UK decision confirms cryptocurrency is ‘property’ capable of being held on trust
The English High Court has held that Tether (USDT) (a type of cryptocurrency) constitutes property in a claim against a cryptocurrency exchange for return of fraudulent misappropriated cryptocurrency.[1]
Australian courts have recognised that cryptocurrency can constitute property for the purpose of interim proceedings, most recently in Australian Securities and Investments Commission v NGS Crypto Pty Ltd (No 3) [2024] FCA 822 (discussed in our previous article). However, no conclusive determination has been made that cryptocurrency is a form of property that attracts property rights. The English High Court decision clarifies that, in the law of England and Wales, cryptocurrency assets can be the subject of tracing and can constitute trust property in the same way as other property.
The claimant in this case, Fabrizio D’Aloia, brought proceedings against several defendants, alleging he was the victim of a cryptocurrency scam. Mr D’Aloia claimed he was induced to transfer around £2.5 million in Circle and Tether (USDT) (two cryptocurrencies) to unknown fraudsters, who had since dissipated the stolen cryptocurrency after it was passed through a number of blockchain wallets. The proceedings principally concerned Mr D’Aloia’s claim against Thai cryptocurrency exchange, Bitkub Online Co. Ltd (Bitkub). Relevantly, the Court considered whether:
- Mr D’Aloia could establish, as a matter of law, that USDT could be followed or traced to Bitkub’s wallet (tracing/following issue);
- the receipt of the USDT was a benefit or enrichment of Bitkub (unjust enrichment claim); and
- Bitkub holds the USDT on constructive trust for Mr D’Aloia (constructive trust claim).
Ultimately, the constructive trust and unjust enrichment claims were unsuccessful because Mr D’Aloia failed to establish that Bitkub’s wallet received any part of the stolen funds. Although the Court found that USDT was a type of property capable of being traced and held on trust, there was insufficient evidence to show that the USDT reached Bitkub’s wallet. That is, as a matter of fact, Mr D’Aloia’s USDT was not successfully ‘followed’ or ‘traced’ through a mixed fund to Bitkub’s wallet.
The Court accepted that USDT, a stablecoin tied to the value of the US dollar, is a cryptoasset to which property rights can attach. Following the Court of Appeal’s decision in Tulip Trading v Bitcoin [2024] EWCA Civ 83, the Court determined that digital assets constitute a third category of personal property distinct from choses in action and choses in possession. In the Court’s view:
USDT attract property rights under English law. It is neither a chose in action nor a chose in possession, but rather a distinct form of property not premised on an underlying legal right. It can be the subject of tracing and can constitute trust property in the same way as other property.
The status of cryptoassets as property has been repeatedly addressed at interim hearings (both in English and Australian courts) and was recently the subject of a Law Commission Report to the UK Government, published on 28 June 2023 (Final Report).
The Court’s judgment was largely consistent with the findings and recommendations of the Final Report. For example, the Court agreed that it is helpful to focus on the characteristics of the crypto-token itself. In determining those characteristics, the Court cited the following extract from Professor Fox’s article, ‘Digital Assets as Transactional Power’ (which was itself cited in the Final Report):
The asset is more than mere data. It is a set of transactional functionalities. The most important of these is the capacity of the person who holds the private key to effect new transactions which will be recognised as valid by the rules of the system. Analysed in this way, the asset can be viewed as a specific transactional power over unique data entries on the ledger.
The combination of both data and transactional functionalities created, in the Court’s view, ‘expectations’ that the transaction will be honoured, which is sufficient to attract property rights.
The Court further stated that crypto-tokens exist independently of the rights and claims associated with them and are used and enjoyed independently of whether they give rise to rights enforceable by action. In other words, any rights that surround the crypto-token are rights in ‘addition to’ and ‘not the basis of the recognition of USDT as property’.
Are cryptocurrencies capable of being traced?
In English law, the short answer is yes. The Court found that digital assets, as a type of property, can be the subject of tracing. However, there was insufficient evidence to show that the claimant’s funds could be followed or traced through a mixed fund to Bitkub’s wallet.
- First, the Court determined that tracing at common law through a mixed fund was not possible.
- Second, although at law USDT could have been followed to Bitkub’s wallet, the claimant’s USDT was not successfully followed as a matter of fact. Although Tether Ltd (the organisation that administers USDT) had the records necessary to carry out the following exercise, there was no evidence to suggest that any form of following based on those records had been attempted in this case.
The case was published just one day after the Property (Digital Assets etc) Bill was introduced in the House of Lords on 11 September 2024. This Bill seeks to implement the recommendations of the Final Report to provide statutory confirmation that digital assets can attract property rights. The outcome of this case indicates that the property status of digital assets in English law is very close to being settled.
Although the UK decision is not binding on Australian courts, it provides persuasive authority that cryptocurrency can be considered a third type of personal property that is distinct from a chose in possession or chose in action.
If Australian courts follow English law and determine that cryptocurrency is a type of property that can be the subject of tracing and held on trust, crypto exchanges should be warned that, in the context of cryptocurrency scams, claims could be brought for fraudulent misappropriation of trust property. However, the case also highlights the evidentiary difficulties in establishing the movement of cryptocurrency through different accounts to allow it to be traced or followed.
This article was written with the assistance of Vanessa Hynes, Law Graduate.
[1]Fabrizio D'Aloia v Persons Unknown Category A & Ors [2024] EWHC 2342 (Ch).
