Landmark Bitcoin judgments classify cryptocurrencies as property

In a case regarding a ransom payment made in Bitcoins to hackers, who encrypted an insurance company’s computer system, the judge Bryan J concluded that crypto assets such as Bitcoins are property and can be the subject of a proprietary injunction. Litigation experts Steven De Lara and Coline Grech discuss the implications of this landmark judgement.

In reaching his conclusion, the judge considered and endorsed much of the reasoning in the UK Jurisdiction Taskforce's legal statement on cryptoassets and smart contracts of November 2019.

 

The hackers managed to bypass and infiltrate the computer system of a Canadian insurance company and installed

malware that encrypted the system. The hackers contacted the victim company and demanded a ransom payment to be

made in Bitcoins, in order to provide them with the decryption software they required to access and restore the information.

 

A payment of $950,000 was agreed; the insurance company, through an agent, purchased 109.25 Bitcoins and transferred

them into the address provided to them by the hackers who then sent the decryption software.

 

The insurance company commenced proceedings to recover the Bitcoins which it contended were paid out under

extortion/blackmail.

 

Ruling

In this case, it was possible to track the Bitcoins that had been transferred as a ransom as the address were most of the

Bitcoins had been sent to was linked to a well known cryptocurrency exchange. At an interim hearing to consider, amongst

other things, the granting of a proprietary injunction over the Bitcoins, Bryan J had to consider the fundamental question of

whether Bitcoins could be considered as property in the first place.   

 

English law traditionally only recognises property as being one of two kinds: choses in possession or choses in action

(or things in possession and things in action). Choses in possession are tangible objects which may be physically

possessed; choses in action refer to personal rights in property which can be enforced by an action (e.g. a lawsuit)

and not be taking physical possession of the property.

 

Bitcoins are neither; they are a virtual currency and so cannot be physically possessed by anyone and they do not embody any right capable of being enforced by action. On this analysis, Bitcoins and other cryptocurrencies could not be classified as property and therefore could not be the subject of a proprietary injunction.

 

Firstly, Bryan J in his judgment considered that cryptocurrencies such as Bitcoins 'ticks the boxes' of what the law regards as 'property' (i.e. they are definable, identifiable by third parties, capable in their nature of assumption by third parties and having some degree of prominence). He also considered in depth the findings of the UK Jurisdiction Taskforce's legal statement and agreed with the conclusions they reached. The English common law has evolved over the years together with technological developments so as to encompass intangible property of an incorporeal nature as choses in action.

 

In refusing to hold that English law recognises no other forms of property other than choses in possession and choses in action, Bryan J endorsed the view that the class of choses in action could be extended to include all intangible property as a residual class of things not in possession rather than limit the class of intangible property to rights that could be claimed or enforced by action.

 

He concluded that because a crypto asset was not a chose in action on a narrow definition of the term did not mean that it could not be treated as property.

 

The Bitcoins were held to be property and the injunction over them was granted.

 

Separately, and also of some importance, Bryan J also granted an application for the hearing to be held in private. The

principle of open justice is a fundamental pillar of the English legal system. However, there are certain cases where, upon

application, judges may allow certain hearings to be held privately if it is necessary to do so and if one of the prescribed

thresholds is satisfied.

 

In this case, given that the overarching purpose of the application was to assist the Insurer in its efforts to recover

cryptocurrency that had been unlawfully extorted under blackmail, Bryan J considered that holding a public hearing could

possibly defeat that purpose due to the possibility of tipping off, revenge cyber attacks, copycat attacks and the possible

revealing of some of the Insurer's confidential information. Bryan J considered these factors and granted the application

be held privately for the proper administration of justice. 

 

Implications

The UKJT's legal statement is not in fact a statement of law. However, Bryan J considered it relevant to consider the

analysis of the legal statement and given the detailed and careful consideration as to the proprietary status of

cryptocurrencies held it should be adopted by the court. This may be the first instance where a legal statement of this

kind has been endorsed by a judge in legal proceedings so compellingly.

 

The ruling that cryptocurrencies are property will, no doubt, have wider ramifications in the crypto-space. The

cryptocurrency market is a rapidly evolving sector. Whereas one could argue that Bitcoins were the cryptocurrency that

thrust distributed ledger technology ("DLT") into the mainstream, it is no longer the 'cryptocurrency of choice'.

 

Many market analysts are increasingly placing their faith in many of the 'alt-coins' which are constantly and swiftly appearing and which possess more refined properties

(e.g. many alt-coins can now process transactions much quicker than Bitcoins; many alt-coins are also 'made for purpose' and so are preferable when conducting specific transactions on certain platforms).

 

The ruling, however, may begin to boost market confidence in the technology more generally and provide some much-needed stability to what can sometimes be a rapidly fluctuating market.

 

The ruling also highlights the adaptability of the English common law system to cater for evolving markets without being required to wait for new legislation to be passed, which can sometimes prove to be a cumbersome and drawn-out process.

 

With such rapidly evolving technology as DLT and cryptocurrencies, going through the rigorous process of legislative reform could mean that once the legislation is passed the technology may have already surpassed it. The English common law system has proved its capability to keep pace with such progressions.

 

Given the ruling was made following an interim application, it will be interesting to see how this case develops and whether any further orders are made against the exchange in relation to the identity of the account holders. Cryptocurrencies are not, in practice, entirely anonymous, as has sometimes been proposed; describing them as 'pseudonymous' may be more accurate.

 

This is even more so when trading over exchanges which would be required to comply with KYC and AML regulations. As such many crypto-exchanges actually require ID verification from their users if they wish to actively participate/withdraw funds. Therefore, if the exchange is compelled to release the identity of the users holding the ransom Bitcoins, it would arguably close the debate surrounding cryptocurrencies and complete anonymity.           

 

Steven De Lara is a Partner and Colin Grech is an Associate at the Gibraltar office of Signature Litigation, a law firm specialising in high value commercial litigation, international arbitration and regulatory investigations.

www.signaturelitigation.com

Coline Grech

Steven De Lara

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