Hong Kong: Demystifying cryptocurrency – Applying traditional legal remedies to digital

In brief

In one of the first cases in Hong Kong in which the court has granted freezing injunctions over bitcoins, the Court of First Instance has now handed down judgment in the trial of Nico Constantijn v Stive Jean-Paul Dan [2022] HKCFI 1254.

The court held that the defendant acted as the plaintiff’s sales agent in respect of the plaintiff’s bitcoins. The court found the defendant had breached his fiduciary duties in failing to account to the plaintiff for the bitcoins and the relevant sales proceeds. Consequently, the court held that the defendant held on trust for the plaintiff the unsold bitcoins, the proceeds from the sale of the bitcoins and the fruits thereof. 

Given the recent drop in prices of cryptocurrency, it is important for businesses to safeguard investments in cryptocurrency and to understand the available legal remedies in case of dispute.

Businesses should put in place adequate safeguards when engaging in cryptocurrency trading and other related activities to minimize the risk of financial losses. These include recording the terms of the transaction in a written agreement, keeping comprehensive records of transfers and putting in place contingency plans for dealing with financial fraud/crime. 

Nico Constantijn v Stive Jean-Paul Dan confirms that the familiar legal principles of trusts and injunctions apply equally to cryptocurrency as a novel asset class. Such legal remedies remain important tools to victims of cryptocurrency fraud and recovery. Businesses may now more confidently rely on the court to grant relief to protect and recover their digital assets.

The practical implications of this case can be summarized as follows:

1. It is important to properly document the agreement between parties in cryptocurrency transactions, including the amount and type of cryptocurrency to be transferred, the transferor wallet and the recipient wallet. In this case, there was no written agency agreement, which led to disputes on the terms of the agency agreement and rate of commission. It is also important for parties to agree on the applicable law for cross-border transactions that will involve parties in different jurisdictions.
2. It is important to keep records of cryptocurrency transfers. Having the transaction ID for a transaction will mean that the details of the transaction can be verified on the public blockchain, including the type of cryptocurrency transferred, the amount of cryptocurrency transferred, the transferring wallet address, the receiving wallet address and when the transfer was effected. 
3. It is important to safely store private keys and seed phrases as these are required to safeguard and maintain access to cryptocurrency wallets. Loss of the private keys and the seed phrase for a wallet will mean that the wallet (and any cryptocurrency stored in that wallet) can no longer be accessed. 
4. Upon the discovery of fraud, it is important to act swiftly and consider whether an application should be made for a freezing injunction. Delays in applying for a freezing injunction may hinder the prospects of successfully obtaining an injunction. If the cryptocurrency transfers involve anonymous parties, it may also be necessary to seek disclosure applications against third parties (such as cryptocurrency exchanges) to identify the parties involved and other relevant information.

Given the fast-changing developments in digital assets, it is all the more important that businesses and victims of cryptocurrency fraud act promptly in seeking legal advice and taking the necessary legal steps.