Taking stock of the recognition of crypto assets as a form of property by the Singapore courts

The Singapore High Court case of ByBit Fintech Limited v Ho Kai Xin [2023] SGHC 199 (released on 27 July 2023) is revolutionary as it is the first judgment in Singapore to conclusively recognise cryptocurrencies as a form of property. The significance of this decision is that the Court can grant proprietary remedies in respect of cryptocurrencies. Hence, in respect of cryptocurrencies which have been stolen, the High Court in this case imposed a constructive trust over those stolen assets such that the defendant held those assets on trust for the claimant, and the claimant could trace the proceeds of those stolen assets.

This decision is demonstrative of the flexibility of the common law to extend existing principles to assimilate cryptocurrencies (a new asset class) into the general concepts of property. Holders of crypto assets now have greater certainty as to their ownership rights over those assets. Indeed, this decision is not an aberration, but follows a series of three other Singapore judgments which have leaned towards a finding that crypto assets are a form of property. While this issue of whether cryptocurrencies are a form a property has not been definitively determined by the apex court in Singapore (ie, the Singapore Court of Appeal), this case adds to the chorus of cases which paved the way for a more definitive decision by the Court of Appeal at a later time. ?????

?

Facts of ByBit Fintech Limited v Ho Kai Xin [2023] SGHC 199

ByBit (the claimant) owns its namesake cryptocurrency exchange. WeChain provides payroll services for ByBit. Ms Ho (the defendant) was employed by WeChain and was responsible for the payroll processing of ByBit’s employees, who were paid by traditional currency, cryptocurrency, or a mixture of both.

As part of her duties, Ms Ho maintained Microsoft Excel spreadsheets which tracked the cash and cryptocurrency payments due to ByBit’s employees each month (“Excel Files”). The Excel Files list the “Address” (in the form of a unique string of alpha numerals) designated by ByBit’s employees for the receipt of cryptocurrency payments. A corresponding “Private Key” is required to access and authorize transfers between Addresses, and these Private Keys are in turn stored in “Wallets”. Hence, access to a Wallet grants access to the stored Private Key which provide control over an Address and thus the cryptocurrency stored therein.

ByBit discovered certain unusual payments of 4.2 million USDT (“the Crypto Asset”) which have been made to four Addresses (“Anomalous Transactions”). These transactions involve large payments of a crypto asset called Tether. Tether is an example of a stable coin. By this it is meant that its issuer represents that it backs each stable coin issued with an equivalent value in fiat currency. For the case of Tether, it is linked to United States Dollars. Hence, Tether is commonly referred to as United States Dollar Tether (USDT).?

ByBit commenced action against Ms Ho, and secured interim relief, including a worldwide freezing order against Ms Ho and a proprietary injunction in respect of the USDT in the four Addresses.

Ms Ho’s defence was that even though the Crypto Asset belonged to ByBit, her cousin (“Jason”) accessed her work laptop without her knowledge and transferred the Crypto Asset to the four Addresses which were owned and controlled by Jason alone.

ByBit applied for summary judgment against Ms Ho on the basis that it has proven a prima facie case against Mr Ho, and Ms Ho had no defence to the claim. ByBit made the following submissions:

1. Jason was an outright fabrication because Ms Ho had no evidence supporting Jason’s existence and her version of events was inherently implausible. Contemporaneous with the Anomalous Transactions, Ms Ho also engaged in a suspicious luxury spending spree, spending approximately S$360,000 on a new car, S$30,000 on Louis Vuitton products, and purchased a penthouse valued at approximately S$3.7m. Moreover, disclosure of information from the service provider of the Wallet for one of the four addresses revealed that Ms Ho owned that Wallet.
2. The Crypto Asset was property capable of being the subject matter of a trust because it comprised of choses in action.
3. Ms Ho held the Crypto Asset as constructive trustee, or alternatively, that Ms Ho was unjustly enriched.

?

Issues to be determined

The High Court had to decide these 2 issues:

1. whether USDT was property capable of being held on trust (“Issue 1”); and
2. whether ByBit is entitled to summary judgment (“Issue 2”).

?

High Court's decision on Issue 1: USDT was property capable of being held on trust

The High Court held that USDT was property capable of being held on trust. In fact, the High Court appeared to have made a broader ruling that a holder of a crypto asset has in principle an incorporate right of property recognizable by the common law as a chose in action (or thing in action).

