Re Gatecoin Ltd (in Liquidation)

HCCW 18/2019

[2023] HKCFI 914

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 18 OF 2019

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D E C I S I O N

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1.There is before the court an application made by Ms Chi Lai Man Jocelyn and Ms Li Chung Ngai both of Kroll (HK) Limited, the joint and several liquidators of Gatecoin Limited (“Liquidators”) under s.200(3) of the Companies (Winding up and Miscellaneous Provisions) Ordinance (Cap. 32) (“CWUMPO”) for directions on (1) the characterisation of cryptocurrencies and fiat currencies[1] (together “Currencies”) held by Gatecoin Limited (“Gatecoin”); and (2) the allocation of the Currencies to the customers.

2.Having regard to the nature of the application, the complex legal and factual issues raised by the Liquidators some of which have never been determined in Hong Kong, and the number of customers whose interest would be affected by the determination, this Court gave directions on the further conduct of the application on 5 December 2022 (reproduced in the Schedule hereto) so that any stakeholders may file evidence and participate in the application if they want to do so.

3.At the hearing, the Liquidators are represented by Mr Justin Ho, who is led by Ms Eva Sit SC in the skeleton submissions originally lodged with the court. Cumberland DRW LLC, a Group A customer (as defined in §24 below), is represented by Mr Eric Chan of Messrs. Simmons & Simmons.

A.  Overview

4.The Liquidators seek directions or determinations on the following questions:

(1)  Question 1: Gatecoin had 3 different sets of terms and conditions (“T&Cs”) at various times.[2]  The question is whether the Currencies are held on trust for each type of “Group A”, “Group B” and “Group C” customers (as defined in §24 below) (collectively “Customers”). The Liquidators’ position is that the Currencies of Group A and B customers were held on trust, whereas Group C customers only have a contractual claim against Gatecoin for the Currencies.

(2)  Question 2: Whether the Currencies in the accounts of Blue Fire Capital, LLC (a US company) or Blue Fire Capital Europe Coöperatief U.A. (a Dutch company) (“BlueFire”) form part of Gatecoin’s general assets.

(3)  Question 3: Given the Currencies in the Liquidators’ hands cannot satisfy all the trust claims of Group A and B customers, how should their claims be met. The Liquidators’ position is:

(a)  Group A and B customers are beneficial tenants-in-common in the pool of a specific type of Currency in proportions to their account balances in the “Exchange Ledger” (as defined in §22(2) below).

(b)  Where there is no shortfall, each Customer should be entitled to his entitlement subject to the Liquidators’ costs, fees and expenses (“Expenses”) being borne by trust assets pro rata.

(c)  Where there is shortfall, the “pools” should be shared amongst Group A and B customers pari passu, subject to the Expenses being borne by such trust assets pro rata, with the remaining claims being treated as unsecured claims.

(4)  Question 4: The mechanics of effecting allocation of trust assets, given the practicalities and expense involved in making allocation in specie. The Liquidators’ position is that:

(a)  If allocation in specie is impracticable, the Liquidators be empowered to sell the Currencies and distribute the proceeds after deduction of the Expenses.

(b)  The share of unidentified and uncontactable Group A and Group B customers’ assets be dealt with pursuant to ss.62 and 67 of the Trustee Ordinance (Cap. 29).

5.Upon determination of Questions 1 and 2, the Liquidators will know whether the Currencies (or any part thereof) are held by Gatecoin on trust for the Customers or any of them. This, in turn, will determine whether Gatecoin has any assets which can be deployed by the Liquidators to pay the Expenses and make distribution to the unsecured creditors. If and to the extent that there are assets not held by Gatecoin on trust for the Customers, it may not be necessary for the court to determine Questions 3 and 4. For these reasons, in this Decision, only Questions 1 and 2 will be determined.

B.  Background

B1.  Gatecoin

6.Gatecoin is a Hong Kong company founded and beneficially owned by Mr Aurelien Pierre Georges Menant (“Mr Menant”).

7.Gatecoin was wound up by the court on 13 March 2019. The Liquidators were appointed on 20 March 2019.

8.From January 2015, Gatecoin operated a cryptocurrency exchange platform at https://gatecoin.com/ (“Platform”) through which it provided all the services to the customers. To access and use the Platform, a customer had to open and register an account with Gatecoin and deposit cryptocurrencies or fiat currencies for trading or withdrawal purposes. There were more than 45 types of cryptocurrencies trading carried on through the Platform.[3] In addition, Gatcoin also engaged in trading of cryptocurrencies in its own right including trading with its customers[4]. Other than the Platform, Gatecoin did not operate its business in any other form.

9.As regards fiat currencies, they were pooled together and kept in the accounts held by Gatecoin at 3 payment service providers (“PSPs”)[5] and the total amount recovered by the Liquidators as at 31 October 2022 was HK$11,589,477[6]. In addition, the Liquidators were able to secure over 50 types of cryptocurrencies which had an aggregate value of HK$140,390,667 as at 31 October 2022[7].

10.The Liquidators have contacted over 102,600 creditors but only 1,132 of them have lodged proofs of debt (“PODs”). This represents 75% of the amount owed to the creditors as recorded in Gatecoin’s books and records, which stood at HK$249,905,111 (as at 13 March 2019)[8]. Apart from Mr Menant, all the creditors are customers with positive account balances in their accounts at Gatecoin. Amongst them, 316 (35% by number and 42% by value) preferred allocation in specie instead of cash dividend[9].

B2.  Cryptocurrency and Blockchain

11.Before considering the facts of this case, it is necessary to understand the nature of cryptocurrency and blockchain technology which lie at the very heart of Gatecoin’s business and operation.

12.Cryptocurrency is a digital asset based on blockchain technology, which records transaction data in a list of records (a block) with a time stamp, and one block is linked to the next by cryptography. The blockchain contains all transactions processed, with each transaction cryptographically linked to the previous one. The data stored can only be changed when all the participants agree. This ensures that blockchain is not controlled by any single authority, and the data stored in the blockchain is immutable (Sarra and Gullifer, Crypto-claimants and Bitcoin Bankruptcy Challenges for Recognition and Realisation (2019) 28 IIR 233, 235-236; UK Jurisdictional Taskforce, Legal Statement on Cryptoassets and Smart Contracts, November 2019, §§28-29).

13.As explained by Ms Jesse Co[10], the expert engaged by the Liquidators, blockchain and cryptocurrency have the following features.

14.First, a cryptocurrency can only be transferred from one user to another user through a cryptocurrency network, and the transfer must be initiated and approved by the owner of that cryptocurrency:

(1)  Each user of a cryptocurrency network owns a “wallet”. Each wallet has a unique address and is associated with 2 distinct keys: a “public key” (akin to a bank account) and a “private key” (akin to a PIN). The private key is used to transfer cryptocurrency from a user’s wallet to the wallet of another user[11].

(2)  To effect a transfer, the transferor creates a record of the transfer by modifying the public key of his wallet, and digitally signing it with his private key. The cryptocurrency then becomes linked to the wallet address of the transferee[12].

15.Second, the cryptocurrencies received by a user in a particular transaction are indivisible and must be fully consumed in a single setting:

(1)  Thus, if a user received 10 cryptocurrencies in an inbound transaction but only wants to transfer 1 cryptocurrency to another user, he needs to make a composite outbound transaction by transferring 1 cryptocurrency to the transferee and 9 cryptocurrencies back to himself as “change”.

