Crypto Assets in Trust: SGHC Clarification (2023)

In the first-of-its-kind decision in the common law, the General Division of The High Court of Singapore in ByBit Fintech Limited V Ho Kai Xin & Ors. [2023] SGHC 199 clarified two vexing legal issues relating to crypto assets: first, whether they are capable of being held on trust, and if so, what type of property crypto assets are (namely, whether they are choses in action, or a novel type of intangible property).

His Honour Philip Jeyaretnam J held that crypto assets were able to be held on trust. He also held that crypto assets were choses in action, capable of being enforced in court.

Deputy Managing Partner, Gerard Quek and Counsel, Daniel Ling of PDLegal LLC (and their team) acted for the successful claimant in this action.

Background

1. This decision flows from a summary judgment application taken out by ByBit Fintech Limited (“ByBit”). ByBit is a Seychellois company that owns a cryptocurrency exchange. Some ByBit employees were paid in part with crypto assets, in this case, USD-denominated Tether tokens known as USDT.

2. Tether is a “stablecoin”, meaning that its value is pegged to that of a fiat currency. In the case of USDT in particular, a verified customer of its issuer, Tether Limited, had the contractual right to redeem USDT for an equivalent value in USD.

3. The defendant, Ms Ho Kai Xin, was a staff of ByBit’s payroll services provider. She had sole access to Excel files containing ByBit’s employee payment details. On eight occasions spanning May to August 2022, Ho manipulated these Excel files, which caused ByBit to transfer some 4,209,720 USDT into crypto wallets controlled by her. Ho then went on a luxury spending spree, purchasing a freehold penthouse apartment with her husband, a brand-new car, and several Louis Vuitton products.

4. In her defence, Ho pleaded that the fraud was perpetrated by her cousin “Jason”, whom she claimed had gained unauthorised access to her work laptop. His Honour Jeyaretnam J found that “Jason” did not exist, and granted summary judgment in favour of ByBit. However, in considering whether to impose an institutional constructive trust over the stolen crypto assets, his Honour Jeyaretnam J had to first answer two novel legal questions.

Novel legal issues

5. His Honour Jeyaretnam J noted that the courts in Singapore and elsewhere have, in granting interlocutory injunctions, recognised preliminarily that crypto assets are property capable of being held on trust. However, he also noted that, to grant judgment and to finally declare a trust, he needed to go further and decide on two important questions, namely:
   1. Whether the crypto assets in questionhere, USDT, were indeed property capable of being held on trust; and
   2. If so, what type of property they were .

Crypto assets are capable of being held on trust

6. First, citing an Monetary Authority of Singapore (MAS) consultation paper on proposed amendments to the payment services regulations titled “Response to Public Consultation on Proposed Regulatory Measures for Digital Payment Token Services” (published on 3 July 2023), his Honour Jeyaretnam J pointed out that the proposed amendments showed that “it is possible in practice to identify and segregate such digital assets”. He found that this supported the view that “it should be legally possible to hold [crypto assets] on trust”.

Crypto assets are property

7. To answer whether crypto assets were choses in action, his Honour, Jeyaretnam J first dealt with the preliminary issue of whether crypto assets are property. He confirmed that this was indeed the case.

• First, he noted that the Rules of Court 2021 had generally recognised cryptocurrency as property, as O 22 r 1(1) defines “movable property” to include “cash, debt, deposits of money… and cryptocurrency or other digital currency”, and concluded that cryptocurrency has thus been “expressly recognised as a form of property capable of being the subject matter of an enforcement order”.

• Secondly, even though the private key and public key of a crypto asset were not permanent, and changed with every transaction on the blockchain, he pointed out that “we identify what is going on as a particular digital token, somewhat like how we give a name to a river even though the water contained within its banks is constantly changing”. His Honour Jeyaretnam J held that this showed that crypto assets can be defined and identified by modern humans, such that they can be traded and valued as holdings, which would thus satisfy the three criteria for  property set out in National Provincial Bank v Ainsworth [1965] AC 1175 .

Crypto assets are, specifically, choses in action

8. His Honour, Jeyaretnam J then went on to consider what kind of property crypto assets were, and in particular, whether USDT can be considered a chose in action.

9. The difficulty (one that has vexed academics) in respect of the legal nature of crypto assets is that traditionally, choses (or things) in action require a counterparty to enforce against. This poses a potential problem, given that there is no individual counterparty to the crypto holder’s right.

10. In his Honour Jeyaretnam J’s view, however, the court need not be restricted to this traditional view. He pointed out that “over time the category of things in action has expanded to include documents of title to incorporeal rights of property, and ultimately incorporeal rights themselves such as copyrights”. His Honour Jeyaretnam J found that there was “a diversity of incorporeal property that has been classed as things in action”, and that this suggested that “the category of things in action is broad, flexible, and not closed” (emphasis added).

11. His Honour Jeyaretnam J then concluded that crypto assets were a chose in action, capable of being enforced in court. In his own words, “the holder of a crypto asset has in principle an incorporeal right of property recognisable by the common law as a thing in action and so enforceable in court”.

12. His Honour Jeyaretnam J also noted ByBit’s submission that, particular to USDT, a holder of USDT who is a “verified customer” of Tether Limited has a contractual right to redeem USDT which may be enforced by way of suit against Tether Limited. PDLegal had submitted that this supported the contention that USDT was a chose in action. His Honour Jeyaretnam J found that this was an “additional” chose in action that the holder of a USDT may have, but that it was not necessary to his conclusion that USDT itself was a chose in action.

Comment

13. The key takeaway from this judgment is that crypto assets are choses in action, which are capable of being enforced in court, and capable of being held on trust.

14. We note that his Honour Jeyaretnam J did not see the need to restrict this holding to the specifics of USDT. As a stablecoin administered and guaranteed by a single issuing entity, USDT differs from typical crypto assets such as Bitcoin in that it has a clear counterparty. However, his Honour Jeyaretnam J gave a ruling that is of general applicability to all crypto assets, and not just USDT.

15. This brings much welcome clarity to the legal nature of crypto assets in general. his Honour Jeyaretnam J’s decision will allow claimants to draw on the vast and well-established body of case law on choses in action and trusts when the subject matter of their claim concerns crypto assets.

16. This bold decision cuts the legal Gordian knot that crypto assets, perhaps by design, had presented. Indeed, much academic ink had previously been spilled over the arcane technical workings of crypto assets, which had caused some authors to suggest that crypto assets required new developments in the law of property. Some had even proposed that the law recognise crypto assets as a “tertium quid”, or third kind of property other than the traditional two kinds (namely, choses in possession, such as physical coins, and choses in action, such as a debt). Such an approach would have created significant uncertainty, as established legal doctrines, remedies and precedents would not have been directly applicable to crypto assets.