First, the High Court held that crypto assets can be defined and identified by modern humans, such that they can be traded and valued as holdings, and they satisfied the 4 criteria for property: (a) definable; (b) identifiable by third parties; (c) capable in its nature of assumption by third parties; and (d) have some degree of permanence or stability (laid down in National Provincial Bank v Ainsworth [1965] 1 AC 1175).?

The reasons are as follows:

1. The Monetary Authority of Singapore (“MAS”) has recently issued a consultation paper on proposed amendments to the payment services regulations that would implement segregation and custody requirements for digital payment tokens. These proposed amendments reflect the reality that it is possible in practice to identify and segregate such digital assets, and hence support the view that it should be legally possible to hold them on trust.
2. General recognition has been given to cryptocurrency as property in Singapore's procedural rules (ie, the Rules of Court). In particular, cryptocurrency has been expressly recognised as a form of property capable of being the subject matter of an enforcement order because Order 22 r 1(1) defines “movable property” to include "cryptocurrency or other digital currency".
3. Crypto assets do manifest themselves in the physical world. In particular, the combination of Private Key with Public Key unlocks the previous cryptographic lock and in turn locks the unspent transaction output of the crypto asset to the holder’s public Address on the blockchain. Even though this physical manifestation at the level of digital bits and bytes is not permanent, and changes with every transaction, we identify what is going on as a particular digital token.
4. While some people are sceptical of the value of crypto assets, value is not inherent in an object, but a judgment made by an aggregate of human minds (which varies with circumstances).

Second, the High Court held that crypto assets can be classified as choses in action. The Court noted that choses in action originated as rights enforceable by action (in the sense of litigation in court) against persons (such as the right to be paid money or debts, or contractual rights), but there is no individual counterparty to the crypto holder’s right. However, over time, the category of choses of action has expended to include incorporeal rights such as copyrights. This shows that the category of choses in action is broad, flexible, and not closed.?

While the terms of service for USDT provide for a contractual right of redemption such that its issuer represents that it backs each USDT issued with an equivalent value United States Dollars (enforceable by way of suit against Tether Limited), the Court noted that this feature was not necessary to its conclusion that USDT is itself a chose in action.??

High Court's decision on Issue 2: ByBit was entitled to summary judgment

The Court granted summary judgment against Ms Ho. The reasons are as follows:

1. From the totality of the evidence, Jason does not exist (or did not play the role asserted for him by Ms Ho).
2. The evidence was indeed compelling that Ms Ho fraudulently transferred the Crypto Asset to herself. There was the direct evidence that Ms Ho owned the Wallet associated with one of the Four Addresses, as well as the circumstantial evidence of her unexplained spending spree.

Accordingly, the Court declared a constructive trust over the Crypto Asset (and other stolen fiat monies), and that ByBit was the legal and beneficial owner of the Crypto Asset. The Court also made various orders against Ms Ho for the payment of money being the value of the Crypto Asset, for a an account to be given by Ms Ho, and for ByBit to trace and recover the Crypto Asset or the proceeds thereof.? ?

?

Analysis & Significance

This judgment is revolutionary as it is the first judgment in Singapore to have conclusively recognised that cryptocurrencies are a form of property. As recognised by the judgment, the courts in Singapore and elsewhere have in granting interlocutory injunctions recognised that there is at least a serious question to be tried or a good arguable case that crypto assets are property capable of being held on trust. In so doing, it has not been necessary in those cases to determine whether such crypto assets are choses in action or are instead a novel type of intangible property. To grant judgment and finally declare a trust, the Court had to go further and decide that the crypto assets in question (ie, USDT) were indeed property capable of being held on trust and, if so, what type of property they are. To that end, the Court held that USDT was property capable of being held on trust, and was a chose in action.

The significance of recognizing cryptocurrencies as a form of property is that the Court can grant proprietary remedies in respect of cryptocurrencies. Hence, in respect of cryptocurrencies which have been stolen, the Court can impose a trust over those stolen assets such that the thief is holding those assets on trust for the claimant, and the claimant can trace the proceeds of those stolen assets. Wider than that, there is theoretically nothing to stop the Court from declaring a constructive trust over cryptocurrencies and crypto assets over a range of situations established in law in relation to more established forms of property, including the following:

• Breach of trust
• Transfer of property subject to a condition
• An acquisition of property due to the fraudulent or unconscionable conduct of the defendant
• Breach of fiduciary duty