(2)  Conversely, a user may amalgamate the cryptocurrencies received in a few inbound transactions and transfer them out of his wallet[13].

16.Third, once the cryptocurrencies received from an inbound transaction are transferred out of a user’s wallet, that inbound transaction (which remains recorded on the blockchain) ceases to have any value in the wallet and cannot be used as an “input” transaction in another transaction[14].

17.Fourth, a user cannot select which inbound transaction he would like to use for a transfer/withdrawal, as the system would do the matching and select the inbound transaction (with the specific wallet address and the amount of cryptocurrency held) and use it as “input” for a transfer/withdrawal. The cryptocurrency in that “input” would be fully utilised and transferred to other wallets and shown as “outputs” in that transaction (or the fee charged by the operator/exchange if there was such fee)[15].

18.Fifth, blockchain is a publicly available ledger containing a record of all transactions made in respect of that cryptocurrency[16]. For example, in respect of Bitcoin, details of all the transactions can be viewed at Wallet.Exlorer.com. A user can trace a cryptocurrency from its creation all the way through to each transaction it has gone through.

19.Sixth, every transaction recorded in the blockchain is unique and can be identified:

(1)  For each transaction recorded on the blockchain, apart from date and time of the transaction, there is (a) a unique transaction ID; (b) a wallet address of the transferor; (c) a wallet address of the transferee; (d) the amount of cryptocurrency transferred; and (e) a unique identifier of the previous transaction through which the transferor obtained the cryptocurrency in question[17].

(2)  As each transaction is linked to an “input” (akin to a deposit) or a number of “inputs” and an “output” (akin to a withdrawal), one can trace any specific cryptocurrency from the date it was first created or “mined” to all the transactions through which it was transferred to various wallets[18].

(3)  Each record of transfer will be added to the blockchain upon being checked against all other transactions to ensure there is no double spending (Sarra & Gullifer, 236).

20.Seventh, the blockchain does not show the current balance of each wallet. The balance of cryptocurrency in a given wallet is simply a reference to the difference between (1) the total amount of cryptocurrencies of all inbound transactions (i.e. inputs) and, (2) the total amount of cryptocurrencies of all outbound transactions (i.e. outputs)[19].

B3.  Operation of Gatecoin

21.For the purpose of its business, Gatecoin controlled 4 types of wallets, and all the transactions conducted with these wallets were recorded and shown in the blockchain[20]:

(1)  External Wallets: Wallets designated to receive cryptocurrencies deposited by the Customers from their private wallets. Gatecoin had thousands of External Wallets.

(2)  Mother Wallets: Each Mother Wallet was used to collect and store a type of cryptocurrency. Once the cryptocurrency was received through the External Wallet(s), it would be transferred to the Mother Wallet and mixed with all cryptocurrencies kept in that Mother Wallets. Gatecoin had 18 Mother Wallets.

(3)  Operational Wallets: Wallets designated to transfer cryptocurrency to the Customers’ private wallets in accordance with their transfer/withdrawal instructions, or to receive the balance of cryptocurrencies not consumed in a single setting. Gaincoin had 25,408 Operational Wallets[21].

(4)  Multifunction Wallets: Wallets with the functions of Operational Wallet and Mother Wallet[22].

22.As regards the dealings between Gatecoin and its Customers:

(1)  A Customer had to register an account with Gatecoin, and would be assigned with a unique customer ID.

(2)  The Customer would deposit or transfer/withdraw cryptocurrency through the Platform. All transactions made by the Customers through the Platform would only be recorded in Gatecoin’s internal exchange ledger (“Exchange Ledger”). The Exchange Ledger recorded details of the transactions namely, the date, transaction ID, type of cryptocurrency, amount, transaction type, transferor address (for deposit into Gatecoin) and transferee address (for withdrawal out of Gatecoin).

(3)  In turn, Gatecoin would carry out the transactions made/approved by the Customers through either (a) its External Wallet and Mother Wallet (for cryptocurrency deposited by customer), or (b) its Mother Wallet and Operational Wallet/Multi-function Wallet (for cryptocurrency withdrew by customer). All these transactions would be recorded and shown in the blockchain[23].

(4)  Where Gatecoin executed the trade made by a customer “in house”, that is, using the cryptocurrency kept at the Mother Wallet it controlled, the transaction would not involve any movement between different wallets and, therefore, would not be recorded or shown in the blockchain[24].

23.The modus operandi of Gatecoin’s business means that:

(1)  Once a customer deposit cryptocurrency at the Platform, it would be transferred from the External Wallet to the Mother Wallet (both controlled by Gatecoin) and mixed with the cryptocurrencies in that Mother Wallet;

(2)  Gatecoin would be able to apply any cryptocurrencies in the Mother Wallet for its purposes including making a transfer in compliance with a withdrawal request made by any customer;

(3)  The customer ceased to have any control over the cryptocurrency from the moment it was deposited with Gatecoin[25]; and

(4)  The information recorded on the Exchange Ledger is not sufficient for the Liquidators to trace through the cryptocurrency deposited with Gatecoin as most of the trades recorded in the Exchange Ledger were executed by Gatecoin “in house” which did not involve any movement between different wallets[26].

B4.  Gatecoin’s T&Cs

24.The Liquidators have identified 3 different sets of T&Cs which were in force at different time periods. According to Gatecoin’s books and records, as at 31 October 2022, the number of Customers and the value of their claims are as follows[27]:

Set	Effective Date	Customers	No. of Customers	Value of claim
“2016 T&C”	28/1/2015 – 11/2016	Group A	10,010[28]	205,409,870
		With ETD	401	178,868,991 (valued as at 31/3/2019)
“Trust T&C”	11/2016 – ~3/2018	Group B	80,011	170,955,596
“2018 T&C”	6/3/2018 – 13/3/2019	Group C	12,697	11,992,862

25.The 2016 T&C provides, inter alia, that:

(1)  the terms constitute “a binding agreement” (p.1);

(2)  Gatecoin reserved the right to modify the terms “without prior notice” (p.2); and

(3)  a User’s access to and use of the website constitutes “acceptance of [the 2016 T&Cs]”. There is no provision which has the effect of creating a trust over the Currencies deposited or kept by Group A in their accounts at Gatecoin.

26.As for the Trust T&C, the Liquidators consider that the following terms taken together have the effect of creating a trust over the Currencies in favour of Group B customers:

(1)  Clause 1.1 states that the use of Gatecoin’s platform constitutes agreement to be bound by the Trust T&C.

(2)  Clause 1.2.2 reserves Gatecoin’s right to change terms, although Users would “have the right to receive prior notice of any material change” and be “asked to agree”.

(3)  Clause 5.1 provides that Gatecoin maintains an Exchange Ledger to track User’s ownership of fiat currency and “Digital Assets” reflected in the associated Digital Asset Account.

(4)  Clause 7.3.1 provides that the Digital Assets would be held in “pooled digital wallets” and a User “will have beneficial ownership interest in the Digital Assets”.

(5)  Clause 7.3.2 provides that Gatecoin acts as a “custodian” holding the Digital Assets “in trust”.

