Disputes Quick Read: Dealing in crypto? Be careful what you call it

Briefing

If your business involves dealing in cryptocurrencies, you should be aware that if the legal status of a transaction is not clearly agreed, a counter party may claim that you hold those digital assets on trust for them.

This is a particular risk for cryptocurrencies that are rising in value as a counter party may seek to assert a proprietary claim (ie a right to beneficial ownership over the asset or their traceable proceeds) which may end up being higher in value than the consideration agreed under the contract. You should therefore ensure that you have a clearly drafted agreement for the nature of the transaction -ie, whether is it a loan, a sale and buy-back, a trust arrangement, or something else.

This issue arose in the recent case of Wang v Darby. The court had to determine the proper legal characterisation of two transactions between the parties - Mr Wang and Mr Darby - involving Tezos and Bitcoin. Mr Wang sought to argue that the transactions had given rise to a trust, entitling Mr Wang to a proprietary claim rather than just a personal one. Mr Darby on the other hand argued that the transactions were for the sale and buy-back of the cryptocurrency.

On an application brought by Mr Darby for Mr Wang's claim to be struck out and/or for the court to enter reverse summary judgment, the court held that while it was possible under English law for digital assets such as Tezos to be subject to an English law trust, no trust had been created under this transaction.

The transactions

There was no formal contract entered into between the parties. The relevant contracts had been formed via the parties' discussion on Telegram. The key terms were as follows:

Under the First Contract, concluded in December 2018, Mr Wang transferred a parcel of 200,000 Tezos to Mr Darby in return for 13 Bitcoins.
Under the Second Contract, concluded in January 2019, Mr Wang transferred a parcel of 200,000 Tezos to Mr Darby in return for 17 Bitcoins.
After a period of two years, Mr Wang would buy-back the 400,000 Tezos from Mr Darby at an agreed price in US dollars, or the price of US$ 110,000, or the Bitcoin equivalent.
During the two-year period, Mr Darby would use the Tezos for baking and/or stake bonding and Mr Wang would receive a share of the rewards or profits made by Mr Darby.

The court’s finding

Following a disagreement between the parties, Mr Wang issued a formal demand for the return of his 400,000 Tezos. Mr Darby failed to return the Tezos, which gave to rise to these proceedings. Mr Wang's case was that the 400,000 Tezos, and/or their traceable proceeds, were held by Mr Darby on trust for him.

The court held that no trust had been created under English law because the contracts between the parties involved essential reciprocity; ie, in order for Mr Wang to become entitled to the return of the 400,000 Tezos, he had to return corresponding value in (or equivalent to) Bitcoins to Mr Darby. This transactional element was inimical to the concept of a trust.

And it was common ground between the parties that the transaction involved a sale of the Tezos to Mr Darby, which Mr Wang could repurchase on restoring the value to Mr Darby of the Bitcoins. Each sale/purchase in the transactions between the parties involved a transfer of ownership – which precluded the existence of a trust.

This is a different legal scenario to that reached of the High Court of New Zealand in Ruscoe & another v Cryptopia Limited (in Liquidation) [2020], in which the court held that a cryptocurrency trading exchange, known as Cryptopia, held the digital assets of its customers on express trust. In that case, the account holders (ie the beneficiaries) were held to have deposited, traded and owned their own cryptocurrency in return for certain fees.

Takeaways

This case is a helpful reminder that cryptocurrencies can constitute property under English law and can therefore also be the subject of a trust.
Whether a trust arises in a particular transaction will depend on the objective common intention of the parties. The court is entitled to discern the parties' objective intentions from their pleaded cases as well as the evidence before the court.
Here, the court considered the transactional language used by the parties to be consistent with a sale and buy back transaction. The fact that they had also at times used proprietary or possessory language such as "my" or "yours" when referring to the digital assets was not enough to create a trust.
The court forewarned that the language used by the parties when transacting will not on its own be determinative of the legal characteristics of the transaction, particularly where, as was the case here, the parties agreed the transaction informally via Telegram without legal advice.
To avoid the risk of a trust being created unintentionally, you should however ensure that you communicate clearly with counterparties about the terms and legal effect of transactions involving crypto assets. If it is not your intention to create a trust this should be expressed clearly in writing.