Such a proprietary remedy (such as imposing a constructive trust over the cryptocurrencies held by the defendant) is generally superior over an order for monetary compensation. This is because:

1. It gives the claimant priority over the general body of the defendant’s creditors in the event of the defendant’s insolvency. Hence, if the thief becomes insolvent, the claimant can simply point to the stolen cryptocurrencies and claim for the return of those, without having to share those with the other creditors of the thief.
2. Moreover, should the cryptocurrency (or its traceable proceeds) have risen in value from the time of theft to the time of recovery, the claimant’s entitlement is not restricted to the value of the cryptocurrency at the time of theft, but includes the rise in value of the cryptocurrency, or any “profits” made by the traceable proceeds. Hence, where the Crypto Asset was sold by Ms Ho and the proceeds were used by Ms Ho to pay for the penthouse, the Claimant would be entitled to the rise in the value of the penthouse from the time the penthouse was purchased.

This judgment may be regarded as being progressive in recognising cryptocurrencies as a form of property – something which the commercial world has long assumed to be so. Holders of crypto assets now have greater certainty as to their ownership rights over those assets. This decision is demonstrative of the flexibility of the common law to extend existing principles to assimilate cryptocurrencies (a new asset class) into the general concepts of property. Indeed, this decision is not an aberration, but follows a series of three other Singapore judgments which have leaned towards finding that crypto assets are a form of property.

First case of the series: Quoine Pte Ltd v B2C2 Ltd [2020] 2 SLR 20. ?

Quoine was the operator of a cryptocurrency exchange platform (“the Platform”). Quoine also functioned as a market-maker on the Platform by placing buy and sell orders to create liquidity. Quoine conducted its market-making trades through its “Quoter Program”.

B2C2 was a trader on the Platform at the material time. B2C2 traded using its own algorithmic trading software (“the Trading Software”). The Trading Software was designed to function with minimal human intervention, and would always produce the same output given the same input. The inputs to the Trading Software would be used to generate quotes for sale and purchase orders on the Platform. In particular, the inputs were to be the best 20 orders from the Platform. There was also a fail-safe “deep price” of 10 Bitcoin (“BTC”) to 1 Ethereum (“ETH”) built into the algorithm, which would be invoked should input data from the Platform be unavailable.

In 2017, Quoter Program’s failed to generate new orders because of Quoine’s oversight in making certain necessary changes to the Platform’s critical operating systems. This triggered the deep price in the Trading Software to take effect such that B2C2’s sell orders were matched with the buy orders of two other traders (“the Counterparties”). In particular, due to the Quoter Program’s failure to generate new orders, that caused the Platform’s order book to be “abnormally thin” such that the Platform triggered margin calls against the Counterparties and automatically force-closed their positions by placing market orders to buy ETH at the best available price on the Platform (which was B2C2’s deep price sell order).

Hence, 13 trades (“the Disputed Trades”) were concluded between B2C2 (which bought BTC) and the Counterparties (which sold BTC) at a rate of 10 BTC for 1 ETH. These rates were approximately 250 times the then going rate in the market of around 0.04 BTC for 1 ETH. In other words, B2C2 bought BTC at a rate which was 250 times lower than the market price, and the Counterparties paid 250 times more for the ETH it bought from B2C2.

The Disputed Trades were automatically settled by the Platform, with BTC debited from the Counterparties’ accounts and credited into B2C2’s account, and ETH debited from B2C2’s account and credited into the Counterparties’ accounts. When Quoine became aware of the Disputed Trades the next day, it unilaterally cancelled the Disputed Trades and reversed the settlement transactions on the basis that these trades were concluded at highly abnormal rates.

B2C2 commenced proceedings against Quoine alleging that its unilateral cancellation of the Disputed Trades and reversal of the settlement transactions were in (a) breach of contract or (b) breach of trust.

The Singapore Court of Appeal held that Quoine’s unilateral cancellation of the Disputed Trades and reversal of the settlement transactions were in breach of contract (the Irreversible Action Clause) and there was no term (express or implied) in the platform agreement which allowed Quoine to cancel the Disputed Trades. The Court also rejected Quoine’s defences that it was entitled to cancel the Disputed Trades because the relevant trading contracts were void on the basis of unilateral mistake at common law, or unilateral mistake in equity.

On B2C2’s alternative claim based on trust, B2C2 argued that Quoine was holding the BTC which was credited into B2C2’s account pursuant to the Disputed Trades on trust and that Quoine breached that trust when it reversed that credit transaction. This raised the issue of whether cryptocurrency, specifically BTC, was a species of property that is capable of being held on trust.