(6)  Clause 7.4.1 provides that Gatecoin is “fiduciary” and will hold the fiat currency reflected in User’s Fiat Account.

(7)  Clause 7.4.2 provides that “cash balances held in your Fiat Account will not be treated as general assets”.

(8)  Clause 7.5 provides that all tokens would be registered in Gatecoin’s name, although it would credit “all rewards, distributions and other[29] in respect of tokens” not registered in a User’s name into his account.

(9)  Further, the phrase “your Digital Assets” can be found in Clauses 3.3.2, 7.3.1, 7.3.2, 10.2.2.7.

27.Under the 2018 T&C, there is no provision which has the effect of creating a trust over the Currencies in favour of Group C customers:

(1)  Clauses 1.7 and 3.5 provide that Gatecoin is “not” acting in “fiduciary capacity”.

(2)  Clause 12.5 provides a User should “not” expect any new or additional Blockchain Assets created by Forks to be credited, and Clause 13.1 provides a User will “not” receive any tokens or Airdrops;

(3)  Clause 10.1.1 provides that “Gatecoin maintains a private exchange ledger to track a … User’s ownership of (a) Fiat Currency reflected in the User’s Fiat Account and (b) Blockchain Assets reflected in the User’s Blockchain Asset Account”; and

(4)  Clause 27.1.2 provides that upon closure of an account, a User is required to provide transfer instructions of where to transfer the fiat and Blockchain Assets in his account, and Clause 27.2.4 states that Gatecoin is authorised to send any remaining Currencies or sell them.

B5.  BlueFire

28.BlueFire was a “market maker” which traded in cryptocurrencies on behalf of Gatecoin, using the funds provided by Gatecoin. Although BlueFire held the largest amount of Currencies at Gatecoin, it has not asserted any claim over the Currencies. Nor has it lodged any POD with the Liquidators. According to the information provided by Mr Menant, as corroborated by the Liquidators’ investigation, the Currencies held in BlueFire’s accounts belonged to Gatecoin[30].

B6.  ETD Holders[31]

29.In May 2016, there was a cyberattack on the Platform in which 90% of ETH[32] held by Gatecoin was stolen (“Hack”). By email dated 17 August 2016, Gatecoin informed the Customers affected by the Hack that:

(1)  All customers who held ETH could withdraw and trade up to 10% of their balances in ETH, and the remaining 90% would thenceforth be recorded as “ETD” (i.e. Ethereum Debt) in their account balance;

(2)  ETD is simply a record of the debt owed by Gatecoin to the holders of ETD (“ETD Holders”), but the ETD Holders would not be able to withdraw them at that time;

(3)  The value of ETD would link to the market price of ETH; and

(4)  The ETD would be “locked until [Gatecoin has] the ETH liquidity to enable full reconciliation of ETD for ETH”.

C.  Applicable principles

30.The Liquidators apply for directions under s.200(3) of the CWUMPO, having regard to the following facts and matters:

(1)  The existence of 3 different sets of T&Cs, one of which indicates that the Currencies are held on trust;

(2)  If the Currencies are held by Gatecoin on trust, (a) given the diverse nature of cryptocurrencies and their fluctuating value, it may not be practicable or cost effective to distribute them to the Customers in specie, and (b) it is necessary to devise a means for dealing with the unclaimed Currencies for those Customers who do not come forth to claim their entitlements;

(3)  Although BlueFire held accounts at Gatecoin, the evidence suggests that the Currencies in BlueFire’s accounts may be assets belonging to Gatecoin; and

(4)  The substantial shortfall between the Currencies and the total amount owed to the Customers as recorded in Gatecoin’s records.

31.The principles governing an application under s.200(3) are well settled. As submitted by Mr Justin Ho, counsel for the Liquidators:

(1)  A liquidator should seek directions from the court if there is any difficulty at any stage during the course of the administration. However, this does not mean that a liquidator can ask the court to approve any decision which appropriateness she is uncertain about. In particular, the liquidator should not ask the court to approve what is a matter of commercial judgment; it is for the liquidator to conduct a liquidation exercising her own professional expertise and judgment.

(2)  A direction must require something other than general endorsement of a proposed cause of action. Normally this will require the formulation of a precise issue, commonly legal and of significance.

(3)  The liquidator bears responsibility of making full and fair disclosure of material facts, and the court is not to resolve factual conflicts.

(4)  It is not for the court to develop alternative proposals, but depending on the issue it may be appropriate for the court to suggest changes to the proposed course of action which could render it acceptable (McPherson and Keay, Law of Company Liquidation, 5^th edn, 2021, §§9-043-9-046; Re a Company (Liquidators: Cowley and Lui) [2020] 3 HKLRD 96, §§19-22, applied in Re Hsin Chong Construction Company Limited [2021] HKCA 1581, §§15-16).

D.  Question 1: the Trust Issue

D1.  Liquidators’ view

32.The view of the Liquidators on Question 1 may be summarised as follows:

(1)  Group A customers who opened their accounts when the 2016 T&C was in force have no proprietary claim over the Currencies in their accounts as Gatecoin did not hold the Currencies on trust for them. However, as they subsequently agreed to the Trust T&C, a trust was created over the Currencies in favour of Group A (see Section D5.3.1 below);

(2)  Group B customers who opened their accounts when the Trust T&C was in force have a proprietary claim over the Currencies in their accounts given that (a) the Trust T&C has the effect of creating a trust over the Currencies in favour of Group B; and (b) the legal requirements for creating a trust over the Currencies are satisfied (see Section D5.3.2 below);

(3)  The nature of each Group A and B customer’s beneficial interest in the cryptocurrencies in his account is by way of co-ownership in a pool of cryptocurrencies of the specific type to which he or she has a credit balance; and

(4)  The cryptocurrencies in the accounts of Group C customer and ETD Holders were not subject to any trust arrangement and they only have contractual claims against Gatecoin[33] (see Section D5.3.3 below).

D2.  Whether 2018 T&C applies to Group A and B

33.In my view, the question whether the Currencies are held by Gatecoin on trust for the Customers (be it Group A, B or C) should be determined by construing the terms of the 2018 T&C. The earlier versions of the T&Cs (i.e. 2016 T&C and Trust T&C) have no application for the reasons explained below.

34.According to Mr Menant, the 2018 T&C came into force in March 2018, and superseded the Trust T&C. From that time onwards, all Customers including Group A and B customers who registered their accounts when the 2016 T&C and Trust T&C were in force, were required to click to acknowledge and accept the 2018 T&C before they could continue to access and use Gatecoin’s website (i.e. the Platform)[34]. His statement is consistent with:

(1)  the Liquidators’ investigation; and

(2)  the following terms of the 2018 T&C:

(a)  Clause 1.2.2 and 3.2.2 (which are identical) state that:

“By visiting, accessing or using Gatecoin Platform, you confirm, represent and warrant that:

1. ….

2. You have the legal capacity to accept these Terms and to agree to be bound by the Terms in their entirety;” (underlined added)

(b) Clause 28.2 provides that:

“These Terms (including any other terms and/or documents incorporated herein by reference) constitutes the entire agreement between you and Gatecoin relating to your use of or participation in the Gatecoin Platform and these Terms supersede any and all other agreements, oral or in writing, with respect thereto between you and Gatecoin.” (underlined added)

35.As Gatecoin did not have any physical presence and all the services were provided through the Platform, it is reasonable to infer that Group A and B customers (and each of them) must have accepted the 2018 T&C as otherwise they would not have been able to access their accounts or carry on any transactions in respect of the Currencies in their accounts.

