Is cryptocurrency property capable of being held on trust?

This article is produced by CMS Holborn Asia, a Formal Law Alliance between CMS Singapore and Holborn Law LLC.

Recently, the Singapore High Court in ByBit Fintech Limited v Ho Kai Xin [2023] SGHC 199 (“ByBit”) was presented with this issue and held that Tether, also known as USDT, a fiat backed stablecoin pegged to the US Dollar is property, and more specifically classified as a chose in action/ thing in action. Accordingly, a constructive trust can be imposed over any misappropriated USDT.

The decision of the Singapore High Court comes amidst similar developments in other common law jurisdictions like England and New Zealand where the High Courts have held that cryptocurrencies are a form of property capable of being held on trust.

We analyse the reasoning of the Singapore High Court and also compare against the position in England below.

(1) The Decision in ByBit

(A) Brief Facts of ByBit

ByBit, the owner of a cryptocurrency exchange which pays its employees in cryptocurrency and/or fiat currency, applied to the Singapore High Court for summary judgment against Ho Kai Xin (“Ms Ho”), one of the employees of ByBit’s payroll services provider. It was ByBit’s case that Ms Ho had abused her position to fraudulently cause certain USDT (in addition to some fiat currency) to be transferred to addresses associated with wallets that she owned and controlled. ByBit sought a declaration that Ms Ho holds both the USDT and the fiat currency on trust for ByBit, and an order for the return of the same or of its traceable proceeds, or for payment of a sum equivalent in value.

On the evidence, the Court accepted on a balance of probabilities that Ms Ho had fraudulently transferred the USDT and the fiat currency to herself, following which she went on a luxury spending spree.

(B) The nature of USDT

The Court found that USDT are property, specifically choses in action, which gives their owners the right to commence legal action to enforce their rights over the property. In reaching its conclusion, the Court relied on the following factors:

1. The recent consultation paper by the Monetary Authority of Singapore on proposed amendments to the payment services regulation that will implement segregation and custody requirements for digital payment tokens, reflecting the reality that it is possible in practice to identify and segregate such digital assets, and hence supporting the view that it should be legally possible to hold them on trust.
2. The general recognition given to cryptocurrency as property capable of being the subject matter of an enforcement order in the Singapore Rules of Court.
3. Crypto assets can be defined and identified by modern humans, and accordingly traded and valued as holdings, satisfying the three criteria for property set out in National Provincial Bank v Ainsworth [1965] AC 1175.
4. While the origin of the category of things in action was as rights enforceable by action against persons (and there is no individual counterparty to the crypto holder’s right), this category has expanded over time to include a diverse range of incorporeal property, suggesting that the category is broad, flexible and not closed.

In conclusion, the holder of a crypto asset has in principle an incorporeal right of property recognisable by the common law as a thing in action and so enforceable in court.

(C) The imposition of a constructive trust

An institutional constructive trust arises over stolen assets at time of the theft, and the remedy of tracing in equity is available in respect of stolen assets. Accordingly, the Court granted summary judgment against Ms Ho and declared a constructive trust over the crypto assets. The Court also ordered that

1. Ms Ho pay to ByBit the USD equivalent of the value of the cryptocurrency and the fiat currency.
2. Ms Ho give an account of the remaining USDT
3. ByBit to trace and recover the assets or the proceeds thereof into which the remaining USDT had been converted into

As the Court granted relief on the basis of institutional constructive trust, the alternative bases of remedial constructive trust and unjust enrichment were not dealt with.

This decision is the first time that a Singapore court has recognised cryptocurrency as property, specifically choses in action, capable of being held on trust. Prior to this, Singapore courts had only granted interlocutory relief on the preliminary basis that there was a serious question to be tried or a good arguable case that crypto assets were property capable of being held on trust, without commenting on whether crypto assets are choses in action or a novel category of property.

It should be noted that in ByBit, the Singapore Court was only concerned with granting remedies, including the imposition of a constructive trust, against Ms Ho - the party that perpetuated the fraud, and not against any cryptocurrency exchange.

(2) The Position in England

In Zi Wang v Graham Darby [2021] EWHC 3054 (Comm), the English courts addressed the question of whether cryptocurrencies were held on trust. The case involved an agreement between two individual cryptocurrency traders. The Claimant argued that the agreement created a trust over the specified cryptocurrencies and sought various proprietary claims against the Defendant for breach of trust and fiduciary duties. The Defendant contested the existence of a trust and sought reverse summary judgment or strike out of the proprietary claims for breach of trust and fiduciary duty.

It was agreed between the parties that, as a matter of English law, a unit or token of Tezos constitutes property which can in principle be the subject of a trust. Therefore, this principle was not subject to debate on this occasion.

The Claimant alleged that the Tezos were held on trust for him by the Defendant in one of three ways: express trust, Quistclose-resulting trust or constructive trust. The Judge examined whether the agreement constituted each alleged type of trust within the context of a commercial transaction and relationship. The Judge held that the agreement did not create a trust. Please click here for our LawNow on this case.

In another recent judgment the English court discharged an interim proprietary injunction that was made against a crypto exchange and considered issues around the position of a crypto exchange as a constructive trustee. The judge considered the claimant’s case that the crypto exchange was a constructive trustee. In that regard, the judge held that the claimant had not presented to the court at the without notice hearing the potential defences to this point. It was also held that the previous case of D’Aloia v Persons Unknown & Others (please click here for our LawNow on this case) does not support the proposition without more that “exchanges are constructive trustees”. The claimant had knowledge that the crypto exchange operated pooling re the cryptocurrency received and that it could rely on a bona fide purchaser defence, these were points that ought to have been brought to the court’s attention at the without notice hearing by the claimant. This issue also permeated into the lack of explanation about how the crypto exchange could demonstrate practical compliance with the order in circumstances where, given the pooling structure it had, identification of the claimant’s Tether would have been affected.

The above judgments demonstrate that, under English law, cryptocurrency is capable of being held on trust. However, the proposition of crypto exchanges being constructive trustees cannot be taken for granted. It will be fact dependent and needs careful consideration.

(3) Key Takeaways

The recent case law gives welcome clarity to a developing area of law. The classification of crypto assets as choses in action means there is greater certainty on how these assets would be treated in terms of asset tracing, enforcement, as well as in any insolvency situations. This also translates to greater protection for cryptocurrency owners in enforcing their rights. 

That said, uncertainty remains as to several related issues, including whether a constructive trust may be imposed on a cryptocurrency exchange if the stolen crypto assets were transferred to a wallet maintained by the exchange, and it remains to be seen how courts globally tackle this issue.