Partner, Steven de Lara and Associate Colin Grech discuss the English High Court decision that Bitcoins are property which can be the subject of proprietary injunctions, in Fintech Direct.
Steven and Colin’s article was published in Fintech Direct, 30 March 2020, and can be found here. A version of this article was also published in Law360, 17 April 2020, and in The Investigator, 10 June 2020, and can be found here, and here respectively.
The case of AA v Persons Unknown arose in the wake of an incident where hackers accessed the computer system of a Canadian insurance company, installing malware that encrypted the system. The hackers then demanded ransom to enable the company to decrypt the information. A payment of $950,000 was agreed, to be paid in Bitcoin. The company arranged for 109.25 Bitcoins to be transferred to a wallet provided and the hackers then sent the decryption software to the company.
The Canadian company’s English insurer covered certain cyber-related incidents. It attempted to recover the Bitcoins by hiring consultants who located the Bitcoins at an exchange, discovering that 96 of the 109.25 Bitcoins paid remained in the relevant account. The insurer then commenced proceedings to recover the Bitcoins, on the basis that they were paid under extortion. In the context of these proceedings, among other things, the insurer asked the High Court to grant a proprietary injunction over the remaining 96 Bitcoins.
Before granting a proprietary injunction over the Bitcoins, Mr Justice Bryan had to first consider whether Bitcoins could be considered “property” in law. English law traditionally recognises just two kinds of property: “things in possession” and “things in action”. Things in possession are physical objects. Things in action are rights which can be enforced by a lawsuit, such as rights to enforce debts or inheritances, for example.
However, Bitcoins are neither. They are a virtual currency, which cannot be physically possessed and which doesn’t embody a legal right capable of enforcement by action. However, since only property can be the subject of a proprietary injunction, the insurer had to first persuade the court that Bitcoins could be classified as property in order to recover them.
In deciding the issue, Mr Justice Bryan carefully considered the findings of the UK Jurisdiction Taskforce’s (UKJT) legal statement of November 2019. The UKJT’s legal statement is not in fact a statement of law and is therefore not necessarily binding on the courts. However, Justice Bryan considered it “compelling”, and in light of its detailed and careful consideration as to the proprietary status of cryptocurrencies, he adopted its reasoning. This may be the first instance where a legal statement of this kind has been so strongly endorsed by a judge in legal proceedings.
The court therefore refused to hold that English law recognises no other forms of property except things in possession and things in action. Mr Justice Bryan noted that Bitcoin met the criteria for property set out in case law in that it is definable, identifiable by third parties, is capable in its nature of assumption by third parties and has a degree of permanence. The court therefore endorsed the view that the class of “things in action” could be extended to include all intangible property, as a residual class of things not in possession. The judge found that, even though a cryptoasset was not a “thing in action” on a narrow definition of the term, this did not prevent it being treated as property. The Bitcoins were therefore held to be property and an injunction over them was granted.
This landmark ruling that cryptocurrencies are property will have wide ramifications in the rapidly evolving cryptocurrency markets. Although, Bitcoin first made distributed ledger technology mainstream, it is no longer the ‘cryptocurrency of choice’. Several new “alt-coins” are appearing which possess more refined capabilities, including the ability to process transactions more quickly. Some cryptocurrencies are designed for specific purposes and these can be preferable when conducting specific transactions on certain platforms.
More generally, the High Court ruling may help to boost market confidence in the technology. This may help to provide increased stability in a market where values can rapidly fluctuate. This ruling was made by way of an interim application. It will be interesting to see how this case progresses, and whether orders are made against the Bitcoin exchange to reveal the identity of the account holders. Cryptocurrencies are not, in reality, entirely anonymous as is sometimes thought. They could more accurately be described as pseudonymous. Indeed, many exchanges are required to comply with KYC and AML regulations, which mean that users’ ID verification would be required.
The English common law has evolved over centuries, in tandem with many technological and social developments. This ruling highlights the adaptability of the English common law system, which enables it to respond to evolving circumstances without having to wait for new legislation to be debated and passed. Indeed, the rapid pace of technological development – and the often-lethargic pace of legislative reform – could mean that any new legislation would already be outdated by the time it was passed. Fortunately, the English common law system has the flexibility to be interpreted judicially so as to keep pace with developments.
Feb 26, 2021
Feb 26, 2021