Unravelling the cryptic - Hong Kong Court helps victim recover crypto-assets against pilfering agent

The Hong Kong High Court has recently granted proprietary remedies over bitcoins that were misappropriated by a fraudulent agent in Nico Constantijn Antonius Samara v Stive Jean Paul Dan [2022] HKCFI 1254. The victim was granted relief to recover the misappropriated bitcoins, sale proceeds and the fruits thereof. This decision suggests that bitcoins, and by extension other cryptocurrencies, may be protected as property under Hong Kong law.

Background

The Plaintiff’s case was that he entered into an oral agreement with the Defendant for the Defendant to sell the Plaintiff’s bitcoins as sales agent in return for a commission. Pursuant to that agency agreement, the Plaintiff transferred a large number of bitcoins from his personal bitcoin wallets to several wallet addresses belonging to the Defendant held with Gatecoin Limited, a Hong Kong cryptocurrency exchange that has been subsequently wound up, as well as a copay wallet. Since the Plaintiff could not open a Hong Kong bank account to handle the sale proceeds, he agreed with the Defendant that the sale proceeds should be deposited into the Defendant’s bank account in Hong Kong. The Defendant gave the login details and security token of his account to the Plaintiff, and the Plaintiff could then transfer the sale proceeds from the Defendant’s account to his personal bank account in Germany.

Initially, some of the Plaintiff’s bitcoins were sold by the Defendant, and the Plaintiff managed to transfer some of the sale proceeds from the Defendant’s account to his bank account in Germany. However, after several months, the Plaintiff noticed that the money in the Defendant's account was locked in and subsequently the Plaintiff lost online access to the Defendant’s account. The Plaintiff therefore claimed against the Defendant for failure to account for his bitcoins and the sale proceeds.

The Defendant's case was that he was a Bitcoin trader who had traded with the Plaintiff prior to the matter in issue. His relationship with the Plaintiff was one of buyer and seller dealing directly with each other as principals. He claimed that the bitcoins were transferred to him as purchaser, and that he paid for the bitcoins by cash or wire transfers, including transfers made from his Hong Kong bank account to the Plaintiff.

Interim relief

Shortly after the commencement of the action in 2018, the Plaintiff applied for and obtained a Mareva Injunction to freeze the assets of the Defendant up to US$2.6 million. The Court at the same time made an order for discovery against the relevant Hong Kong bank account and Gatecoin to ascertain what had become of the bitcoins and the fund flow of the sale proceeds.

Based on the documents given in discovery, the Plaintiff was able to trace the sale proceeds, and applied for and obtained a proprietary injunction over the relevant bitcoins and sale proceeds.

The trial

The trial took place in April 2022. The Court found that, inter alia:

• The Defendant acted as an agent of the Plaintiff to sell the Plaintiff’s bitcoins;
• The relevant bitcoins transferred to the Defendant’s wallet addresses indeed originated from the Plaintiff, based on the transaction records in a report of Gatecoin as collaborated with the public bitcoin ledgers;
• The bitcoins transferred were entrusted to the Defendant to sell the same on the Plaintiff’s behalf as his sales agent;
• The Defendant owed fiduciary duties when dealing with the Plaintiff’s bitcoins and sale proceeds; and
• The Defendant breached his fiduciary duties for failing to account to the Plaintiff for the bitcoins and sales proceeds and disposing them for the Defendant’s own benefit.

Based on the above findings, the Court granted various proprietary remedies against the Defendant, including:

• Declarations that the relevant bitcoins and sale proceeds were held by the Defendant on trust for the Plaintiff;
• Order that the Defendant procure the transfer of sums and properties representing the fruits of the Plaintiff’s bitcoins and sale proceeds to the Plaintiff;
• Order for all necessary accounts, inquiry and directions as to what was due to the Plaintiff and that the Defendant transfer the property and the amount found due; and
• Order that the Defendant shall pay equitable compensation if the Plaintiff is unable to recover the bitcoins and money in specie in the Gatecoin account (following Gatecoin’s liquidation).

Commentary

This is one of the first cases where the Hong Kong Court assisted a victim to recover against a fraudulent agent who misappropriated the victim’s crypto-assets. In doing so, the Hong Kong Court granted proprietary remedies over bitcoins of the Plaintiff, including declaration of trust, tracing of assets and equitable compensation. All of these appear to suggest that the Hong Kong Court accepted that bitcoins constitute property protected under Hong Kong law. This position is consistent with other major common law jurisdictions, including the English Courts which held that crypto-assets can be treated as property and the Court may grant proprietary remedies (see the related blog post here). The availability of proprietary remedies is important as a victim is entitled to recovery of the subject crypto-asset (the value of which can be volatile) or the fruits thereof, rather than merely damages that are assessed at a particular point in time.

Further, the case illustrates that the Hong Kong Courts can, and will, grant necessary remedies to protect and preserve crypto-assets from being further misappropriated or dissipated. In this case, the Hong Kong Court granted both a Mareva injunction to freeze the fraudulent agent’s assets and a proprietary injunction to freeze the relevant bitcoins, sale proceeds and the fruits thereof. The interim relief granted helped preserve the status quo so that the victim remained protected pending resolution of the dispute.

Finally, the case illustrates the benefits in the use of the blockchain technology – the historical transaction sequence of the distributed ledger-based cryptocurrency is immutable, publicly accessible and traceable. In the trial, the Plaintiff managed to make use of the publicly available records from the bitcoin ledger in relation to the transfer of his bitcoins to the Defendant’s wallet addresses. Such records were accepted by the Court as proof of ownership of the bitcoins. The publicly available transaction records can therefore be very useful for victims to pursue legal actions in Hong Kong to recover their crypto-assets.