BVI decrypts the legal status of cryptoassets
In Philip Smith and Jason Kardachi (in their capacity as joint liquidators) v Torque Group Holdings Limited, the BVI Commercial Court had to determine how cryptoassets should be characterised under BVI law and it also had to consider how such assets should be treated by a liquidator in an insolvent winding up.
Torque operated a Singaporean run cryptocurrency trading platform offering various crypto-related services. The majority of Torque’s cryptoassets were held in a wallet provided by Binance, an exchange located in Cayman (referred to in the judgment as the "Tran account"). Many customers had "user trading wallets" that allowed "access" to these assets by placing orders on Torque’s customer webpage/application. Other customers had "personal user wallets", which were wallets provided by Torque but which contained just the customers’ own cryptoassets and which they could deal with directly.
After a number of unauthorised trades causing significant losses including potential creditor claims from its 14,000 customers, trading was suspended. Torque is now in liquidation.
Due to the volatility of the cryptocurrency market and its consequential impact on Torque’s estimated book value, the joint liquidators of Torque sought sanction from the Commercial Court to convert Torque’s cryptoassets to USD or Tether.
Justice Wallbank, in following decisions from numerous other courts in Commonwealth jurisdictions, held that cryptoassets should be treated as its “assets or 'property". Just as the English Court had in the case of AA v Persons Unknown, the BVI Commercial Court relied on the guidance given by the UK Jurisdiction Taskforce in a Legal Statement on Cryptoassets and Smart Contractswhich stated that cryptoassets are to be treated as "property" at common law and for the purposes of the English Insolvency Act.
As to the issue of mitigating against volatility, Wallbank J held that converting the cryptoassets to USD or Tether would “better secure the value of the cryptoassets and maximise the return for the creditors”. He, therefore, sanctioned the conversion of cryptoassets that were not already stablecoins into Tether or USD.
As to the ownership of cryptoassets in the two different accounts, Wallbank J recognised that the test for ownership of cryptoassets comes down to who holds the private key that facilitates dealing with those assets. Wallbank J found that as the cryptoassets in the User Trading Wallets were held within Torque’s wallet that was provided by Binance to which Torque held the private keys, those assets belonged to Torque.
However, the cryptoassets in the user personal wallets did not involve users transferring cryptoassets to wallets that were controlled by, or that belonged to Torque. Torque did not have access or knowledge of the private keys. Therefore, assets in user personal Wallets belonged to the individual customers and did not belong to Torque.
The relevance of this in liquidation is that the assets held in the Tran account were subject to the usual rules of distribution, which in an insolvency context typically means a cents-in-the-dollar pay-out to creditors. Conversely, those who held their assets in Personal User Wallets were able to shield their assets from collection and distribution from the liquidator.
In the absence of legislative and regulatory framework defining digital assets, the ruling in Torque is an important and timely decision that demonstrates the BVI Court’s adaptability to respond to evolving commercial mechanisms in the global digital economy by recognising cryptoassets as property in the BVI, at least in the context of liquidations.
Beyond Torque, there is a broader issue in characterising cryptoassets as property as it affects a party’s rights and obligations. The common law position is that the applicable law is that of the jurisdiction in which the property that is the subject of the dispute is located. The traditional approach presents challenges since the very essence of cryptocurrencies is that they are maintained on a decentralised ledger and cannot be said to have a geographical location. In the recent case of ION Science Ltd, the English Commercial Court granted an interim proprietary injunction over cryptoassets and ruled that the applicable law is the place where the person or company who owns the cryptocurrency is located. It remains to be seen how the law develops to deal with the proprietary status of cryptoassets.
Another point that comes from the decision is the circumstances in which it will be appropriate for liquidators of companies that hold cryptoassets to de-risk from the volatility of cryptoassets by exchanging those assets for stablecoins or fiat currency. There will no doubt be scenarios in the future where creditors or investors wish to remain exposed to this volatility, perhaps reluctant to miss out on short-term price increases. It may well be that we will therefore see a hybrid approach adopted whereby a portion of assets are exchanged for less volatile assets whilst leaving a portion of assets (or perhaps a portion of creditors) exposed to the potentially substantial gains and losses that we tend to associate with crypto.