On March 6, 2024, Bitcoin reached an all-time high of USD 69,000, albeit for a brief moment. There is no gainsaying that the world over, cryptocurrencies are here to stay. The growing use of cryptocurrencies will inevitably bring with it an increase in disputes concerning them. This is sure to pose many pertinent and relevant legal questions before our courts as well.
Most significant among them, perhaps, is the question of locating cryptocurrencies. This will be key to determining issues such as regulation, jurisdiction and the grant of various important relief.
Cryptocurrencies as property
Lord Wilberforce in National Provincial Bank Ltd. v. Ainsworth, a case before the House of Lords, observed that,
“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 performance or stability.”
The High Court of New Zealand had the opportunity to examine if cryptocurrency assets could be considered as property in David Ruscoe and Another v. Cryptopia Ltd, in light of Ainsworth.
Ruscoe held that cryptocurrencies are “definable” since they are computer-readable strings of characters recorded on networks of computers established for the purpose of recording those strings and are sufficiently distinct to be capable of being allocated to an account holder on that particular network. It also noted that they are “identifiable by third parties” since cryptocurrencies have an owner capable of being recognised as such by third parties. The owner also has the power to exclude others from using or benefitting from the asset through the private key, which is required to record a transfer of the cryptocurrency from one account to another.
Ruscoe noted that cryptocurrencies are “capable of assumption by third parties”, reasoning that this involved third parties respecting the rights of the owner in the asset and that the asset must be potentially desirable. These aspects were met as many cryptocurrencies are actively traded. Cryptocurrencies also have “some degree of performance or stability” as the blockchain technology provides stability to cryptocurrencies and a particular cryptocurrency token stays fully recognised in existence and is stable unless and until it is “spent” through the use of the private key. Cryptocurrencies were thus held to be intangible property.
This has also been followed in Singapore in CLM v. CLN and Others. CLM raised interesting questions of law, one of which included whether stolen cryptocurrency assets can be the subject of a proprietary injunction. Agreeing with Ruscoe, it was held that cryptocurrencies are intangible property which can be the subject of a proprietary injunction.
Locating cryptocurrencies
In ByBit Fintech Ltd v. Ho Kai Xin and Others and the recent decision of Cheong Jun Yoong v. Three Arrows Capital Ltd and Others, the General Division of the High Court of Singapore observed that a crypto asset has no physical identity, is not associated with any physical object and exists as a record in a network of computers associated with it. For this reason, its location cannot be determined by its physical presence.
The High Court of Singapore in Three Arrows examined where the situs of a cryptocurrency would be located to determine jurisdiction. The Court noted that the situs of a crypto asset would be where its owner was resident. The presumptive owner of a crypto asset, it noted, would be whoever controlled the wallet linked to the crypto asset. This “control” over a crypto asset is with the person who controls the private key to the crypto asset linked to that key (a cryptocurrency has a public address and a private cryptographic key. The public address, also known as the “wallet”, is all that is needed to receive a cryptocurrency. A private key is an alphanumeric code which is mathematically linked to the public address. To transfer a cryptocurrency, one needs both the public address and the private key). The Court observed that since a crypto asset has no physical presence and exists as a record in a network of computers, it best manifests itself through the exercise of control over it.
The Court reasoned that in treating crypto assets as choses in action, this too would lead the situs analysis to the person who controls the private key. Choses in action, though were once said to have no location, evolved to be considered as being located in the place where they can be effectively dealt with, or in other words, enforced (see Hollis R. Bailey, Situs of Choses in Action). Therefore, as a chose in action, a crypto asset would be properly recoverable or enforced where the person who controls the private key resides and can be sued.
The courts in England though, have taken a slightly different approach. In Lavina Deborah Osbourne v. Persons Unknown and Another, the English High Court decided that crypto assets are to be treated as located at the place where the owner is domiciled.
Residence and domicile
Residence requires mere bodily presence in a locality. Domicile requires bodily presence along with an intention to make that locality one’s permanent home and to abandon any other location that one previously called home. Domicile is defined as the place where a person has his true, fixed, permanent home and principal establishment, and to which, whenever he is absent, he has the intention of returning.
In the context of taxation, a resident is one whose presence within the jurisdiction is for a purpose that is not transitory. A transient or a sojourner, therefore, is not a resident. Residence, Frank Keesling writes, is a fine balance between mere physical presence and the rather inflexible rule of domicile which is based largely on subjective intentions (see Frank M. Keesling, The Importance of Citizenship, Residence and Domicile in Federal Income Taxation).
The High Court of Singapore in locating cryptocurrencies and determining jurisdiction based on residence has adopted a more practical approach. In Three Arrows, the High Court of Singapore considered Osbourne but felt that residence was the more appropriate test to determine the situs of crypto assets than domicile. It felt that since the situs of crypto assets was being determined based on the exercise of control over such assets, residence of the person is a better indicator of where the control is being exercised. It also felt that residence was more appropriate given the uncertainties around identification of domicile in difficult cases.
These uncertainties around identification in difficult cases could unnecessarily prevent the exercise of jurisdiction where it otherwise ought to have been, for all practical purposes, validly exercised. Domicile, after all, is a question of fact where there must be no pretence or deception as the intention to make a locality one’s permanent home must be honest, the action in this regard genuine, and the evidence to establish both must be clear and convincing. The animus manendi (intention to remain) must be actual with no animo revertendi (intention to relocate) (see Matter of Newcomb). This can be difficult and cumbersome to prove in difficult cases.
Given that choses in action are considered as being located in the place where they can be effectively enforced, the approach of the Singapore courts in adopting the domicile test may prove to be more effective in determining the situs of crypto assets. It is worth pointing out that even in Osbourne, the owner of the crypto asset was domiciled in the jurisdiction, which made the enforcement of the chose in action and the exercise of jurisdiction more straightforward, even if the domicile test was applied.
A perspicacious understanding of the nature of crypto assets is essential to answer some of these difficult questions through legislation, regulation and even adjudication in courts or tribunals. The growing ubiquity of crypto assets makes it all but likely that our courts too will be faced with some of these questions. For now, one can only wait with bated breath to see which approach our courts will adopt when the question of locating cryptocurrencies inevitably comes before them.
Abhirup Paul Bangara is a practicing advocate in Bengaluru. The views expressed are personal. He can be reached at abhirup@bangara.org.