36.If and to the extent that Group A and B customers have accepted and agreed to the terms of the 2018 T&C, I do not see why the court should ignore the contractual bargain reached between the parties and allow these customers to rely on the terms of the Trust T&C.

37.Mr Ho submits that the 2018 T&C does not impact the position of Group A and B customers (that Gatecoin held the Currencies on trust for them) for the following reasons:

(1)  Clause 1.2.2 of the Trust T&C states that prior notice of change must be notified, but there is no evidence of notification. Mr Menant only stated that the Customers would have to click on the 2018 T&C before they could proceed to use the website, not that notification had been given.

(2)  Even if the 2018 T&C purported to supersede the Trust T&C, it is doubtful whether such an amendment was capable of bringing the existing trust arrangement to an end without the consent of the customer (being the beneficiary of such a trust) given that:

(a)  A trustee can only disclaim his office if he has not yet done any act showing his acceptance of it (Snell’s Equity §27-030). Having expressly agreed to hold (and having held) the Currencies on behalf of Group A and Group B customers, it was no longer open to Gatecoin to disclaim its obligations as trustee.

(b)  Where a trustee accepts his obligations to act as such, he would only be able to free himself from these obligations by varying the terms of the trust or obtaining a release from his beneficiaries. However, the variation contemplated by the present facts involves a termination of the trust arrangement without the trustee first making a final allocation to the beneficiaries (its customers). In other words, it would involve customers transferring their beneficial interest in their Currencies to Gatecoin, in return for a personal obligation by Gatecoin to repay the same. Unless Gatecoin obtains its customers’ fully informed consent to such a course, the transaction would fall foul of the fair dealing rule and would be voidable at the instance of the beneficiary (Snell’s Equity §7-022).

(3)  Although Clauses 1.7 and 3.5 of the 2018 T&C contain express disclaimer of fiduciary obligations, so long as it is clear that the parties intended a trust relationship, the purported exclusion of fiduciary duties would simply be void insofar as it conflicts with the “irreducible core” of duties that are owed by trustees to fiduciaries (including the obligation to act in good faith) (Armitage v Nurse [1998] Ch 241, 253H-254A, per Millett LJ).

(4)  Mr Menant’s reliance on Clauses 10.1.1 and 27.2.4 of the 2018 T&C is neither here nor there. Since the contractual provision governing change in the Trust T&C had not been observed by Gatecoin at all, the 2018 T&C was simply inapplicable to Group A and Group B customers, who continued to be governed by the Trust T&C.

38.At the heart of Mr Ho’s submissions is that Group A and B customers did not receive any prior notice of the changes nor did they ever agree to the termination of the trust arrangement over the Currencies in their accounts. However, as discussed in §§34-35 above, the evidence before the court shows that Group A and B customers must have accepted and agreed to the 2018 T&C in entirety when they accessed and used the Platform after March 2018.

39.While one cannot rule out the possibility that there may be Group A and B customers who had registered their accounts before the 2018 T&C came into effect and did not access or use the Platform from March 2018 up to the date of the liquidation of Gatecoin (such that they did not accept or agree to the terms of the 2018 T&C) (collectively “Non-consenting Customers”), it is not clear whether there is in fact such customer. When this Court raises the issue with Mr Ho, he says that the Liquidators do not possess any information other than what they have already been provided to the court (and shared with the creditors who have been in contact with the Liquidators).

40.It seems to me that the claim of the Non-consenting Customers is a matter which can be addressed by the Liquidators giving appropriate notice to Group A and B customers of the Court’s view on Question 1, and invite them to notify the Liquidators that if they are Non-consenting Customers and provide evidence in support of their claim within a specified time period. Upon completion of this process, the Liquidators will be in a position to know whether there are Non-consenting Customers and the amount claimed by them. This, in turn, will determine the extent to which Gatecoin holds the Currencies on trust for the Non-consenting Customers.

D3.  Whether the Currencies are held on trust

41.In my judgment, the Currencies are not held by Gatecoin on trust for the Customers (except the Non-Consenting Customers), but are held by Gatecoin in its own right for the reasons explained below.

42.As rightly pointed out by the Liquidators, the 2018 T&C contains no express declaration of trust. To the contrary, the following terms make clear that the Currencies in the accounts of the Customers are not held by Gatecoin on trust for the Customers:

(1)  Clauses 1.7 and 3.5 expressly disclaim any fiduciary relationship between Gatecoin and the Customer. Clause 3.5 states that:

“By using Gatecoin Platform you acknowledge and agree that (a) Gatecoin (and the Gatecoin Group) is not acting as your broker, intermediary, agent or adviser or in any fiduciary capacity” (underlined added)

(2)  Clause 10.1.1 provides that:

“… The account amounts listed in the Exchange Ledger may correspond to funds stored in one or more pooled Blockchain Assets accounts or one or more omnibus fiat accounts …”

(3)  Clauses 12.5 and 13.1 provide that Gatecoin, but the Customers, would be entitled to cryptocurrencies created by Forks[35], or any accretions to the cryptocurrencies as a result of tokens and/or Airdrops[36], which is consistent with Gatecoin being the beneficial owner of the cryptocurrencies[37].

(4)  Clauses 27.1.2, 27.2.4 and 27.3.1 (which deal with account closure and suspension and unclaimed funds) refer to fiat currency and cryptocurrency in the same way[38].

43.Further, the following objective facts show that the Currencies have always been treated as Gatecoin’s assets, rather than assets held on trust for the Customers:

(1)  All the cryptocurrencies deposited by the Customers were not segregated, but were transferred to, and mixed with those cryptocurrencies deposited in, the Mother Wallets. The same applies to the fiat currencies, which were not segregated but pooled together with other currencies and kept at the accounts maintained by Gatecoin at the PSPs;

(2)  Gatecoin was able to use the cryptocurrencies kept in the Wallets it controlled in the way it saw fit including for the purpose of carrying on trades in its own right. The same applies to the fiat currencies kept at the PSPs, which Gatecoin was able to use for its purposes;

(3)  There was no requirement for Gatecoin to hold any cryptocurrencies in any of the Wallets it controlled on account of the Customers or that Gatecoin should hold an amount equivalent to the cryptocurrencies recorded in the Exchange Ledger; and

(4)  In Gatecoin’s audited financial statements for the years 2016 and 2017, the cryptocurrencies held by Gatecoin were treated as its assets while the “customer deposits” were treated as liabilities.

44.Having reached the above conclusion, it is unnecessary to determine whether Gatecoin holds the Currencies on trust for Group A and B customers. However, as there may be Non-consenting Customers, I will deal with the other issues raised by the Liquidators.

D4.  Whether cryptocurrency is “property”

45.Mr Ho submits that the starting point is s.197 of the 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 s.3 of the Interpretation and General Clauses Ordinance (Cap. 1) defines “property” as “includes (a) money, goods, choses in action and land; and (b) obligations, easements and every description of estate, interest and profit, present or future, vested or contingent, arising out of or incident to property as defined in paragraph (a) of this definition”. The question therefore is whether cryptocurrency falls within the meaning of “property”.[39]

46.The requirements for “property” were stated by Lord Wilberforce in National Provincial Bank v Ainsworth [1965] AC 1175, 1247-1248 as follows:

“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.”

