A recent High Court judgement, following an application for directions by the liquidators of Cryptopia Limited (in liquidation), has brought some much needed clarity on the legal status of cryptocurrency. While many questions remain as to the legal and regulatory framework governing cryptocurrency, the High Court’s decision that it does constitute property and, therefore, in this case, was capable of being held on trust for account holders, brings greater certainty not just to the creditors and accountholders of Cryptopia, but also to others looking to invest in cryptocurrency.

Background

Cryptopia operated a cryptocurrency trading exchange. Founded in 2014, it developed gradually with around 30,000 account holders by early 2017. After the explosion in the value of Bitcoin, though, it grew massively until it had in excess of 900,000 account holders worldwide. Its fall into liquidation in 2019 was similarly dramatic, after a serious hack leading to the loss of NZ$30 million worth of cryptocurrency from its exchange.

Even after the hack, Cryptopia’s liquidators have estimated that Cryptopia currently holds cryptocurrency worth around NZ$170 million. The recent court case concerned how to deal with these assets.

The main questions that the liquidators put to the High Court in their application for directions were:

• Does cryptocurrency qualify as ‘property’; and

• If so, was the cryptocurrency held by Cryptopia held in trust for its account holders?

The answers to these questions not only affect how the cryptocurrency held by Cryptopia will be distributed, but also contribute to our growing understanding of how cryptocurrency will be treated by the courts.

Is cryptocurrency property?

While it might seem obvious that cryptocurrency would be considered property, legal systems around the world have struggled with its categorisation, given that it does not fit easily into any of the recognised categories of property and that information itself is not generally considered to be property. It is therefore welcome that the High Court reached a firm decision that cryptocurrency is a form of intangible personal property. This decision was made with reference to the wide definition of ‘property’ at section 2 of the Companies Act and also to previous cases that have considered the categorisation of other assets such as money.

The main implication of the debate in the context of this case was that, if cryptocurrency is not property, it is not capable of being subject to a trust. However, the decision also clarifies the position in relation to insolvency law, succession law and commercial law more generally. 

Was the cryptocurrency held in trust for its account holders?

The High Court ultimately decided that the cryptocurrency remaining in Cryptopia’s accounts was held in trust for the account holders. In reaching this conclusion, it looked at the operating practices of Cryptopia, how it had marketed itself to account holders and the terms and conditions in place at various times. Of particular importance was the fact that account holders brought their own currency on to the platform to make it available for exchange. Cryptopia acted as a platform for the exchanges but did not hold the currency as part of its assets (apart from the currency traded on its own account).

The consequence of this decision is that only account holders are entitled to recover the remaining cryptocurrency on Cryptopia’s insolvency. If the High Court had decided that the cryptocurrency was not held in trust, it would simply be considered an asset in the liquidation to be distributed amongst all creditors.

Where to from here?

Confirmation that cryptocurrency is ‘property’ as defined in the Companies Act is welcome. While the judgement does not have the authority of a Court of Appeal or Supreme Court decision, it will give more comfort to those using or trading in cryptocurrencies in New Zealand. We do, though, expect the issue of regulation of cryptocurrency to remain a live one for some time to come.

This decision also serves as a reminder, from the point of view of both platform owners and investors, of the importance of being clear as to the terms on which investments or deposits are being made. As always, we recommend seeking legal advice at an early stage so that comprehensive terms and conditions are put in place and questions such as in this case do not require to be considered by a court.

A copy of the decision is available here. If you are interested in any of the issues discussed in this article, please get in touch with the authors of this article, who would welcome the opportunity to discuss your situation with you.