LittleLaw looks at… Cryptocurrency as a Property

How and why English Courts expanded the traditional view of property to classify cryptoassets

June 21, 2020

7 min read

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What’s going on here?

Cryptocurrency is a digital asset designed to act as a medium of exchange. It can be used to secure financial transactions, verify asset transfers, and control the creation of additional units.1 The popularity of cryptocurrencies have sparked several debates on whether they can be considered “real property” in the eyes of the law. This debate is important to consider because if a dispute arose regarding crypto assets, ruling authorities would find it difficult to resolve the matter without any legal certainty or classification of cryptocurrency. 

In the recent case of AA v Persons Unknown,2 the High Court of England held that cryptocurrencies (Bitcoin in this scenario) can be treated as property under English law. The decision is important because it is one among a series of decisions which re-define property in a more flexible manner. It is also relevant because, in this case, the court placed a considerable weight on the UK Jurisdictional Task Force’s (“UKJT”) Legal Statement on crypto assets and smart contracts.3 The UKJT evaluated the 5 essential characteristics of property, as outlined in the case National Provisional Bank v Ainsworth4 and applied it to cryptocurrency.

As a result, the case is precedent that cryptocurrencies are a type of property, meaning that they are legally protected in the same way as any other type of asset.

Background to the case

Cryptocurrency was first identified as property in the case of Robertson v Persons Unknown.5 The court based its decision on the Singaporean case of B2C2 v Quoine6 which found that Bitcoin could be classified as property subject to a trust, as it satisfied Lord Wilberforce’s classical definition of property in National Provisional Bank v Ainsworth.7 The issue was briefly considered again by the High Court of England in Vorotyntseva v Money.8 Here, the court noted that there were neither objections to the cryptocurrency being classified as property, nor complaints against the claimant’s ownership over the funds. As such, the court granted a freezing injunction to prevent embezzlement.9

AA v Persons Unknown is the third case of this type to appear before English courts but the first to consider the debate in depth. It is about an insurance company (the “Insurer”) which applied for a proprietary injunction over a ransom amount paid in Bitcoin. This transaction was conducted after their client (the “Affected Customer”) had their computer systems hacked. The hacker(s) demanded a transfer of $1.2m in Bitcoin from the Affected Customer to allow them to regain access to their IT systems. As the Affected Customer was insured against ‘ransomware’, the Insurer paid $950k in Bitcoin to a designated account, and the Affected Customer regained control of their IT systems.10

Upon completion of the payment, the Insurer traced the hacker(s) to recover the Bitcoin paid and found a part of the sum had been converted into fiat currency (a currency without intrinsic value established as money, such as the Dollar).11 They found that 96 of the 109.26 Bitcoins were linked to a Bitfinex (a cryptocurrency exchange platform) account. As there was a high chance the Bitcoin would be dissipated before issuance of a final judgment in the case, the Insurer sought interim relief in the form of a proprietary injunction, to restrict the unknown owner’s ability to use or transfer the Bitcoin. The question posed to the court was to consider whether the Insurer was entitled to injunctive relief and in doing so, consider whether a crypto asset could be classified as property under English law.12

Decision in AA v Persons Unknown

The High Court granted the Insurer the relief sought and held that cryptocurrency was a form of property capable of being subject to a proprietary injunction.

Bryan J oversaw this case and first looked at the case of Colonial Bank v Whinney,13 which dictates the “traditional view” of what constitutes property under English law. It classifies property into one of two kinds, choses in possession (anything tangible that can be possessed)14 and choses in action (a right that can be legally enforced).15 If the traditional view is followed, a cryptocurrency cannot be classed as property because it is intangible and can neither be possessed, nor can it embody any right capable of being enforced in action.16

Due to the above factors, Bryan J adopted a more flexible view by finding that crypto assets satisfy Lord Wilberforce’s alternative definition of property in National Provisional Bank v Ainsworth,17 rather than adopting the traditional view in Colonial Bank v Whinney. This is because they are (i) definable (ii) identifiable by third parties (iii) capable in their nature of assumption by third parties and (iv) have some degree of permanence. So, whilst cryptocurrency does not fall under the narrow, traditional definition of property, it still possesses the characteristics of property and can be treated as such.18

The judge also leaned towards a conclusion that cryptocurrency can be property according to common sense. Bryan J relied on paragraphs 71-84 of the UKJT’s statement, where previous authorities treated novel, intangible assets as property, such as milk quotas or carbon emissions allowances, even though neither were choses in possession or action.19 The statement also found that statutes such as the Theft Act 1968, the Proceeds of Crime Act 2002 and the Fraud Act 2006 define property as ‘including things in action and other intangible property’. This type of classification, in the least, demonstrates that there is no conceptual difficulty in treating intangible assets, such as cryptocurrencies as property, even if they do not fall within the strict definition of choses in action.20

The UKJT statement was also of the opinion that the Colonial Bank case should not be used to limit the scope of property classifications under the law.21 This is because, if Bitcoin has a real world value of $950k and was not regarded as an asset, it would be impossible to tax them, include them in the execution of commercial contracts or regulate their use under financial services legislation.22 As a result, classifying them as a property means their value could be protected for parties with an interest in them. This decision is consistent with Robertson v Persons Unknown and Vorotyntseva v Money, where the remedies sought were granted to protect the claimant’s proprietary interest in the cryptocurrency they sought to recover.

