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Security tokens: a new class of crypto assets
The tenth anniversary of the first ever BitCoin transaction will fall in April 2020. Not many people are using cryptoassets for everyday transactions, such as a takeaway pizza order, and as such, Satoshi Nakamoto’s vision of a stateless peer to peer electronic currency is yet to be realised. However in the last few years cryptoassets have certainly entered the public consciousness, even if that does mostly relate to the huge spike in the value of BitCoin in December 2017.
2019 saw cryptoassets and their legal status discussed by the Singaporean and English and Welsh Courts with the conclusions of those Courts endorsed in the Legal Statement on cryptoassets and smart contracts produced by the UK Jurisdiction Taskforce.
The judgment given by the Singapore International Commercial Court in B2C2 Ltd v Quoine Pte Ltd was published following a hearing at the end of 2018. I wrote about that decision with my Corporate colleague Luke Gregory in Do androids dream of electric sheep? focussing on the issue of how mistakes can occur in respect of contracts where computer automated processes are involved.
However, for crypto-watchers the key take-away from that case was the approval by the Court of the position adopted by both parties that cryptoassets constitute property which could be held on trust.
At paragraph 142 of the Judgment Simon Thorley LJ stated that cryptoassets
do have the fundamental characteristics of intangible property as being an identifiable thing of value”
as well as confirming that they met the requirement of a classic definition of a property right set out in National Provincial Bank v Ainsworth namely that they are definable, identifiable by third parties, capable in their nature of assumption by third parties and have a degree of permanence or stability.
Building on the precedent of CMOC Sales & Marketing Limited v Persons Unknown came Robertson v Persons Unknown in which an asset preservation order was made over BitCoin which had been stolen from the Claimant and transferred to an address which was recognised as a cryptoasset exchange. Not only were most of the BitCoin frozen in the hands of the exchange, but they were also recovered by the Claimant.
The fact that a large proportion of the stolen BitCoin were transferred to an exchange (Coinbase) was to a great extent what allowed the Claimant to freeze and recover his assets as it provided an identifiable entity as the controller of the wallet holding those assets. Further, the fact that the entity controlling the wallet was a UK incorporated company gave the Courts of England and Wales reason to accept jurisdiction and meant there was a realistic prospect of enforcing an order for the transfer of the BitCoin (had that been necessary).
Another novel aspect of this case was the use of a specialist blockchain analysis company (Chainalysis). Although Coinbase acknowledged that it controlled the wallet into which the stolen BitCoin had been transferred, the analysis by Chainalysis assisted in showing that the BitCoin had been transferred there. This demonstrates the potential need for specialist involvement when tracing cryptoassets. It will be interesting to see how much blockchain analysis grows as a specialist industry and how soon it is before expert opinion on this becomes a familiar sight in the High Court.
One of Mrs Justice Moulder’s concerns in granting the asset preservation order was was the lack of precise information about the recipient of the BitCoin and whether they might have been planning to use those BitCoin for legitimate business interests. This is a rather strange concern in circumstances in which a cross undertaking in damages could have been given, and in an environment in which very few parties use cryptoassets for anything other than their trading and the acquisition of value rather than, for example, using them to purchase assets such as vehicles, or for the payment of rent on premises.
Mrs Justice Moulder stopped short of making a freezing injunction over the First Defendant’s assets generally in respect of the balance of the stolen BitCoin (i.e. those which had not been transferred into the CoinBase wallet), although she adjourned that application rather than dismissing it. One of her concerns was the lack of information about the apparent fraudster, although this goes somewhat against the run of play when considered in light of the other ‘persons unknown’ cases dealt with by the Courts this year. It also seems to require a high level of knowledge about a respondent before a freezing order could be made, which is perhaps unrealistic in cases involving cyber-crime where the perpetrators are and may always be unknown and unnamed parties.
My summary of the end of 2019 starts with something of a red herring by way of the publication of the decision of Mr Justice Birss in Vorotyntseva v (1) Money-4 Limited t/a Nebus.com (2) Sergey Romanovsky (3) Konstantin Zaripov. I call this a red herring not because the case is not interesting and relevant to this summary, but because it was in fact heard in September 2018 and therefore throws my timeline a little. The delay in publication was simply because the parties did not want to publicise the orders made.
The case involved an application for a freezing and proprietary injunction on short notice over cryptoassets held in a wallet with the first respondent. There was no dispute between the parties that the cryptoassets held in the wallet belonged to the applicant, nor that the assets constituted property which could be subject to the jurisdiction of such injunctions. This view was endorsed by Mr Justice Birss who was satisfied that the Court could make such orders.
The final crypto-related event I want to mention was the launch of the legal statement on cryptoassets and smart contracts on 18 November 2019. The purpose of the statement was to answer a number of legal questions relating to cryptoassets and smart contracts in a bid to provide a little more legal certainty about how the law should approach them. In short and perhaps unsurprisingly given the recent Court decisions discussed above, the authors of the statement concluded that cryptoassets “have all the indicia of property” and should therefore be treated as such. Whilst the statement has no legal status in and of itself, it would likely be a brave judge who chose to ignore the conclusions reached.
Does the use of Chainalysis in Robertson herald the start of the Court’s recognition of a new specialist area in which expert evidence is required? It will be interesting to see whether 2020 will see complex technical explanations about issues such as the ‘clustering’ of addresses in order to identify the controller of a wallet being heard by the Courts. Had Coinbase not accepted that it controlled the wallet into which Mr Robertson’s BitCoin had been transferred an explanation would have had to be given of how (a) Mr Robertson knew the wallet to which his BitCoin had been transferred and (b) he could tell with some certainty that the wallet was a Coinbase wallet.
Facebook’s cryptoasset Libra is set to launch in 2020. Whilst its press has been far from positive, its status as a ‘stablecoin’ (i.e. a cryptoasset backed by audited reserves) may make it more palatable for users for whom BitCoin and its ilk feel are too risky or too volatile to adopt.
Likewise the BVI will be launching its own cryptoasset which will also be a stablecoin, pegged to the US dollar. The stated aim is to reduce fees, increase transaction speed and help to build the BVI’s status as a financial hub. It remains to be seen whether those aims are met.
And perhaps 2020 will be the year when we discover whether OneCoin was anything more than the elaborate Ponzi scheme portrayed in the admission of the founder’s brother, provided as part of his plea deal in response to multiple charges including money laundering offences.
Only time will tell...
Mary Young is a partner in Kingsley Napley’s Dispute Resolution team. Her practice covers a wide range of areas but Mary’s particular interests and expertise lie in civil fraud and asset tracing as well as claims against professionals in negligence, breach of fiduciary duty and breach of trust.
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