On 31 March 2023, in the case of Re Gatecoin Limited  (in liquidation), the Honourable Madam Justice Linda Chan of the Hong Kong Court of First Instance ruled on an application by the liquidators of Gatecoin seeking directions on the characteristics of cryptocurrencies and fiat currencies and whether the cryptocurrencies held should be regarded as being held on trust for Gatecoin’s account holders. The decision brings Hong Kong in line with other common law jurisdictions whose courts have already decided that issue, including England and Wales, New Zealand and the BVI. This is further acceptance by the common law courts that, despite their unusual features, cryptocurrencies and digital assets do not sit outside of the law.

Gatecoin is a Hong Kong company that operated a cryptocurrency exchange platform that provided deposit and trading services for cryptocurrencies and fiat currencies. The Hong Kong Court wound it up on 13 March 2019, and liquidators were appointed shortly afterwards on 20 March 2019. The value of the cryptocurrencies on the exchange was in excess of HK$140 million (approximately US$17.8 million) as at 31 October 2022.

The Hong Kong Court was asked to interpret section 197 of Hong Kong’s Companies (Winding up and Miscellaneous Provisions) Ordinance (Cap. 32) (CWUMPO)  which imposes an obligation on a liquidator to take into custody all “property” upon a winding-up order. However, the meaning of “property” is not defined in CWUMPO, and section 3 of the Interpretation and General Clauses Ordinance (Cap. 1) contains a broad definition for “property”. The Hong Kong courts had granted interlocutory proprietary injunctions in the recent past over cryptocurrencies without any party suggesting that cryptocurrencies are not “property”. Furthermore, the Hong Kong Court considered landmark judgments in England and Wales, the BVI, Singapore, Canada, the United States, Australia and New Zealand, where all these jurisdictions reached similar conclusions of cryptocurrency meeting certain criteria for it to qualify as property equivalent to other intangible assets, such as stocks and shares.

In determining that cryptocurrencies are property and therefore capable of forming the subject matter of a trust, the Hong Kong Court found that a trust had not been established in favour of account holders with Gatecoin due to a lack of certainty of intention to create a trust over the cryptocurrencies held by Gatecoin (as part of the three certainties required to create an express trust). The specific set of terms and conditions that applied to the majority of account holders clearly stated the currencies were not to be held on trust for the account holders. Furthermore, the fact that customers’ cryptocurrencies were not segregated but held in pooled wallets controlled by Gatecoin, demonstrated that the cryptocurrencies were always Gatecoin’s assets (and in an insolvency context, Gatecoin’s estate), rather than assets held on trust for its customers.

This is a welcome ruling for insolvency practitioners dealing with a company’s digital assets in liquidation in Hong Kong. However, caution must be exercised for cryptocurrency owners on exchanges if they wish to assert that their assets are held on trust by the exchange for their benefit. In spite of the new, evolving world of cryptocurrencies and digital assets, close scrutiny and attention must be paid to the contractual provisions governing how the assets are held and well-established principles of contractual construction surrounding those provisions.