47.Mr Ho draws to the court’s attention the academic debate on whether cryptocurrencies, which are not choses in possession (as they are virtual and cannot be possessed) or choses in action (as they do not embody any right capable of being enforced by action), constitute property (Legal Statement §§66-68; Sarra and Gullifer 235).

(1)  The debate stems from the traditional view that “property” can only be choses in possession and choses. In Colonial Bank v Whinney (1885) 30 Ch D 261, Fry LJ said “all personal things are either in possession or action. The law knows no tertium quid between the two”.

(2)  In the Legal Statement however, UKJT[40] considered that Colonial Bank is not an authority on the scope on what kinds of things can be property in law. Rather, it is an authority on the question whether shares are things in action for the purpose of the Bankruptcy Act (§§73-78). The courts have found no difficulty in treating novel kinds of intangible assets as property, both in particular statutory contexts and in general. On that basis, while a crypto asset might not be a thing in action on the narrower definition of that term, but that does not mean that it cannot be treated as property (§§82-84).

48.As far as counsel’s research goes, the preponderance of jurisprudence recognises the proprietary nature of cryptocurrencies.

49.In Hong Kong, the courts have granted interlocutory proprietary injunctions over cryptocurrencies without any party suggesting that cryptocurrencies are not “property”. See: Nico Constantijn Antonius Samara v Stive Jean-Paul Dan [2021] HKCFI 1078[41]; Yan Yu Ying v Leung Wing Hei [2021] HKCFI 3160; Huobi Asia Limited & Anor v Chen Boliang & Anor [2020] HKCFI 2750.

50.In England and Wales:

(1)  In AA v Persons Unknown [2019] EWHC 3556 (Comm) [2020] 4 WLR 35 §§55-61, Bryan J considered the question whether Bitcoin is “property” capable of being subject of a proprietary injunction. The learned Judge adopted the reasons identified in §§71-84 of the Legal Statement and held that Bitcoin meets the 4 criteria set out in Ainsworth as being definable, identifiable by third parties, capable in their nature of assumption by third parties, and having some degree of permanence (§59).

(2)  The courts granted proprietary injunctions over cryptocurrencies in Toma v Murray [2020] EWHC 2295 (Ch); Zi Wang v Graham Darby [2021] EWHC 3054 (Comm) (where AA was followed); Sally Jayne Danisz v Persons Unknown [2022] EWHC 280 (QB) and Lavinia Deborah Osbourne v Persons Unknown [2022] EWHC 1021 (Comm).

51.In the BVI, in Joint Liquidators of Torque Group Holdings Ltd (In liq) v Torque Group Holdings Ltd (In liq) (BVIHC (Com) 0031 of 2021, 2 July 2021), the court considered an urgent application made by the liquidator for sanction to convert or exchange the various types of cryptocurrencies to US dollars owing to their volatility. On the question whether cryptocurrencies are “asset” within the meaning of s.2(1) of the BVI Insolvency Act, 2003[42] (which is very similar to the definition of “property” under s.3 of our Cap 1), Wallbank J followed the conclusions in the Legal Statement and in AA and held that crypto assets are assets for the purposes of liquidation (§§23-25).

52.In Singapore, the courts came to the same conclusion that cryptocurrencies meet all the requirements for property:

(1)  In B2C2 Ltd v Quoine Pte Ltd [2019] 4 SLR 17; [2019] SGHC(I) 03, the plaintiff claimed against the defendant (which operated a platform for third parties to trade in cryptocurrencies) for breach of contract and breach of trust. The defendant did not dispute that cryptocurrencies are a specie of property that is capable of being held on trust. Simon Thorley IJ considered that the concession was right as cryptocurrencies “do have the fundamental characteristic of intangible property as being an identifiable thing of value”, and they meet all the requirements for property discussed in Ainsworth (§142).

(2)  On appeal, the Court of Appeal considered the Legal Statement’s view that (a) cryptocurrencies have all the indicia of property, (b) their novel or distinctive features do not disqualify them from being property, and (c) they could be treated, in principle, as property. Although the court considered that there may be much to commend the view that cryptocurrencies should be capable of assimilation into the general concepts of property, it did not find it necessary to decide what type of property that is involved in respect of cryptocurrency (B2C2 Ltd v Quoine Pte Ltd [2020] 2 SLR 20; [2020] SGCA(I) 02, §§139-144).

(3)  In CLM v CLN & Ors [2022] SGHC 46, the court in the context of an ex parte application for joinder of parties as defendants and proprietary injunction enjoining such defendants from dealing with the cryptocurrencies stolen from the plaintiff, considered the question whether cryptocurrency is capable of giving rise to proprietary right which could be protected through a proprietary injunction. Lee J reviewed the cases decided in other common law jurisdictions and concluded cryptocurrencies satisfy the definition of a property right in Ainsworth (§§40-46).

53.In Canada:

(1)  In Copytrack Pte Ltd v Wall [2018] BCJ 3325, the plaintiff claimed against the defendant for conversion and wrongful detention of certain ETH transferred to the defendant by mistake. On the plaintiff’s application for summary judgment, the court considered that the proper characterization of cryptocurrency and the evidentiary record was not sufficient to permit a summary determination of the issue. However, regardless of the characterisation of the ETH, it was not in dispute that they were the plaintiff’s property and had been sent to the defendant in error, and the defendant had no proprietary claim to them. The court ordered that the plaintiff was entitled to trace and recover the ETH from whatever hands they were currently held in but refused to give summary judgment on the other relief such as disgorgement and/or damages.

(2)  In Shair.Com Global Digital Services Ltd v Arnold [2018] BCJ 3114, the plaintiff claimed against the defendant (a former officer and employee) for conversion and/or misappropriation of certain digital currencies and information related thereto. On the plaintiff’s ex parte application, the court was satisfied that the plaintiff had a claim to a proprietary interest in the laptop computer and in any digital currencies purchased by defendant flowing from the plaintiff’s initial amount invested in Bitcoin, and granted a preservation order over such currencies and the wallet information in relation thereto (§§13-15, 24).

54.In the United States:

(1)  In United States v 50.44 Bitcoins, Civil Action No. ELH-15-3692 (D Md 31 May 2016), in the context of an application for default judgment and order of forfeiture over the 50.44 Bitcoins on the ground that they were “property, real or personal, involved in a transaction or attempted transaction in violation of [18 U.S.C. s.1960], or any property traceable to such property”[43]. The federal magistrate judge proceeded on the basis that Bitcoins were property which may be subject to forfeiture and concluded that there was reasonable cause for the seizure of the Bitcoins in question.

(2)  In Lagemann v Spence, 2020 U.S. Dist. LEXIS 88066 (SDNY 18 May 2020), the court gave summary judgment against the defendant (who did not file any opposition) for inter alia conversion of the cryptocurrencies purchased with the plaintiffs’ funds. The case was decided on the bases that (a) cryptocurrencies are “property”; (b) under New York law, “money can be the subject of a conversion action when it can be identified and segregated as a chattel can be”, and “intangible rights can form the basis of conversion damages when the converted property is a document into which intangible rights have merged” (p.10, section G).

