Crypto on trust?: Wang v Darby

Introduction

In a recent decision, the judiciary continued to develop its approach towards cryptoassets. A line of cases have now made clear that cryptoassets constitute property. In Wang v Darby [2021] EWHC 3054 (Comm), the High Court considered for the first time whether cryptocurrencies could be held on trust, for the purposes of establishing a proprietary right over those assets.

On the facts of the case the Court found that no form of trust – whether express, constructive or Quistclose – arose. That was due to the circumstances of the case: the claimant was required to re-transfer certain cryptocurrencies to the defendant and it is well-established that a sale and re-purchase agreement (repo) does not create a trust relationship.

Although the question of whether cryptoassets are capable of being held on trust is yet to be expressly determined by the Court, the case demonstrates the Court’s willingness to apply trust law principles to a proprietary claim over cryptoassets.

Background

Mr Wang (the Claimant) is a cryptoasset trader based in Australia and Mr Darby (the Defendant) held himself out as an experienced cryptoasset trader offering banking and other cryptoasset services from the UK. The dispute concerned two related contracts between the parties under which they exchanged specified quantities of two cryptocurrencies (400,000 Tezos and 30 Bitcoins) with the option to repurchase the exchanged cryptocurrencies at a later date. The arrangement would allow Mr Darby to "bake" with the Tezos (ie to generate profit by pooling those assets) and to then share the proceeds of that "baking" with Mr Wang. Although the Claimant sought to exercise the option to repurchase the exchanged amount two years later, the Defendant did not “sell-back” the Tezos to the Claimant.

The Court subsequently ordered a Worldwide Freezing Order (WFO) and proprietary injunction over the Tezos.

The Claimant sought damages and proprietary remedies against the Defendant. In particular, he claimed that by ceasing to bake the Tezos, the Defendant was in breach of trust and/or his fiduciary duties. The Defendant denied that the claim had any (real or reasonable) prospect of success on the basis that the agreement constituted a sale and buy-back arrangement, which precluded any form of trust from arising.

The applications

The judgment related to the following applications:

• Applications by the Claimant to continue (and vary the terms of) the WFO and proprietary injunction.
• An application by the Defendant to strike out or enter into a reverse summary judgment in respect of the proprietary claims pleaded against him, on the basis that no trust was formed.

Given that all relevant communications between the parties were made or evidenced via the Telegram app – on which the contracts had been entered into – and a transcript of those messages was available, the High Court accepted that the issue could be determined summarily.

Decision

1. Did a trust exist over the cryptocurrencies?

It was accepted by the Court and the parties that, as a matter of English law, fungible and non-identifiable digital assets such as Tezos were property which could, in principle, be held on trust. The key issue before the Court was whether some form of trust arose in respect of the Tezos transferred by the Claimant to the Defendant.

The Court found that no trust – whether express, resulting or constructive – was created in this instance. In reaching this conclusion, the Court held that the fundamental problem with the existence or imposition of a trust over the Tezos was the reciprocal nature of the transactions in question. In order for the Claimant to be entitled to the return of the Tezos, he had to return a corresponding value of Bitcoin to the Defendant in order to reverse the swap. That “economic reciprocity” precluded any kind of trust from being established and was inconsistent with the parties having an objective intention to create a trust.

The Claimant’s own characterisation of the Defendant’s restoration obligation as one of “sale or purchase back” was considered by the Court to be “fatal” to the proprietary claims. That kind of description was “anathema to the existence of a trust over the relevant property arising upon or from the original outward transfer. It is the antithesis of a trust”. The Court therefore granted summary judgment in favour of the Defendant on the proprietary claims.

2. Did the Defendant owe the Claimant any fiduciary duties?

Whilst no trust was found to exist, the Court concluded that a personal claim for breach of fiduciary duty was possible in this case.

3. The WFO

As the Court concluded that there was a real risk of the Defendant dissipating assets so as to render enforcement of any judgment in the Claimant’s favour more difficult, the Court continued the WFO. In reaching this decision, the Court commented on the Defendant’s experience as a cryptocurrency trader, as well as the quantities of Bitcoins which he held in comparison to the quantities of Bitcoins disclosed in his net worth suggesting an incomplete disclosure of his assets.

Takeaway points

Whilst, in this case, the transactions in question did not constitute a trust, the Court’s decision was based on the construction of the relevant contracts rather than the crypto nature of the assets. Although the Court did not go on to expressly note this in its judgment, it is likely that cryptoassets can be held on trust like any other form of property. Holders of cryptocurrencies may therefore take comfort from the fact that the Court appears to treat cryptocurrency in the same way as any other property for the purpose of proprietary claims. Given the increasing volume of cases relating to cryptoassets, this issue is likely to be expressly determined by the Courts very soon.