Synopsis

The British Virgin Islands ('BVI') and the Cayman Islands have become the jurisdictions of choice for many developers and entrepreneurs when incorporating cryptocurrency exchanges, structuring cryptoasset funds or blockchain enterprises. As such, when a user has an issue with their account (e.g. their trade is not honoured or their account is frozen) or their cryptoassets are misappropriated there is a high probability that an exchange or entity located in the BVI or Cayman will be somewhere in the mix.

This article discusses the legal remedies that may be available in the BVI and/or the Cayman Islands in the event that crypto-related proceedings have been or will be commenced in these jurisdictions.

For the purposes of this article, we have excluded from our analysis crypto-related insolvencies, of which there are many, especially of late, varying in size and complexity

Introduction

The growth of blockchain technology over the last decade has been staggering. Emerging in 2008, partly in response to the Great Financial Crisis, Bitcoin and other cryptocurrencies were initially developed and intended to give people greater control over their finances, by removing the intermediates (usually traditional banks) and storing the currency on a public distributed ledger, that is, a decentralised blockchain.

After a somewhat slow and narrow adoption of cryptocurrencies and blockchain technology, the recent explosion in all things crypto (from banking, trading, insurance, intellectual property rights and so on to personal information custody and the interactions between governments and citizens) has meant that, traditionally, the law and regulation has had to play catch-up. However, over the last few years, that has changed and the legal world is increasingly adapting to blockchain technologies and a steady stream of case law has emerged which explains how the law applies to, and can be used to govern, cryptocurrencies.

There has been a sharp increase in crypto disputes involving companies and exchanges incorporated in the BVI and the Cayman Islands. The nature of the disputes often fall into one of the following four categories:

  1. Stolen cryptoassets, often by 'persons unknown', where the cryptoassets are moved to or through an exchange-hosted wallet provided by an exchange incorporated in the BVI or Cayman Islands;
  2. Algorithmic trading claims, that is, where an offshore exchange reverses or refuses to honour a trade, often citing 'unilateral mistake' as justification;
  3. Frozen wallets or trading accounts managed by offbshore exchanges or funds; and
  4. Partnership disputes, where the relationship between the individuals involved in a blockchain project structured through offshore entities breaks down.

The law

In the absence of local legislation or case law, the BVI and Cayman Islands courts will look to decisions of the English courts for guidance and authority. Decisions of the English Court of Appeal and UK Supreme Court (whilst not binding in the Cayman Islands or the BVI) will be highly persuasive, as will decisions of the Privy Council on appeals originating from other Commonwealth jurisdictions.1 Accordingly, and in light of what is currently a limited body of case law in the BVI and Cayman Islands in comparison to England, this article focuses on key developments in English law with respect to cryptoassets and how these have been or are likely to be applied in the BVI and Cayman Islands.

The basic principles

How crypto is held

Cryptoassets can be held in three mains ways: (i) centralised exchanges (least secure); (ii) software wallets (somewhat secure); and (iii) hardware wallets (most secure).

As already noted, cryptocurrencies are designed to be decentralised in nature and without intermediaries. Nevertheless, the majority of people choose to hold their cryptoassets on a centralised exchange which often facilitates trading, staking, earning crypto 'interest' or other services. While the use of centralised exchanges might give the user the feel of a traditional bank or broker, the reality is often very different and the rights and obligations between an exchange and a customer can vary significantly from what one might expect in a traditional banking relationship. For example, exchanges frequently co-mingle clients' cryptoassets, hold them in non-segregated accounts, exclude by contract the creation of a trust relationship, loan assets out without notice or authorisation, or otherwise treat cryptoassets differently than one might expect assets to be treated by a fiduciary. Additionally, the respective rights and obligations can change over time (often significantly) when an exchange updates its terms and conditions.

With software and hardware wallets, the onus is on the user to safeguard the private keys and cryptoassets. While this somewhat mitigates the risks associated with exchanges (which could include hacking, mismanagement of cryptoassets or becoming insolvent), it does make the wallets vulnerable to more traditional risks such as theft, loss, or partners/directors going rogue with the 'keys to the kingdom'.

Cryptoassets as property

Common law traditionally identifies two forms of property:

  1. Things in possession (physical items); and
  2. Things in action (a right which is capable of being enforced).

Strictly speaking, cryptocurrency does not fall into either of these categories. However, a legal statement published in 2019 by the UK Jurisdictional Taskforce on cryptoassets and smart contracts the ('UKJT Statement') stated that a strict interpretation would be unsuitable and that there were strong grounds on which crypto currencies should be recognised as property.

Subsequently, in the landmark decision of AA v Persons Unknown2 it was confirmed, following consideration of the UKJT Statement, that cryptocurrencies should be treated as property. In coming to this conclusion, Mr Justice Bryan referred to Lord Wilberforce's definition of property in National Provincial Bank v Ainsworth, 3 which had stated that the four criteria for an object to be defined as property included being 'definable, identifiable by third parties, capable in their nature of assumption by third parties and having some degree of permanence' [59]. The High Court was thereafter satisfied that cryptoassets, such as Bitcoin, do indeed meet this definition of property.

This principle has similarly been accepted in the BVI following the decision in Torque Group Holdings Limited (In Liquidation) v Torque Group Holdings Limited (In Liquidation)4 where cryptoassets were held to constitute property for the purposes of a liquidation under the BVI Insolvency Act 2003 (as amended).

More recently, in the English case of Lavinia Deborah Osbourne v Persons Unknown and Ozone Networks Incorporated5 the High Court also concluded that there is 'at least a realistically arguable case that [non-fungible] tokens are to be treated as property as a matter of English law.'

Once recognised as property, the usual legal remedies are available where appropriate (as further discussed below), including:

  1. Freezing injunctions;
  2. Proprietary injunctions;
  3. Disclosure orders in support of injunctions; and
  4. Norwich Pharmacal relief.

Crypto as a trust asset?

The question as to whether cryptocurrencies can be held on trust has also arisen in case law over the past few years. English, Singaporean and New Zealand authority have confirmed that they can be. In the English case of Wang v Darby6 the High Court considered for the first time whether cryptocurrencies could be held on trust for the purposes of establishing a proprietary right over those assets. On the particular facts of the case, it was held that no form of trust arose. Nevertheless, this case demonstrated the High Court's willingness to apply the principles of trust law to a proprietary claim over cryptoassets in an appropriate case.

Footnotes

1. As the President of the Cayman Islands Court of Appeal observed in Miller v R [1998] CILR 161 at 164 'a decision of the English Court of Appeal [and a fortiori, the House of Lords/UK Supreme Court], while not formally binding upon this court automatically, is necessarily one of great persuasive authority, especially where it is unanimous and is directed towards a doctrine of the common law'

2. [2019] EWHC 3556 (Comm).

3. [1965] AC 1175.

4. BVIHC (COM) 0031 of 2021.

5. [2022] EWHC 1021 (Comm) at [13].

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Originally Published by Chase Cambria Company (Publishing) Ltd

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.