(3)  Similarly, in Meta-Tech Consultants, LLC v Niu, 2021 US Dist LEXIS 209207 (D Nev, 29 October 2021), the court in the context of the plaintiff’s application for default judgment, held that the defendant’s conversion of the Bitcoins (which had been purchased by the defendant with the plaintiff’s fund but failed to return them upon demand) denied the plaintiff the opportunity to sell the Bitcoins at their then high-end value. Judgment was entered against the defendant for the amount invested by the plaintiff together with loss of profit and fee paid to the defendant.

(4)  In BDI Capital v Bulbul Investments LLC 446 F.Supp.3d 1127 (2020), the plaintiff applied for summary judgment for conversion of the Bitcoins wrongfully retained by the defendant. On the question whether Bitcoins, as a virtual and intangible cryptocurrency, may be the subject of a conversion action, the court applied the reasoning in Kleiman v Wright[44], and held that Bitcoins are sufficiently identifiable to be considered “specific intangible property” and hence are capable of being the subject of a conversion action under Florida law (p.8).

(5)  Further, for federal tax purposes, the Internal Revenue Services has treated virtual currency as property and general tax principles apply to transactions using virtual currency (IRS Notice 2014-21).

55.In Australia, in Australian Federal Police v Bigatton [2020] NSWSC 245, the court held that there were reasonable grounds to suspect that the defendant had been “dealing with property reasonably suspected of being proceeds of crime contrary to s.400.9 of the Criminal Code” (§59), and granted a freezing order and custody and control orders over the defendant’s property including the Bitcoins and ETH in the wallets under its effective control (§§60, 64-66, 79).

56.The most detailed analysis on the issue is to be found in Ruscoe v Cryptopia [2020] NZHC 728, where the New Zealand court was asked to give directions under s.284(1)(a) of the Companies Act 1993[45] relating to the categorisation and distribution of the cryptocurrencies under the control of Cryptopia Ltd, a company which operated a cryptocurrency trading exchange and was placed into liquidation after suffering a serious hack and loss of a substantial amount of cryptocurrencies. The main issues are (1) whether the cryptocurrencies held by the liquidators is a type of “property” within the meaning of s.2 of the Companies Act 1993 and can cryptocurrency form the subject matter of a trust; and (2) whether the cryptocurrencies are held by Cryptopia on trust for the account holders (§§46-47). In essence, the dispute is one between the accountholders and the creditors of Cryptopia, and the court had the benefit of the submissions from counsel representing the liquidators, the accountholders and the creditors at a hearing which lasted for 4 days.

57.On the “property” issue, the accountholders contend that cryptocurrency is a form of intangible personal property both at common law and within the definition of s.2 of the Companies Act[46] and, even if cryptocurrency is not personal property in the full sense, it is still capable of forming the subject matter of a trust. On the other hand, the creditors contend that cryptocurrency is not property capable of forming the subject matter of a trust at common law (§§50-51). All parties agreed that cryptocurrency is a form of “assets”[47] for the purpose of the Companies Act (§61). Gendall J considered some of the authorities discussed in §§47-55 above, and concluded that cryptocurrency satisfies the 4 criteria for “property” as explained in Ainsworth and is a type of intangible property in that:

(1)  It is definable as the public key allocated to a cryptocurrency wallet is readily identifiable, sufficiently distinct and capable of being allocated uniquely to individual accountholder (§§104-108).

(2)  It is identifiable by third parties in that only the holder of a private key is able to access and transfer the cryptocurrency from one wallet to another (§§109-113).

(3)  It is capable of assumption by third parties in that it can be and is the subject of active trading markets where (a) the rights of the owner in that property are respected, and (b) it is potentially desirable to third parties such that they want themselves to obtain ownership of it (§§114-116).

(4)  It has some degree of permanence or stability as the entire life history of a cryptocurrency is available in the blockchain (§§117-119).

58.Further, Gendall J held that:

(1)  cryptocurrency, not being tangibles or choses in action, is no bar to recognition of its proprietary status (§§122-125);

(2)  cryptocurrency is not just information[48], but an item of tradeable value which affords exclusivity to its owner (§§127-128); and

(3)  there are no public policy objections to the court recognising cryptocurrency to have the status of property (§§129-132).

59.Although the definition of “property” under s.3 of Cap 1 is different from those adopted in the other jurisdictions considered above, I note that like other common law jurisdictions, our definition of “property” is an inclusive one and intended to have a wide meaning. Further, our courts have consistently applied and followed the principles expounded in Ainsworth when determining the question whether a right or interest meets all the requirements for property. For these reasons, it seems to me that in considering the question whether cryptocurrency is “property”, it is appropriate to apply and follow the reasonings in the Legal Statement and Ruscoe v Cryptopia, and their conclusion that cryptocurrency is “property”, which is capable of forming the subject matter of a trust.

D5.  Whether Gatecoin held cryptocurrencies on trust

60.Mr Ho submits that to create an express trust, there must be the “three certainties” (Snell’s Equity, 34^th ed., §22-012). The question is to determine not just the express arrangements as to how property is to be held, but whether it is held on trust (R v Clowes [1994] 2 All ER 316, 326d).

D5.1  Certainty of subject matter

61.As Mr Ho submits, notwithstanding the lack of segregation of the cryptocurrencies[49], there is sufficient certainty of subject matter. The law distinguishes between shares and intangibles on the one hand, and chattels on the other (Re Harvard Securities Ltd [1998] BCC 567,575). While a trust can only attach to specified and identifiable chattels (Re Goldcorp [1995] 1 AC 74), the position is different in respect of intangibles:

(1)  It is possible for a settlor to declare a trust over a part of a bulk of identical and interchangeable assets such as shares or securities (e.g. Hunter v Moss [1994] 1 WLR 452, 457H-458C; Re CA Pacific Finance Ltd [1999] 2 HKLRD 1, 17B-18F).

(2)  A trust of part of a fungible mass without appropriation of any specific part does not fail for uncertainty of subject matter, provided that the mass is sufficiently identified and the beneficiary’s proportionate share of it is not uncertain (Re Lehman Brothers Intl (Europe) [2010] EWHC 2914 (Ch), §225(iii)). Such a trust works by creating a beneficial co-ownership share in the identified fund, instead of having to identify a particular part of the fund which the beneficiary owns outright (§232).

62.In the present case, certainty of subject matter can be derived from a claim to a proportionate share of an undivided bulk:

(1)  There is compelling reason to draw an analogy between cryptocurrencies with a trust over shares or securities. In both cases, the right conferred upon the beneficiary would not depend on the precise identification of the asset owned. As each unit of cryptocurrency is identical to other unit of that kind, it makes no difference whether a customer holds the same output that originated from his initial input on the blockchain.

(2)  On the basis that there can be a trust over a proportionate share of all cryptocurrencies, the subject matter of the trust vis-à-vis each customer is sufficiently certain, as the account balance represents the proportion of the cryptocurrencies over which such customer has a beneficial interest in the pool.