The Court of Appeal held that no express trust arose over the BTC in B2C2’s account because there was no certainty of intention to create a trust (because the manner in which BTC was stored by Quoine suggests there was no segregation of the BTC). On the issue of whether cryptocurrencies were a species of property, the Court stated that there may be “much to commend” the view that cryptocurrencies should be capable of assimilation into the general concepts of property, but that there remained “difficult questions as to the type of property that is involved”. The Court ultimately found that it was not necessary to come to a final position on this question given that B2C2’s breach of trust claim failed on the basis of the lack of certainty of intention to create a trust.

Therefore, while the Court of Appeal’s passing comments indicated that it was leaning towards finding that cryptocurrencies could be property, it stopped short of ruling on that question. This issue was left open. ????

Second case of the series: CLM v CLN and others [2022] 5 SLR 273

The claimant had stored cryptocurrency (109.83 Bitcoin (“BTC”) and 1497.54 Ethereum (“ETH”)) in two separate digital wallets that were accessible through a free mobile application secured with a password. The wallets employed recovery seeds that could be used to recover the password if the mobile phone was lost or destroyed.

The claimant and seven acquaintances went on vacation at his apartment in Mexico. One night, the claimant and one acquaintance went out while the rest of the group remained at his apartment. As the claimant needed some money, he called one member of the group at his apartment and requested that member to retrieve some cash that he had kept in a safe. The claimant then read the safe combination over the phone. The claimant claimed that some other members of the group were in the same room while two other members were in a nearby bedroom, and they could hear the safe combination being said out loud. This safe contained the recovery seeds for his wallets. The next night, the claimant found that the BTC and ETH were withdrawn from his wallets without his knowledge or consent (the “Stolen Cryptocurrency Assets”).

The claimant then commenced the court proceedings to trace and recover the Stolen Cryptocurrency Assets that were allegedly misappropriated from him by unidentified persons (ie, the first defendant), a portion of which had been traced to digital wallets that were controlled by cryptocurrency exchanges with operations in Singapore (ie, the second and third defendants).

In an application for interlocutory orders pending final determination of the court proceedings, the claimant sought, amongst other things, a proprietary injunction prohibiting the first defendants from dealing with, disposing of, or diminishing the value of the Stolen Cryptocurrency Assets.

In determining this application, the Singapore High Court had to consider whether the Stolen Cryptocurrency Assets, being cryptocurrency, were capable of giving rise to proprietary rights which could be protected via a proprietary injunction (being an interlocutory remedy). The Court referred to the classic definition of a property right in National Provincial Bank Ltd v Ainsworth [1965] AC 1175 (“Ainsworth”) at 1248: “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 Court ruled that cryptocurrencies satisfied the definition of a property right in Ainsworth. In doing so, the Court referred to the New Zealand case of Ruscoe v Cryptopia Ltd (in liq) [2020] 2 NZLR 809 (“Ruscoe”), where the High Court also held that cryptocurrencies satisfied the four requirements set out in Ainsworth to be considered a species of ‘property’. In this regard, the court in Ruscoe examined the four requirements in Ainsworth in turn:

1. The first requirement is that the right must be “definable” – the asset must hence be capable of being isolated from other assets whether of the same type or of other types and thereby identified. To this end, cryptocurrencies are computer-readable strings of characters which are recorded on networks of computers established for the purpose of recording those strings, and are sufficiently distinct to be capable of then being allocated to an account holder on that particular network.
2. The second requirement is that the right must be “identifiable by third parties”, which requires that the asset must have an owner being capable of being recognised as such by third parties. An important indicator is whether the owner has the power to exclude others from using or benefiting from the asset. In this vein, excludability is achieved in respect of cryptocurrencies by the computer software allocating the owner with a private key, which is required to record a transfer of the cryptocurrency from one account to another.
3. The third requirement is that the right must be “capable of assumption by third parties”, which in turn involves two aspects: that third parties must respect the rights of the owner in that asset, and that the asset must be potentially desirable. The fact that these two aspects are met by cryptocurrencies, is evidenced by the fact that many cryptocurrencies, certainly BTC and ETH, are the subject of active trading markets.
4. The fourth requirement is that the right and in turn, the asset, must have “some degree of permanence or stability”, although this is a low threshold since a “ticket to a football match which can have a very short life yet unquestionably it is regarded as property”. In this respect, the blockchain methodology which cryptocurrency systems deploy provides stability to cryptocurrencies, and a particular cryptocurrency token stays fully recognised, in existence and stable unless and until it is spent through the use of the private key, which may never happen.

