In Ruscoe v Cryptopia Ltd (in Liquidation)  NZHC 728 the New Zealand High Court held that cryptocurrencies, as digital assets, are a form of property that are capable of being held on trust.
The decision is important:
- as one of only a few currently in the common law world to address expressly the question, in a fully reasoned judgment, as to whether digital assets such as cryptocurrencies constitute property and can be the subject of a trust; and
- because it also addresses the difference between “pure information”, on the one hand, and “digital assets”, on the other, in terms of characterisation as property (this is an issue of significance in areas going beyond the realm of cryptocurrencies and Distributed Ledger Technology – for example, in relation to ownership of machine-generated data created by Artificial Intelligence and the Internet of Things).
This briefing outlines the Court’s findings on these issues before considering the wider implications of the judgment.
How did the dispute arise?
Cryptopia was a cryptocurrency exchange that enabled account holders to trade pairs of cryptocurrencies among themselves. It maintained a database listing the account holders and their digital assets held on the exchange (in the form of digital “wallets” or accounts). Cryptopia charged fees for trades, deposits, and withdrawals made by account holders.
The account holdings within digital wallets were protected by encryption, with Cryptopia exclusively holding the private keys to the digital wallets (account holders did not have access to the private keys). Despite such protection, in 2019 Cryptopia’s servers were hacked and approximately NZ$30 million of cryptocurrency from account holder wallets was stolen, using the private keys.
Cryptopia’s shareholders placed the company into liquidation and the liquidators applied to the Court for guidance on two questions relating to the categorisation and distribution of assets in the liquidation:
- Is cryptocurrency “property” for the purposes of section 2 of New Zealand’s Companies Act 1993, capable of forming the subject matter of a trust?
- Was the cryptocurrency in fact held on trust by Cryptopia for the account holders?
Essentially the dispute was a contest between the account holders and the unsecured creditors (and potentially the shareholders) as to whom was entitled to distribution of the remaining assets of the business.
Were cryptocurrencies property?
The account holders argued that cryptocurrencies must be seen as a form of intangible personal property both at common law and within the definition in section 2 of New Zealand’s Companies Act 1993 (the relevant statutory provision in terms of the pool of assets available for distribution on liquidation).
Section 2 of New Zealand’s Companies Act 1993 defines “property” as:
"[P]roperty of every kind whether tangible or intangible, real or personal, corporeal or incorporeal, and includes rights, interests, and claims of every kind in relation to property however they arise.”
The Court held that all of the various cryptocurrencies at issue were “property” within the definition in section 2 of New Zealand’s Companies Act 1993 “and also probably more generally” (i.e. at common law).
This briefing does not consider the Court’s reasoning in relation to the Companies Act definition of property, but focuses on the reasons the Court gave for its conclusion on the position at common law. Specifically, in reaching such conclusion, the Court relied on Lord Wilberforce’s opinion in the House of Lords in the English case of National Provincial Bank Ltd v Ainsworth  AC 1175 (HL) at 1247–1248, where he said:
“Before a right or an interest can be admitted into the category of property, or of a right affecting property, it must be definable, identifiable by third parties, capable in its nature of assumption by third parties, and have some degree of permanence or stability.”
The Court in Ruscoe was “satisfied the criteria for Lord Wilberforce’s definition of ‘property’ were clearly met in this case.” This was because:
- Identifiable subject-matter: the Court considered that this requirement was met because “computer-readable strings of characters recorded on networks of computers established for the purpose of recording those strings … are sufficiently distinct to be capable of then being allocated uniquely to an account holder on that particular network. For the cryptocurrencies involved here, the allocation is made by what is called a public key – the data allocated to one public key will not be confused with another. This is the case even though the identical data is held on every computer attached to the network”;
- Identifiable by third parties: the Court was also “satisfied here that cryptoassets clearly meet this criterion. On this aspect, it has long been recognised by property lawyers that the power of an owner to exclude others from an asset provides a more important indicator of ownership than the power actively to use or benefit from that asset.” On the facts of the current case, “the degree of control necessary for ownership (namely the power to exclude others) is achieved for cryptocurrencies by the computer software allocating to each public key a second set of data made available only to the holder of the account (the private key), and requiring the combination of the two sets of data in order to record a transfer of the cryptocurrency attached to the public key from one account to another”;
- Capable of assumption by third parties: the Court held that this criterion was met too – cryptocurrencies had the two characteristics of property relevant to this criterion. That is, that property is: (1) “by its nature to be concerned with legal rights that affect strangers to bilateral transactions”; and (2) “normally, but not always, an asset recognised by the law as an item of property will be something which is potentially desirable to third parties such that they would want themselves to obtain ownership of it”; and
- Some degree of permanence or stability: the Court held that this criterion was also satisfied. Referring to the fact that, on a blockchain, a cryptocurrency is transferred by the digital destruction of an existing asset in the hands of the transferor and by the creation of a new one in the hands of the transferee, the Court noted that there “will be situations where the short life of an asset is the result of the deliberate process of transferring the value inherent in the asset so that one asset becomes replaced by another. [C]ryptocurrencies work in this manner but it is also true that bank payments use a similar process which is simply native to the type of property in question. This is not inimical to the asset’s status as property.”
