Monday 3 August 2020

New Zealand High Court decides cryptofunds are property

In New Zealand’s first significant cryptocurrency case, Ruscoe & Moore v Cryptopia, the High Court in April 2020 found cryptocoins constituted property and that cryptocoins held by a cryptocurrency exchange were held on trust for the benefit of its account holders.

Facts

Cryptopia, a cryptocurrency exchange company located in Christchurch, was set up in 2014 to facilitate trading between pairs of cryptocurrencies. Its number of account holders expanded exponentially from November 2017 when the value of bitcoins trebled. Cryptopia was hacked in January 2019 and lost account holders’ cryptocurrencies totalling $NZ30 million—about 15% of its total cryptofund holdings. The company was liquidated in May 2019 and the liquidators sought a judgment on the legal status of cryptocurrencies and whether Cryptopia’s cryptocoins were property held in trust for its over 900,000, mostly overseas, account holders. In practical terms, the Court would decide the financial position of the exchange’s account holders as against its general creditors.

Cryptopia had online wallets for each cryptocurrency, physically hosted on servers located in the USA. Cryptocurrency trades outside the exchange involved Cryptopia (not the account holder) creating transactions on the blockchain for the cryptocurrency in question. Cryptopia was the participant on each blockchain and held the relevant private and public keys—not the account holders.

The decision

Justice Glendall expressed the prime legal issue as: did the cryptocoins held by Cryptopia when it was liquidated constitute ‘property’ so as to be capable of being the subject matter of a trust whose beneficiaries were the account holders?

The New Zealand Companies Act defines ‘property’ as ‘property of every kind whether tangible or intangible, real or personal, corporeal or incorporeal, and includes rights, interests, and claims of every kind in relation to property however they arise.’ New Zealand courts have always accepted this definition includes ‘money’.

Accepting cryptocurrencies were intangible, the question remained whether they constituted property. Glendall J reviewed New Zealand cases dealing with digital subject matter that she considered, like cryptocurrency, to be right at the boundaries of the legal concept of ‘property’.

The first and most significant was the New Zealand Supreme Court’s 2015 decision in Dixon v R on the alleged taking of property under the computer misuse provisions of the Crimes Act where Dixon had, without authority, made and physically taken away a copy of a bar’s digital CCTV footage containing scenes of potential interest to UK scandal sheets. While the Supreme Court acknowledged decisions of UK courts that information as such did not constitute property, it decided, somewhat controversially, that a digital file of CCTV footage was more than mere information and did constitute property that could be stolen. Glendall J, having decided cryptocurrencies were digital files, sought to rely at least in part on Dixon as a supporting authority for cryptocurrencies to be property.

Glendall J then adopted a House of Lords 1965 decision where Lord Wilberforce had set out the criteria for ascertaining if a given subject matter could constitute personal property. Namely, was the subject matter in question (i) definable, (ii) identifiable by third parties, (iii) capable of assumption by third parties and (iv) did it have some degree of permanence. Glendall J decided cryptocurrencies such as bitcoin met these four criteria.

Glendall J nevertheless felt that, despite having made this decision, she should revisit the information (no property) versus digital files (property) argument. She concluded that argument could be put aside because ‘… cryptocurrencies are far more than merely digitally recorded information.’

Comment

It is suggested that Glendall J’s decision that cryptofunds are personal property is appropriate. However, reflections on the digital file or bottom level of the abstraction hierarchy for cryptocurrencies is something of a red herring. It is what the content (represented digitally) happens to be, along with its function, that should be used for determining such things as property status and ownership.

It is suggested that the best approach to understanding cryptocurrencies for the purpose of legal analysis is to focus on the structure of cryptocurrency transactions. The only data permanently stored in each cryptocurrency’s distributed (shared) ledger is each and every transaction between one participant and another in that cryptocurrency. There are no accounts and no balances stored. The ‘output’ of each transaction is an amount in cryptocoins digitally attached to a uniquely identified recipient. Together, all such transaction amounts, which are as yet unspent by each such recipient, constitute the cryptocurrency.     

Putting that issue aside, this pioneering judgment on the legal nature of one species of pure intangibles raises the prospect that the long-awaited decision that computer programs constitute personal property might be made by a New Zealand court rather than one in the UK or Australia.