Cryptoassets are property: AA v Persons Unknown, Re Bitcoin

In AA v Persons Unknown and Others, Re Bitcoin the English court endorsed the analysis of crypotassets as property in the UK Jurisdictional Taskforce’s legal statement.

In Brief

• The English court has approved the UK Jurisdictional Taskforce’s analysis of cryptoassets as property.
• The court will be prepared to hear applications in cyber extortion cases in private, where publicity would potentially be detrimental result, including tipping off the wrongdoers and enabling them to dissipate assets.

Overview

The English court has approved the UK Jurisdictional Taskforce’s view of cryptoassets as property for the first time. In our Insights analysis here we considered the UKJT’s legal statement, which answers critical English law questions about cryptoassets and smart contracts. Traditionally English law only recognises two types of personal property – choses in possession and choses in action – neither of which would include cryptoassets The Statement favours the interpretation of cryptoassets as a third kind of property.

This will be of interest to any industry where Bitcoins are used for payment or as a form of value consideration; it could also have knock-on effects on the law of succession, bankruptcy, insolvency, fraud, theft, tax, trust, data protection, IP, consumer rights, financial regulations, money laundering and KYCs, and others.

Insurers and insureds of cyber policies will be interested; cryptocurrencies are often requested in cyber extortion situations. Our Insights in relation to the Travelex extortion are here.

This decision also tackled questions of jurisdiction and procedure which will be of interest to those involved in complex litigation. In particular, the court tackled jurisdictional issues in the context of seeking remedies over intangible assets.

Bitcoins as property

The courts, along with many legal and financial commentators, have grappled in recent times with the question of what, legally, cryptocurrency is. The traditional English law position has been to recognise two types of “property”, neither of which would encompass cryptocurrencies; cryptocurrencies are not “choses in possession” or “choses in action”. These are virtual and intangible assets, which cannot be possessed. Nor do they embody any right capable of being enforced by action.

In the AA decision, an insurer sought a proprietary injunction against the accounts of certain Bitfinex companies into which 96 Bitcoin had been paid following a hack and cyber extortion of its insured. In order to grant such an injunction, the court was required, among other things, to establish whether Bitcoins are “property” in law. In short, the court decided that they are. Bryan J considered that it is “fallacious” to proceed on the basis that English law only recognises “choses in possession” or “choses in action”, and no other type of property.

The English court has effectively treated crypto currencies as property in previous decisions, without considering the issue in depth. In Vorotyntseva v Money -4 Limited t/a as Nebeus .com, Birss J granted a worldwide freezing order in respect of a substantial quantity of Bitcoin and Ethereum. In Liam Robertson v Persons Unknown Moulder J granted an asset preservation order over crypto currencies.

In AA the court considered the UKJT’s legal statement. This includes a very detailed discussion of the case law on the definition of property, tracing the evolution of the definition of property over time. Although not binding on the court, the statement is a “detailed and careful consideration” of the issue, and the court found the analysis “compelling”. The statement concludes that the common law has in fact recognised other types of property, which were neither in possession or in action. Not only is there nothing in the common law which prevents cryptoassets from being property, cryptoassets are positively capable of being property.

Comments

Although the application in AA was heard in private, and was uncontested, this decision is a clear step to establishing the position that cryptoassets are “property” in English law.

That said, there are some very complex issues still in play, such as:

• The Legal Statement signposts throughout its analysis that the application of common law will inevitably vary from case to case. Although the analysis in AA may prove useful for future Bitcoin cases, it may be of lesser value for other cryptocurrencies, and of limited value for other types of cryptoassets.
• The judgment does not in fact explain why the BitFinex defendants are treated as being “in possession” or in “receipt” of the property, such that a proprietary injunction can be imposed upon them. The legal statement states that “knowledge of the private key confers practical control over the asset”. However, the legal statement is also clear that the private key on its own its not enough to be treated as property; it is the entire public/private key system which constitutes property. This nuance adds an additional layer of complexity which is not dealt with in the AA judgment.
• Several other applications were adjourned due to the complexities involved with service out of the jurisdiction. This means that there is still no certainty as to whether a Norwich Pharmaceutical and/or Banker Trust application would succeed in cases involving Bitcoins or other cryptoassets.

For insurers bringing subrogated claims, it is worth noting the need to be clear in this type of case who is seeking what relief from the court. The court observed that it was “not as clear as it might have been precisely what causes of action were being claimed by the Insurer”. The claim in AA v Persons Unknown was drafted to include proprietary claims in restitution and/or constructive trustees or for the tort of intimidation and/or fraud and/or conversion. The Insurer was subrogated to the rights of the Insured and had been given an express assignment of the Insured’s rights, as well as having been the party which had paid out the ransom monies.