The Court was therefore satisfied that cryptocurrencies met the standard criteria outlined by Lord Wilberforce so as to be considered a species of “property”:
“They are a type of intangible property as a result of the combination of three interdependent features. They obtain their definition as a result of the public key recording the unit of currency. The control and stability necessary to ownership and for creating a market in the coins are provided by the other two features – the private key attached to the corresponding public key and the generation of a fresh private key upon a transfer of the relevant coin.”
Pure information versus digital assets
The liquidators in Ruscoe had argued that information is not generally recognised as a form of “property” and cryptocurrencies might be said to be a form of information. Referring to English authorities on the point,1 such argument - the Court explained - was based on the view that neither the common law nor equity recognised property in “information”, and cryptocurrencies are said to be merely digitally recorded information.
The Court took the view that, whether or not this was the definitive position at common law, cryptocurrencies were not, in any event, pure information:
- the Court noted that “the whole purpose behind cryptocurrencies is to create an item of tradeable value not simply to record or to impart in confidence knowledge or information”; and
- pure information can be infinitely duplicated. This, the Court said, was not true of cryptocurrencies, “where every public key recording the data constituting the coin is unique on the system where it is recorded. It is also protected by the associated private key from being transferred without consent.”
Moreover, referring to a number of New Zealand authorities dealing with computer data and electronic information,2 the Court said that the New Zealand courts “have accepted that the orthodox position that information is not ‘property’ does not attach to cases involving digital assets. [D]igital files were seen as ‘property’ by distinguishing them from ‘pure information’.”
While it is still too early to say so definitively, it is possible that, in having to consider: (1) where new technologies lie within the orthodox legal categorisations of property; and (2) the reality that electronic data has enormous value in commercial dealings, courts in the common law world may increasingly feel compelled to begin to draw distinctions such as those made in Ruscoe. There a distinction was drawn between digital files / digital assets (property) and pure information (not property). Perhaps we may soon see that kind of judicial pragmatism in other jurisdictions too.
For example, the English Court of Appeal in Fairstar Heavy Transport NV v Adkins & Anor  EWCA Civ 886 said as early as 2013 that it “would be unwise … for this court to endorse the proposition that there can never be property in information without knowing more about the nature of the information in dispute and the circumstances in which a property right was being asserted. Some kinds of information, such as non-patentable know-how, are more akin to property in their specificity and exclusivity than, say, personal information about private life.”3
Was there a trust?
Having found that the cryptocurrencies were property, it followed, the Court in Ruscoe said, that they are capable of forming the subject matter of a trust.
Did such a trust in favour of account holders arise on the facts? The Court held that the three elements required to give rise to a trust were met:
- Certainty of subject matter: This element was satisfied because the subject matter of the various trusts (being the cryptocurrencies) was clearly recorded in Cryptopia’s database.
- Certainty of objects: The Court found that there was no uncertainty as to whom the beneficiaries of the relevant trusts were. They were those account holders with positive balances for the respective currencies in Cryptopia’s database.
- Certainty of intention: An intention of the settlor to create a trust had been established, the Court found, because Cryptopia had manifested its intent through its conduct in creating the exchange without allocating to account holders public and private keys for the digital assets it commenced to hold for them. The database that Cryptopia created showed that the company was a custodian and trustee of the digital assets.
What are the wider implications of the judgment?
The account holders in Ruscoe had argued that any finding by the Court that cryptocurrencies were not property would have unsatisfactory implications for the law, including in particular insolvency law, succession law, the law of restitution, and commercial law more generally.
Property is the foundation of many transactions. In the absence of legislation, under common law cryptocurrencies cannot become the subject matter of a trust or a proprietary right of security unless they are recognised as property. “The same is true of a secured creditor or trust beneficiary enforcing their claim in property to the unsecured creditors of an insolvent coin-holder. The development of a viable cryptocurrencies derivative market may sometimes require that the primary assets from which secondary claims are constructed are capable of legal recognition as property.”4
Similarly, the UK Jurisdiction Taskforce’s Legal Statement on Cryptoassets and Smart Contracts5 (cited with approval in Ruscoe) observed that “it is important to understand whether the many statutory and common law rules applicable to property apply also to crypto-assets and, if so, how. Of particular significance are the rules concerning succession on death, the vesting of property on personal bankruptcy, the rights of liquidators in corporate insolvency, and tracing in cases of fraud, theft or breach of trust. It would, to say the least, be highly unsatisfactory if rules of that kind had no application to crypto-assets.”
Perhaps influenced by such policy considerations, we may soon see more common law decisions following the kind of reasoning in Ruscoe in relation to cryptocurrencies and property, and maybe even in relation to other kinds of digital assets more broadly. Whether other jurisdictions take a similar path to this decision remains to be seen. The Court of Appeal of Singapore – the nation’s highest court – has expressly not decided whether cryptocurrencies are a type of property, and in England and Wales there is High Court authority to say that cryptocurrencies are property.6
Of more significance, longer term though, is the distinction made in the case between pure information and digital files/digital assets in the light of the ascendancy of the importance of data in the commercial arena.
The protection of data has long been problematic for commerce and industry. Intellectual property rights provide very limited protection for machine-generated data, such as that produced from Artificial Intelligence and the Internet of Things (with limited scope for copyright and database rights, and reliance typically having to be placed on the weaker rights of confidentiality/trade secrets law or contractual rights). The possibility that some forms of data may constitute property could have profound implications for the protection and commercialisation of commercial and industrial data.