Since the Court ruled that cryptocurrencies satisfied the definition of a property right in Ainsworth, the claimant was able to prove a serious arguable case that the Stolen Cryptocurrency Assets were capable of giving rise to proprietary rights, which could be protected via a proprietary injunction. The Court reiterated that since this was only an interlocutory application (in contradistinction to a final determination of the merits of the case), the Court did not engage in complex questions of law or fact at this stage of the proceedings.

Third case of the series: Janesh s/o Rajkumar v Unknown Person (“CHEFPIERRE”) [2023] 3 SLR 1191 ?

This case concerns Non-Fungible Tokens (“NFTs”).? The claimant was the owner of an NFT known as the Bored Ape Yacht Club (“BAYC”) ID #2162 (the “Bored Ape NFT”). He was a regular user on “NFTfi”, which was a community platform functioning as an NFT-collateralised cryptocurrency lending marketplace. He would often enter into loan transactions with other users to borrow cryptocurrencies with NFTs as collateral. One NFT he would use as collateral was a Bored Ape NFT.

Because the Bored Ape NFT was extremely precious to the claimant, for every loan transaction in which he used the Bored Ape NFT as collateral, he was careful to state specific terms as part of the loan agreement which ensured that while the claimant was entitled to use the Bored Ape NFT as collateral, lenders whom he transacted with would not be able to take control or claim ownership over the NFT.

The dispute arose out of a loan transaction which the claimant had entered into with the defendant, who went by the pseudonym “chefpierre.eth”. The claimant asked for a short extension of time to repay the loan and the defendant agreed. Two days later, the defendant agreed to the Claimant’s proposal to enter into a refinancing loan – the outstanding amount owed under the current loan would be deducted from fresh funds provided to the claimant. The defendant, however, changed his mind and refused to enter into the refinancing loan, insisting that the current loan be repaid in full. The claimant was caught offguard, and the defendant transferred the Bored Ape NFT which was held in NFTfi’s escrow account into his cryptocurrency wallet. The Bored Ape NFT was later listed for sale on “OpenSea” (an online NFT marketplace). The claimant sued the Defendant, and also took out an application for a proprietary injunction (which is an interlocutory application pending final determination of the merits of the case) over the Bored Ape NFT.

As part of determining the application for a proprietary injunction over the Bored Ape NFT, the Singapore High Court had to consider whether the Bored Ape NFT, or NFTs in general, were capable of giving rise to proprietary rights which could be protected by an injunction. The Court held that that such NFTs did satisfy the Ainsworth criteria.

1. The first Ainsworth criteria is that the right must be “definable” – essentially, the asset “must hence be capable of being isolated from other assets whether of the same type or of other types and thereby identified”. This requirement was easily fulfilled as the metadata is central to an NFT. It is this metadata which distinguishes one NFT from another.
2. The second requirement is that the “asset must have an owner being capable of being recognised as such by third parties”. Where NFTs are concerned, the presumptive owner would be whoever controls the wallet which is linked to the NFT. Similar to cryptocurrencies, excludability is achieved because one cannot deal with the NFT without the owner’s private key.
3. The third requirement is that “the right must be capable of assumption by third parties, which in turn involves two aspects: that third parties must respect the rights of the owner in that asset, and that the asset must be potentially desirable”. The Court found that these requirements would be met. Firstly, the nature of the blockchain technology gives the owner the exclusive ability to transfer the NFT to another party, which underscores the “right” of the owner. Secondly, such NFTs are clearly the subject of active trading in the markets.
4. The fourth, and final, requirement is that the “right and in turn, the asset”, must have “some degree of permanence or stability”, although this is a low threshold since a “ticket to a football match which can have a very short life yet unquestionably it is regarded as property”. The NFT concerned has as much permanence and stability as money in bank accounts which, nowadays, exist mainly in the form of ledger entries and not cold hard cash.

It should be noted that the High Court in this case has merely found that NFTs in general were capable of giving rise to proprietary rights which could be protected by an interim proprietary injunction, which is an injunction in the interim pending final determination of the merits of the case (whether in the form of summary judgment or in the form of a trial). The High Court did not have to and did not make a conclusive finding that NFTs are a form of property.