(3)  Such was the conclusion in Ruscoe, where the court held (§§145, 147) that the internal ledger clearly recorded the contributions of each accountholder which provided sufficient certainty of subject matter. A trust arose whereby the beneficial co-ownership of each cryptocurrency was shared by all account holders in proportion to the amount of relevant cryptocurrencies they each contributed.

(4)  In the present case, there is certainty of subject matter as the amounts of Currencies held by the Customers were recorded in the Exchange Ledger, and they co-own and share each type of cryptocurrency and fiat currency in proportion to the credit balances standing in their accounts.

D5.2  Certainty of object

63.A trust would be valid so long as there is no conceptual ambiguity or uncertainty in the definition of the class of beneficiaries (Re Gulbenkian [1970] AC 508, 524E-G; Ruscoe, §149).

64.Here, there is certainty of object as the beneficiaries of the trust and the extent of their claim can readily be seen from the Exchange Ledger.

D5.3  Certainty of intention

65.The principles on certainty of intention have been summarised by Briggs J in Re Lehman Brothers §225(v)-(x) as follows:

“(v) Subject to the issue of certainty, the question whether B has a proprietary interest in the property acquired by A for B’s account depends upon their mutual intention, to be ascertained by an objective assessment of the terms of the agreement or relationship between A and B with reference to that property.

(vi) The words used by the parties such as ‘trust’, ‘custody’, ‘belonging’, ‘ownership’, ‘title’, may be persuasive, but they are not conclusive in favour of the recognition of B’s proprietary interest in the property, if the terms of the agreement or relationship, viewed objectively, compel a different conclusion.

(vii) The identification of a relationship in which A is B’s agent or broker is not conclusive of a conclusion that A is, in relation to the property, B’s trustee, although it may be a pointer towards that conclusion.

(viii) A relationship which absolves A from one or more of the basic duties of trusteeship towards B is not thereby rendered incapable of being a trustee beneficiary relationship, but may be a pointer towards a conclusion that it is not.

(ix) Special care is needed in a business or commercial context. Thus:

(a) The law should not confine the recognition and operation of a trust to circumstances which resemble a traditional family trust, where the fulfilment of the parties’ commercial objective calls for the recognition of a proprietary interest in B.

(b) The law should not unthinkingly impose a trust where purely personal rights between A and B sufficiently achieve their commercial objective.

(x) There is, at least at the margin, an element of policy. For example, what appears to be A’s property should not lightly be made unavailable for distribution to its unsecured creditors in its insolvency, by the recognition of a proprietary interest in favour of B. Conversely, the clients of intermediaries which acquire property from them should be appropriately protected from the intermediary’s insolvency.”

D5.3.1  During the currency of the 2016 T&Cs

66.The 2016 T&C is silent on the nature of Gatecoin’s holding of the Currencies for Group A customers.

67.Nevertheless, the Liquidators considered that by reason of the following facts and matters, Gatecoin did intend to hold the Currencies on trust for Group A customers:

(1)  Mr Max Jackowski (“MJ”), the person engaged to “update” Gatecoin’s terms and conditions, was instructed by Gatecoin’s representative on 27 October 2016 that “as Gatecoin, we hold the property on behalf of the client”, and to incorporate express trust language. On this basis, MJ drafted the Trust T&Cs[50].

(2)  Gatecoin agreed to compensate the affected Customers of the value of ETH stolen as at the time the compensation was paid (as opposed to the time of the Hack)[51]. Such treatment was consistent with Gatecoin holding the ETH in Customers’ accounts on trust.

(3)  The pooling of cryptocurrencies in the wallets controlled by Gatecoin does not mean that no trust was intended as the beneficiaries’ interest can be ascertained from the Exchange Ledger.

(4)  Although Mr Menant in his reply dated 13 May 2022 claimed that Gatecoin had no intention to create a trust, that has to be read in its context, where Mr Menant continued to say that the earlier versions of T&C had been superseded by the 2018 T&C; and Clauses 10.1.1 and 27.2.4 of the 2018 T&C show that there was no trust intended. The basis of Mr Menant’s statement is his belief that the 2018 T&C would apply to all Customers, which the Liquidators consider to be incorrect.

(5)  In any event, even if the 2016 T&C by itself did not create a trust, once the Trust T&C was adopted, they applied to the Group A customers, rendering the relationship they had with Gatecoin to be one of trust. In this regard, the 2016 T&C provided that Gatecoin might change the terms at any time without prior notice. In any event, Gatecoin had notified the Group A customers by email when the Trust T&C came into effect.

68.In respect of the Non-Consenting Customers, I agree that for the reasons identified by the Liquidators, Gatecoin holds the Currencies on trust for them. However, for the reasons stated in Section D2 above, I do not agree that the relationship between Group A customers (and B customers for that matter) was governed by the Trust T&C as these customers had accepted and agreed to the 2018 T&C.

D5.3.2  During the currency of the Trust T&C

69.The Liquidators consider that there was a trust relationship between Gatecoin and Group B customers:

(1)  The express trust language in Clauses 7.3.1-7.3.2 and the recognition that accretion to cryptocurrencies belonged to the Customers in Clause 7.5;

(2)  The Trust T&C was drafted by MJ on Gatecoin’s express instructions that the cryptocurrencies were to be held on trust;

(3)  The policy consideration concerning unsecured creditors in insolvency (Re Lehman Brothers §25(x)) cannot override clear expression of intention to create a trust for Group B customers; and

(4)  the Liquidators’ initial view of no trust[52] is of no relevance, since that view was formed on the basis that the 2018 T&C governed the relationship between Gatecoin and all the Customers and without the benefit of the Trust T&C or the contemporaneous evidence of intention referred to above.

70.In view of the clear language of the Trust T&C discussed in §26 above, if the Trust T&C had not been superseded by the 2018 T&C, I would agree with the Liquidators that it was the mutual intention of Gatecoin and Group B customers (and Group A customers for the reasons stated in §67(5) above), that the Currencies were held by Gatecoin on trust for these customers.

D5.3.3  During the currency of 2018 T&Cs

71.It is clear that from the terms of the 2018 T&C that there was no intention to create any trust for the Customers:

(1)  In the 2018 T&C, all the trust language in the Trust T&C was removed;

(2)  Clauses 1.7 and 3.5 contained express disclaimers of fiduciary obligation;

(3)  Clauses 12.5 and 13.1 allow Gatecoin to keep accretion to the cryptocurrencies. This is consistent with and reinforces the position that Gatecoin is the beneficial owner of the cryptocurrencies; and

(4)  Although Clause 10.1.1, still uses the phrase “the Exchange Ledger to track a User’s ownership of” the Currencies, this is not sufficient to displace the clear intention stated in the other Clauses discussed above.

D6.  Whether fiat currencies are held on trust

72.As stated above, Gatecoin’s fiat currencies were also mixed and kept at the PSPs. Such pooling of fiat was expressly contemplated in the Trust T&C Clause 5.1 and the 2018 T&C Clause 10.1.1.

73.The above analysis applies with equal force to fiat currencies standing in credit in the Customers’ accounts. It follows that the fiat currencies are not held by Gatecoin on trust for the Customers, be it Group A, B or C customers.

74.I should add that Mr Chan contends that:

(1)  As a Group A customer Cumberland agrees with the Liquidators’ analysis that Gatecoin holds the Currencies on trust for Group A customers.

