Hong Kong Court provides guidance on distribution of cryptocurrency as trust assets

The Hong Kong case of Re Gatecoin Ltd (in liquidation) [2023] HKCFI 914 is a landmark decision confirming that cryptocurrency is "property" capable of being held on trust, bringing Hong Kong in line with other common law jurisdictions (read our blog post about a case following Gatecoin).  In the ongoing liquidation of Gatecoin, the Court of First Instance ("CFI") has issued a further judgment, Re Gatecoin Ltd (in liquidation) [2025] HKCFI 493, addressing issues concerning the liquidators' distribution of crypto-assets to eligible claimants.

Background

Central to this judgment are three sets of terms and conditions issued by Gatecoin: the 2018 to 2019 set ("2018 T&C"), which superseded the 2016 to 2018 set ("Trust T&C"), which in turn superseded the 2015 to 2016 set ("2016 T&C").  In the earlier judgment, the CFI found that Gatecoin held cryptocurrencies on trust for customers who agreed to the Trust T&C and 2016 T&C. These customers therefore have a proprietary claim over their cryptocurrencies, in practice allowing them to 'leapfrog' over unsecured creditors in the waterfall of priorities in respect of the specific cryptocurrency held.  In contrast, customers who agreed to the 2018 T&C were not subject to any trust arrangement and have only a contractual claim against Gatecoin, meaning that they would only receive distribution as unsecured creditors from any remaining general assets of Gatecoin.

In the latest judgment, the CFI reviewed claims by certain customers, referred to as non-consenting customers ("NCCs"), who maintained that they never accepted the 2018 T&C and therefore have a proprietary claim over their cryptocurrencies.  The NCCs claimed that they registered their accounts before the 2018 T&C came into effect and did not access or use Gatecoin's platform after March 2018 (customers were required to click to acknowledge and accept the 2018 T&C before they could continue to access and use Gatecoin's platform).

Decision

Classification of NCCs

Although evidence showed activity in the NCCs' accounts after March 2018, the NCCs maintained that these transactions were recorded due to automated processes or actions by Gatecoin or by third parties, rather than their own use of the platform.  After considering evidence presented by the Liquidators' expert, the Court distinguished between two types of transactions:

• Transactions that did not involve the customers accessing or using Gatecoin's platform: these included free cryptocurrencies that were credited into their accounts by Gatecoin as a referral reward, and cryptocurrencies deposited into their accounts by a third party 'miner' as a result of cryptocurrency 'mining' (the process by which transactions are finalised and entered into the blockchain).  The Court held that customers with these transactions did not accept the 2018 T&C and were therefore subject to a trust arrangement under the Trust T&C, giving them a proprietary claim over their cryptocurrencies.

• Transactions that required customers to access or use Gatecoin's platform: these included subscriptions to a particular cryptocurrency known as GEN.  Since the private sale of GEN only started accepting subscriptions after March 2018, the customers who subscribed must have accessed or used Gatecoin's platform after March 2018, thereby accepting the 2018 T&C and not being subject to any trust arrangement.

Nature of NCCs' beneficial interest

Given the trust relationship between Gatecoin and the NCCs, the Court had to consider the nature of each NCC's beneficial interest, as this impacted the method of cryptocurrency allocation.  The Court held that each NCC should be regarded as a beneficial tenant-in-common, sharing the pool of cryptocurrency with all NCCs in proportion to the total account balance.  This decision, amongst other things, was based on the fact that:

• The Trust T&C provides that digital assets are held in "pooled digital wallets" and users will have a "beneficial ownership interest" in the digital assets.

• The way cryptocurrencies are transferred and recorded makes it impossible for any NCC or liquidator to identify which particular part of the pool a NCC owns outright.

• Once a NCC deposited a cryptocurrency with Gatecoin, the currency would be received by an external wallet which would in turn be transferred to a 'mother wallet' and eventually mixed with the same type of cryptocurrency in that 'mother wallet'.

How NCCs' trust claims should be met

Where there is no shortfall, and since the NCCs are tenants-in-common in a pool of cryptocurrency, Gatecoin is obligated to return the equivalent amount of the cryptocurrency to each NCC, subject to a deduction for the liquidator's costs (e.g. costs of investigating the issue of entitlement).  Where there is shortfall, the Court held that the "pari passu ex post facto" approach is the appropriate method of allocation because the rights of all the NCCs in this case vis-à-vis Gatecoin are identical.  The approach also approximates the nature of NCCs' interest as tenants-in-common in a pool of cryptocurrency. 

Further, given the high costs involved in transferring cryptocurrency to the NCCs (because a service provider has to be engaged to set up wallets for each type of cryptocurrency), it may be impracticable for the liquidators to effect allocation in specie in certain circumstances.  The Court therefore provided some flexibility for the liquidators to sell the cryptocurrency and apply the sale proceeds to meet the NCCs' claims in those circumstances, particularly when the cost of in specie distribution is disproportionate.

Comments

This judgment is noteworthy as it is the first Hong Kong judgment on how cryptocurrencies held by trustees should be distributed in the event of shortfall. The approach adopted by the Court in this case provides a practical solution, avoiding the need to conduct any time-consuming and costly tracing exercise. It also provides flexibility for in specie distribution, which may be favourable to beneficiaries in view of the volatility in cryptocurrency prices. By addressing the complexities of digital assets and trust arrangements, the Court has provided valuable guidance for future cases involving similar issues.

For more information, please contact Jojo Fan, Managing Partner, Rachael Shek, Partner, Truman Mak, Partner, Sara Troughton, Professional Support Lawyer or your usual Herbert Smith Freehills contact.