrency trading exchange. It had a short but tumultuous history. It was placed into liquidation in May 2019 after suffering a serious hack and the loss of some $30m of cryptocurrency from its exchange. [2] Issues in the liquidation …
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Counsel Details

Scott Barker (Buddle Findlay, Aon Centre, 1 Willis Street, Wellington 6011, New Zealand, tel +64 4 499 4242), Maddie Harris (O’Donoghue Webber, Level 3, AON House, 241 Hardy Street, Nelson 7010, New Zealand, tel +64 3 539 4159; at Buddle Findlay at time of case) and Annie Cao (Buddle Findlay, 83 Victoria Street, Christchurch 8013, New Zealand, tel +64 3 379 1747) for the applicant liquidators.

Jenny Cooper QC and Jane Barrow (Shortland Chambers, Level 13, 70 Shortland Street, Auckland, New Zealand, tel +64 9 309 1769) for the creditors.

Peter Watts QC and Samuel Jeffs (Bankside Chambers, Level 22 Shortland & Fort, 88 Shortland Street, PO Box 1571, Auckland 1150, New Zealand, tel +64 9 379 0802, e-mail reception@bankside.co.nz) for the accountholders.

Cases Referenced

  • AA v Persons Unknown & ors [2019] EWHC 3556 (Comm)
  • Armstrong DLW GmbH v Winnington Networks Ltd [2012] EWHC 10; [2013] Ch 156
  • Attorney General of Hong Kong v Nai-Keung [1987] 1 WLR 1339
  • B2C2 Ltd v Quoine Pte Ltd [2019] SGHC(I) 3; [2019] 4 SLR 17
  • Boardman v Phipps [1966] UKHL 2; [1967] 2 AC 46
  • Carter Holt Harvey Woodproducts Australia Pty Ltd v Commonwealth [2019] HCA 20; (2019) 368 ALR 390
  • Chapman v Effective Fencing Ltd HC Auckland CIV – 2004 – 404 – 5905, 21 April 2005
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  • Colonial Bank v Whinney (1885) 30 Ch D 261
  • Commissioner of Police v Rowland [2019] NZHC 3314
  • Commonwealth of Australia v WMC Resources Ltd (1998) 194 CLR 1
  • Dixon v R [2015] NZSC 147; [2016] 1 NZLR 678
  • Finnigan v Yuan Fu Capital Markets Ltd (in liquidation) [2013] NZHC 2899
  • Goldcorp Exchange Ltd (in receivership) & ors v Liggett & ors [1994] UKPC 3
  • Gwinnutt v George & anr [2019] EWCA Civ 656; [2019] Ch 471
  • Henderson v Walker [2019] NZHC 2184
  • Levin v Ikiua [2010] NZCA 509; [2011] 1 NZLR 678
  • McIntosh v Fisk [2017] NZSC 78; [2017] 1 NZLR 863
  • Money Markets International Stockbrokers Ltd v London Stock Exchange Ltd [2002] 1 WLR 1150
  • National Provincial Bank v Ainsworth [1965] UKHL 1; [1965] AC 1175
  • Pearson & ors v Lehman Brothers Finance SA & ors [2010] EWHC 2914 (Ch)
  • Quoine Pte Ltd v B2C2 Ltd [2020] SGCA(I) 02
  • Re Baden’s Deed Trusts (No. 2) [1972] EWCA Civ 10; [1973] 1 Ch 9
  • Re Harvard Securities Ltd (in liquidation) [1997] EWHC Comm 371; [1997] 2 BCLC 369
  • Russell-Cooke Trust v Prentis & ors [2003] EWHC 1206 (Ch)
  • Shair.Com Global Digital Services Ltd v Arnold (2018) BCSC 1512
  • Swift v Dairywise Farms Ltd [2000] 1 WLR 1177
  • Vorotyntseva v Money-4 Ltd & ors [2018] EWHC 2596 (Ch)
  • Your Response Ltd v Datateam Business Media Ltd [2014] EWCA Civ 281; [2015] QB 41

Legislation Referenced

  • Companies Act 1993 (New Zealand), ss2, 129, 237, 248, 253, 284, 292 and 313, Sch 7
  • Crimes Act 1961 (New Zealand), s2
  • Criminal Proceeds (Recovery) Act 2009 (New Zealand), s5
  • Property Law Act 2007 (New Zealand), s4
  • Trustee Act 1956 (New Zealand), s76