(2)  Cumberland does not agree with the Liquidators’ view that the ETD Holders are unsecured creditors to the extent of the value of the ETD in their accounts, apparently on the basis that Gatecoin held the ETH on trust for Group A customers including Cumberland. To the extent that Gatecoin lost the ETH in the Hack, it acted in “breach of duty and give rise to an action in conversion” and Cumberland is entitled to be compensated for the loss of the ETH.

(3)  In any event, the information available is not sufficient for the Court to determine the question whether the ETH Holders have a proprietary claim over the ETH recorded in their accounts or that they only have a non-proprietary claim against Gatecoin.

75.In light of my conclusion that the Currencies are not held by Gatecoin on trust for the Customers, the basis for contending that Cumberland has a proprietary claim over the ETH recorded in its account no longer exists. As to the question whether the ETD Holders have a proprietary claim over the ETH lost in the Hack (that is, the ETD Debt), it will be considered in the next stage, after the parties have the opportunity to consider the Court’s determination on Question 1.

E.  Question 2: Blue Fire Issue

76.As stated in Section B5 above, BlueFire is the largest account holder but has not asserted any claim over the Currencies or filed any POD. The evidence shows that BlueFire did not carry on any trade in its own right but acted on behalf of Gatecoin in that:

(1)  BlueFire was described as a market maker for Gatecoin;

(2)  Gatecoin had advanced credit lines to BlueFire for the trades it carried on through the Platform; and

(3)  Gatecoin’s records show that BlueFire did not pay any account fees or charges, unlike the Customers who had to pay fees and charges to Gatecoin in return for the services rendered to them.[53]

77.As Gatecoin acted as agent of Gatecoin in carrying on all the transactions, the Currencies recorded in its accounts must be regarded as assets of Gatecoin. The conclusion is consistent with and reinforced by the following facts and matters.

78.First, according to Mr Menant, there was no written agreement entered into between BlueFire and Gatecoin. The Liquidators find no evidence of any agreement or documentary record of Gatecoin’s arrangements with BlueFire[54].

79.Second, the evidence available to the Liquidators all show that BlueFire acted as a service provider which: (a) used Gatecoin’s funds to buy and sell cryptocurrencies in accordance with Gatecoin’s orders at the crypto clearing house and (b) transferred the cryptocurrencies to Gatecoin’s Wallets after completion of these transactions (which Gatecoin recorded in the Exchange Ledger under BlueFire name).

(1)  Mr Menant referred to BlueFire as a market maker. This is consistent with industry understanding of what this means[55]- a market maker upon receiving an order from a buyer would immediately sell off its position of cryptocurrency from its own inventory and is then compensated with a fee in exchange for providing the market-making service (though it may also profit from the difference in the bid-ask spread from the trades it makes.

(2)  The description in the Cheng Report is consistent with news report which described BlueFire as a market maker.

80.Mr Ho submits that the position that Gatecoin (but not BlueFire) has proprietary interest in the Currencies recorded in BlueFire’s account is bolstered by the following legal analysis:

(1)  Since Gatecoin’s funds were advanced to BlueFire for the sole purpose of purchasing cryptocurrencies on Gatecoin’s behalf[56], a Quistclose trust would have arisen whereby BlueFire held the funds Gatecoin advanced on trust for Gatecoin (Twinsectra Ltd v Yardley [2002] 2 AC 164, §§68-102).

(2)  Further, a Quistclose trust may be applied to non-loan situations such as the present (Twinsectra §99; Typhoon 8 Research Ltd v Seapower Resources International Ltd [2002] 2 HKLRD 660, §§18-19, per Le Pichon JA (as she then was)).

(3)  If a Quistclose trust is imposed on the fiat used to acquire cryptocurrencies, this adds strength to the conclusion that the cryptocurrencies so acquired belong to Gatecoin.

81.As there is no dispute that BlueFire was the market maker engaged by Gatecoin and all the transactions were carried on by BlueFire using the funds provided by Gatecoin, it is indisputable that the Currencies recorded in its accounts are assets of Gatecoin.

F.  Conclusion

82.For the reasons discussed above, in respect of Question 1, I hold that:

(1)  Except the Non-Consenting Customers, the 2018 T&C applied to, and governed the relationship between all the Customers (be it Group A, B or C customers) and Gatecoin (Section D2 above).

(2)  The terms of the 2018 T&C make clear that the cryptocurrencies are not held by Gatecoin on trust for the Customers. This is consistent with and reinforced by the objective facts that the cryptocurrencies have always been treated as Gatecoin’s assets (Section D3 above).

(3)  Cryptocurrency is “property” and is capable of being held on trust (Section D4 above).

(4)  There was certainty of subject matter and object. However, the terms of the 2018 T&C show that there was no certainty of intention to create a trust over the cryptocurrencies held by Gatecoin (Section D5 above).

(5)  Except the Non-Consenting Customers, the fiat currencies are not held by Gatecoin on trust for the Customers (Section D6 above).

83.As for Question 2, I hold that the Currencies recorded in BlueFire’s accounts are assets of Gatecoin (Section E above).

84.I give liberty to the parties to apply for further directions.

Mr Justin Ho, instructed by Clifford Chance, for the Liquidators

Mr Eric Chan, of Simmons & Simmons, for Cumberland DRW LLC

Schedule

(Directions made on 5 December 2022)

1.  Notice of the Summons, the 2^nd Affirmation of Chi Lai Man Jocelyn dated 29 November 2022, the Skeleton dated 30 November 2022, and the draft Order attached to the Skeleton be uploaded to the website maintained by the Liquidators of Gatecoin: https://www.gatecoinliquidation.com/ (“Website”) from the date of this order;

2.  Any former customer or creditor of Gatecoin wishing to be heard by the Court on the Summons do (a) notify the Liquidators of Gatecoin of their intention; (b) provide to the Liquidators (i) an effective means of communication (email address or physical address) and (ii) the names of their legal representatives (if any), and (c) file and serve affidavit evidence (together with any exhibits) (if any) within 4 weeks of this order;

3.  Within 4 weeks thereafter:

3 .1   The Liquidators shall file any affidavit in reply to the affidavit evidence in §2 above (if so advised);

3.2   Subject to confirmation of identity, the Liquidators shall compile (a) a list of all persons who have given notice in accordance with §2 above (“Interested Parties”) and (b) a list of issues raised by the Interested Parties, and lodge such lists with the Court and upload such lists on the Website;

4.  A callover hearing of the Summons be fixed on 23 February 2023 at 10am (“Callover Hearing”), at which the Court will consider whether the Summons can be determined summarily, and in the event that the Court so decides the Summons will be determined summarily at the Callover Hearing;

5.  7 days prior to the Callover Hearing, the Interested Parties may (if they so wish) file their skeleton submissions with the Court, and in the event that they choose to file skeleton submissions they must serve a copy on the Liquidators. The skeleton submissions of each Interested Party will be limited to 10 pages (using at least size font 14 with normal page margins, i.e. 2.54 cm on top, bottom, right and left of page), unless leave of the Court is obtained for a higher page limit; and

6.  3 days prior to the Callover Hearing, the Liquidators do file skeleton submissions in reply (if any) and upload the same to the Website. The Liquidators do upload these directions to the Website within 24 hours from the date of this order.

7.  Costs be in the cause of the Summons.