Does it matter if cryptocurrency is classified as property?

The consideration of whether a crypto asset has the necessary characteristics to constitute a property is important in relation to a party’s rights and obligations in relation to the asset. It means the transfer of a crypto asset would have legal validity and enforceability, is capable of being inherited upon to the death of its owner23 and can be given as security in cases of bankruptcy or corporate insolvency. In cases of theft and cyber security, courts can even impose proprietary or freezing injunctions over them.24

Despite the fact that cryptocurrencies still face other barriers to becoming official legal tender, such as price volatility and investor confidence,25 the decision in AA v Persons Unknown has taken a step forward in removing the legal uncertainty surrounding this type of asset and is welcomed.

LittleLaw’s Verdict: The decision in AA v Persons Unknown should help avoid future crypto calamities

AA v Persons Unknown should instill some confidence in crypto asset owners. It shows the courts have an understanding of the danger malware attacks can pose to their assets and of the sensitive nature of cryptocurrency transactions as opposed to those involving fiat currency.26 By viewing crypto assets as property, individuals or entities with a proprietary interest in them can avail themselves of remedies such as orders or injunctions. However, it can be argued that while positive steps are being taken under the common law in the UK, case law in this area is limited and crypto asset owners still do not have a binding, statutory classification for certainty, which would fully secure their proprietary rights. 

On a brighter note, crypto enthusiasts do have legal clarity in the context of inheritance and capital gains tax, and how they can be treated under wills, as outlined by  Her Majesty’s Revenue and Customs (HMRC)’s guidance on crypto assets and tax.27 So, while English law is far from a fully-fledged definition of cryptocurrency, case law and governmental guidance is slowly evolving to recognise crypto assets as “real property”.

Report written by Evania D’souza

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Footnotes

  1. https://en.wikipedia.org/wiki/Cryptocurrency
  2. AA v Persons Unknown who demanded Bitcoin on 10th and 11th October 2019 and others [2019] EWHC 3556 (Comm).
  3. The Artificial Lawyer, “Cryptocurrencies ‘Can be Treated as Property’ – UK Courts” (4 February 2020).
  4. National Provisional Bank v Ainsworth [1965] 1AC 1175.
  5. Jason Rix, “English court grants asset preservation order over Bitcoin” (Allen & Overy, 22 October 2019).
  6. B2C2 Limited v Quoine PTC Limited [2019] SGHC (I) 03 [142].
  7. National Provisional Bank (n 4).
  8.  Vorotyntseva v Money-Ltd (T/A Nebus.com) [2018] EWHC 2598 (Ch).
  9. Nicholas Otieno, “UK Court Recognised Cryptocurrency as Property in Freezing Order” (Blockchain News, 23 December 2019).
  10. AA v Persons Unknown (n 2).
  11. https://en.wikipedia.org/wiki/Fiat_money.
  12. Andrew Moir et al, “High Court grants proprietary injunction against Bitcoin exchange holding proceeds of ransomware attack” (Herbert Smith Freehills, 3 February 2020).
  13. Colonial Bank v Whinney [1885] 30 ChD 261.
  14. Sue McLean & Ben Thatcher, “UK Court Confirms Bitcoin’s Status as Property” (Baker & McKenzie, 3 February 2020).
  15. Sue McLean (n 14).
  16. Andrew Moir (n 12).
  17. National Provisional Bank (n 7).
  18. David O’Donovan, “English High Court Recognizes Cryptoassets to be a Form of Property: Considerations Following AA v Persons Unknown” (Orrick – On the Chain, 5 February 2020).
  19. UK Jurisdiction Taskforce, “Legal statement on cryptoassets and smart contracts” (The LawTech Delivery Panel, November 2019).  
  20. UK Jurisdiction Taskforce (n 19).
  21. Andrew Moir (n 12).
  22. UK Jurisdiction Taskforce (n 20).
  23. Garon Anthony & Rose Chaudry, “English Court confirms that cryptoassets are property” (The National Law Review, 4 February 2020).
  24. David O’Donovan (n 18).
  25. Sue McLean (n 14).
  26. Robin Henry & Imogen Jones, “Court confirms status of cryptoassets as ‘property’” (Collyer Bristow, 3 February 2020).
  27.  Jen Wiss-Carline, “High Court confirms that cryptocurrency is property” (April King Blog, 30 January 2020).