Cryptocurrency can be ‘property’ under Hong Kong law – and yet it may not be

Danny Tsui

Ribeiro Hui,Hong Kong

d.tsui@ribeirohui.com

On 31 March 2023, Justice Linda Chan of the High Court of Hong Kong in her judgment for directions on the characterisation of cryptocurrencies officially recognised cryptocurrency as ‘property’ under the Hong Kong legal regime. As a ‘property’, cryptocurrency is capable of, among other things, being put into a trust or distributed upon winding up and, in an ideal world, being safely treated as a form of asset that carries property rights. However, does it mean that all types of cryptocurrencies or tokens of a virtual nature will be regarded as ‘property’ under the law? At least for now, it would be too good to say yes to the question.

Perhaps one should look at the logical process that lead to the conclusion in the judgment. In Linda Chan J’s judgment, cryptocurrency is defined to be:

'[A] digital asset based on blockchain technology, which records transaction data in a list of records (a block) with a time stamp, and one block is linked to the next by cryptography. The blockchain contains all transactions processed, with each transaction cryptographically linked to the previous one. The data stored can only be changed when all the participants agree. This ensures that blockchain is not controlled by any single authority, and the data stored in the blockchain is immutable.'[1]

On the basis of such a definition the Justice accepted, with the assistance of the opinion of a blockchain technology expert, that cryptocurrency has the following features:[2]

1. a cryptocurrency can only be transferred from one user to another through a cryptocurrency network, and such transfer must be initiated and approved by the owner of that cryptocurrency;
2. it is indivisible and must be fully consumed in a single setting;
3. cryptocurrencies received from an inbound transaction are transferred out of a user’s wallet, and such inbound transaction ceases to have any value in the wallet while remaining recorded on the blockchain, and cannot be used as an 'input' transaction in another transaction;
4. during a transfer or withdrawal, the blockchain system rather than the user would do the matching and select the inbound transaction (with the specific wallet address and the amount of cryptocurrency held) and use it as 'input' for a transfer/withdrawal. The cryptocurrency in that 'input' would be fully utilised and transferred to other wallets and shown as 'outputs' in that transaction;
5. blockchain is a publicly available ledger containing a record of all transactions made in respect of that cryptocurrency;
6. every transaction recorded in the blockchain is unique and can be identified; and
7. the blockchain does not show the current balance of each wallet.

In coming to the conclusion that cryptocurrency is a 'property', Linda Chan J applied the well-known Ainsworth test laid down by Lord Wilberforce in National Provincial Bank v Ainsworth [1965] AC 1175. The Justice accepted that cryptocurrencies, at least those before The Hon Madam Justice, met the requisite four criteria under the Ainsworth test, and they are: (1) definable; (2) identifiable by third parties; (3) capable in its nature of assumption by third parties; and (4) have some degree of permanence or stability.

The conclusion of the judgment can hardly be said to cover all types of cryptocurrencies or tokens of a virtual nature. The judicial recognition of cryptocurrency as a ‘property’ is arguably confined to blockchain based cryptocurrencies, and, in the strictest sense, not all cryptocurrencies are blockchain based. The Court has yet to provide a definite answer to other types of cryptocurrencies or tokens that exist or might come into existence in the virtual world. Complex of combinations among conflated characteristics of virtual assets have not been tested before the Court, including many not-so-novel concepts such as centralisation versus decentralisation, security versus non-security nature, blockchain based versus non-blockchain based or even coins versus tokens.

One cannot neglect the remarkable rate of innovation in the virtual world, but uncertainty still exists. This uncertainty is clear in the Guidelines for Virtual Asset Trading Platform Operators published by the Securities and Futures Commission (which came into effect on 1 June 2023). The guidelines state that the licenced virtual asset trading platform operators should sufficiently warn the clients (ie, investors) in their risk disclosure statements that ‘a virtual asset may or may not be considered ‘property’ under the law, and such legal uncertainty may affect the nature and enforceability of a client’s interest in such a virtual asset.’[3]  

Having said the above, the Court’s ruling certainly brings glad tidings to crypto investors. While investors may not be able to safely assume that all possible types of cryptocurrencies can be ‘property’ under the law, they may continue to apply the Ainsworth test and rest assured that the Hong Kong courts are generally receptive to sensible ideas, as evidenced by Linda Chan J’s decision.