Cryptocurrency is property

Wednesday 20 May, 2020

Do you own cryptocurrency? Bitcoins, released in 2009, were the first decentralised cryptocurrency and since then over 6000 other types of cryptocurrencies have been created.

After the value of bitcoins skyrocketed from $998 in January 2017 to $19,783 in December 2017, some New Zealanders started trading in cryptocurrency, including through New Zealand-based cryptocurrency firm Cryptopia Limited. Unfortunately, Cryptopia Limited was placed into liquidation by its shareholders after its servers were hacked in January 2019 and around 9-14% of its cryptocurrency was stolen.

The liquidators of Cryptopia estimated that it held cryptocurrency worth about NZD $170 million at the time of liquidation, however, the issue arose as to whether the cryptocurrency belonged to the account holders, or whether it should be distributed amongst Cryptopia’s creditors. The appropriate course of action depended on whether cryptocurrency was property and capable of being held on trust for the account holders, and whether Cryptopia did in fact hold the cryptocurrency on trust for its account holders.

In a recent judgment, the High Court determined that cryptocurrency is property, and can therefore be held in trust. The Court held that cryptocurrency was property because:

• The definition of “property” is very broad in New Zealand, and the definition of “assets” under the Companies Act is even wider.
• Cryptocurrency is identifiable. Each unit of cryptocurrency has a “public key”, a unique string of characters that distinguishes one unit from another.
• Each unit of cryptocurrency can be allocated to an individual owner by creating a new and unique “private key” after each transaction that inhibits the possibility of involuntary transfers.
• Units can be traded to third parties.

The Court also considered recent international cases involving the question of cryptocurrencies as property and found that they were generally supportive of the conclusion that cryptocurrencies are property.

The Court found that Cryptopia intended to create a trust when it created the exchange. It did not intend to, and did not, trade in the account holders’ digital assets in its own right.  Cryptopia was a platform to enable account holders to store and trade their own cryptocurrency.

This decision is good news for account holders in Cryptopia Limited, as they are likely to be able to recover cryptocurrency stored in their accounts, to the extent that it wasn’t stolen in the original hack. However, the decision is a reminder of the risks that cryptocurrency holders and traders face due to the decentralised control inherent in cryptocurrencies.