A Hong Kong court has granted an injunction freezing the assets of a French cryptocurrency trader in a dispute over what happened to bitcoins held in an insolvent trading platform. In Nico Constantijn Antonius Samara v Stive Jean Paul Dan  HKCFI 2718, the Court found the plaintiff had made out a good arguable case that the bitcoin assets valued at up to US$2.7 million should be preserved in the face of competing claims to ownership.
A bit of a muddle
The plaintiff was a Dutch citizen living in Curaçao who said he came to Hong Kong in June 2017 to ask the defendant to sell 1,000 bitcoins as his agent in return for a 3% commission. As the plaintiff was not resident in Hong Kong, he agreed that the bitcoins should be deposited into the defendant's bank account in Hong Kong, from where the funds would be transferred to the plaintiff's bank account in Germany. According to the plaintiff, the defendant gave him access to the bank account by providing him with login details and the security token, so that the plaintiff could then make funds transfers to his account in Germany.
The plaintiff transferred some of his bitcoins into the defendant's bitcoin wallet at Gatecoin, a cryptocurrency exchange, so they could be traded by the defendant. Gatecoin Limited had suffered a major security breach in May 2016 with around US$2 million said to have been lost. The arrangement was that the proceeds of sale would be transferred to the defendant's bank account.
The plaintiff said he noticed from around 14 September 2017 that the money in the defendant's bank account had been placed on time deposit and could not be transferred. From November 2017, the plaintiff said he had been unable to access the account online at all. Allowing for one payment that had been made, he claimed the defendant owed him US$2,597,639.
On 23 February 2018, Gatecoin's CEO informed the plaintiff that 40 bitcoins remained in the wallet but that he would need a legal basis for blocking the account for an extended period of time. Gatecoin Limited went into compulsory liquidation in March this year, with both the plaintiff and the defendant lodging competing proprietary claims over 45.088883 bitcoins in the Gatecoin account.
In making the application, the plaintiff argued that the defendant's fraudulent intention was evidenced by the fact that according to French authorities, he was using multiple passports and different names and without an injunction, the defendant would be in a position to dissipate monies in the bank account as well as in the Gatecoin account in the event of any distribution by the liquidator. As the liquidator was the account holder, the plaintiff argued the liquidator would be more likely to accept his claim rather than the plaintiff's.
Bitcoins? What bitcoins?
The Court noted the plaintiff's difficulty in proving ownership to some of the bitcoins in the first place. He was only able to produce records showing the transfer of 275 bitcoins but was unable to show evidence showing the transfer of a further 175 as he no longer had the wallet containing the records.
In evidence, the plaintiff said that, "A bitcoin wallet can only be accessed by inserting a seed (which is a random 12-word phrase), which is only known to the owner. Thus, the ownership of the bitcoin wallet is asserted by possession of the seed. By not keeping the empty bitcoin wallet, it means that I no longer keep or remember the seed which is vital in accessing or restoring the old or empty bitcoins wallets".
The defendant refused to accept this explanation, saying that a public record of the transaction would still be searchable if the plaintiff were in possession of any of the following: (i) the seller's public key to his bitcoins wallet; (ii) the buyer's public key; (iii) the transaction 'hash' (a function that converts an input of letters and numbers into an encrypted output of a fixed length); or the time, volume and quantity of the bitcoins transacted.
Searching for clues
As for the 275 bitcoins that both parties agreed were transferred, the Court said the only questions were in respect of the amounts payable and whether they were paid. The defendant denied that he ever acted or agreed to act as agent for the plaintiff. The defendant pointed to a lack of contemporaneous material in terms of texts, emails or other communications at the time of the trades that went to undermine the plaintiff's claims of agency.
The Court however made a similar criticism of the defendant who had not provided supporting evidence of cash payments made to the plaintiff. Especially troubling, was a table produced to the Court by the defendant which appeared to show duplicate bank transaction references in respect of payments supposedly made.
The Court considered that the plaintiff did have a good arguable case on his claim, that there were assets within the jurisdiction and that there was a real risk they could be dissipated ahead of trial. The defendant had not put forward reasons why the granting of a Mareva injunction should cause him real hardship, and as such, the balance of convenience lay with granting the plaintiff's application.
The court also granted discovery against the defendant, dismissing the defendant's objections that the material sought contained confidential and commercial material involving the privacy of other individuals. The information was relevant to the plaintiff's proprietary claims and would reveal what had happened to the bitcoins.
More on the way
The decision follows a similar case decided in England in September 2019, Vorotyntseva v Money-4 Ltd (t/a Nebeus.com)  EWHC 2596 (Ch), in which the claimant sought a freezing order against the defendant company and its directors. The claimant alleged she had given approximately £1.5 million worth of bitcoins and ethereum cryptocurrency to the defendant for the purpose of testing its trading platform. She likened the relationship between herself and the defendant to essentially one between a client and a bank.
Despite the defendants' producing emails with screenshots from a computer screen purporting to show that the claimant's money was still held by the company, counsel for the claimant said the screenshots did not satisfactorily prove that the bitcoins and ethereum were still in the defendant's possession or control.
The court found that on the evidence before it, there was a real risk of dissipation of assets and granted the application. Significantly, the Court found that there was no suggestion that cryptocurrency could not be a form of property.
Indeed, in its Legal statement on cryptoassets and smart contracts issued last month, the UK Jurisdiction Taskforce considered a number of legal questions arising from its previous Consultation Paper on the status of cryptoassets, distributed ledger technology and smart contracts in English private law (the "UKJT Statement").
The UKJT Statement, prompted by the comments of the Chancellor of the High Court, Sir Geoffrey Vos in his foreword to the Consultation Paper that perceived legal uncertainty was the reason for some lack of confidence amongst market participants and investors, concludes that:
- cryptoassets have all of the indicia of property;
- the novel or distinctive features possessed by some cryptoassets - intangibility, cryptographic authentication, use of a distributed transaction ledger, decentralisation, rule by consensus - do not disqualify them from being property;
- nor are cryptoassets disqualified from being property as pure information, or because they might not be classifiable either as things in possession or as things in action; and
- cryptoassets are therefore to be treated in principle as property.
The UKJT goes on to say: "This is likely to have important consequences for the application of a number of legal rules, including those relating to succession on death, the vesting of property in personal bankruptcy, and the rights of liquidators in corporate insolvency, as well as in cases of fraud, theft or breach of trust".
Taken together, the decisions above illustrate how courts are having to make judgment calls about ownership in circumstances where there may be scant evidence of proof of entitlement and where the parties may disagree about what it takes to establish ownership in the first place.
In the Hong Kong decision, the Court took the view there was something "seriously awry" with the evidence presented, which meant it was only reasonable for it to order the continuation of the status quo until the situation could be untangled at trial. The point as to whether bitcoin does convey a property right that can be enforced at law, may be explored more thoroughly when the case reaches trial.
As interest in cryptocurrencies continues to grow – and as the move from traditional banking relationships to more novel ones intensifies – the questions coming before the courts will only become more regular and complex.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.