The UK High Court followed the UK Jurisdictional Task Force's legal statement on cryptoassets and smart contracts and ruled that bitcoins are property and can be made the subject of a proprietary injunction. The case involved a malware attack on an insurance company and a ransom demand by the hackers of nearly $1 million in bitcoins in return for the decryption tool.
The High Court has ruled that bitcoins are property and can be made the subject of a proprietary injunction.
The court in AA v Persons Unknown  EWHC 3556 (Comm) took its cue from the UK Jurisdictional Task Force's (UKJT) legal statement on cryptoassets and smart contracts, finding the analysis compelling and one to be adopted by the court.
A hacker infiltrated and bypassed the firewall of a Canadian insurance company, installing malware, encrypting its systems and demanding a ransom for the decryption tool that would allow it to regain access to its data.
An incident response company (IRC) that specialised in the provision of negotiation services in relation to cryptocurrency ransom payments was appointed. The IRC was informed by the fraudsters that the price for the decryption tool would be US$1.2 million and that payment would need to be made in bitcoins.
A ransom of US$950,000 was agreed and paid in bitcoins, following which the hackers provided the decryption tool. The insurer then contacted a specialist company to track the ransom bitcoins, tracing them to an exchange based in the British Virgin Islands.
The claimants sought a proprietary injunction against the defendants who were persons unknown, successfully arguing for the hearing to be heard in private on the basis that publicity would defeat the object.
The property puzzle
The court grappled with the issue of whether bitcoins are 'property' under English law, which traditionally views property for these purposes of being potentially of only two kinds: 'things in possession' (tangible rights) and 'things in action' (such as rights under a contract).
On the face of it, bitcoins did not fit squarely into either category. They were not 'things in possession' because they were virtual and not tangible. They were not 'things in action' because they did not embody any right that could be enforced by action. If bitcoins could not be classified as property, the court could not make them the subject of a proprietary injunction or freezing injunction.
Fortunately, the UKJT statement had concluded that cryptoassets should be regarded as property, in the same way as company shares had been treated as property in a case decided in the late 19th century. As we discussed in our earlier article, the UKJT concluded that cryptoassets have all the indicia of property and that their novel or distinctive features (such as intangibility, decentralisation, means of authentication), did not disqualify them from being property. Persuaded by this analysis, the court in AA granted the injunction over the ransom bitcoins.
The court did not definitively hold whether the bitcoins were 'things in possession', as they did not feel they needed to in this particular case, but the question will no doubt be relevant in other cases, particularly in insolvency-related disputes.
Hong Kong to decide
The Hong Kong courts have yet to seriously consider the question of whether bitcoins are property, having opted to keep the status quo in Nico Constantijn Antonius Samara v Stive Jean Paul Dan  HKCFI 2718 on the basis that the "seriously awry" evidence before it meant that bitcoins valued at up to US$2.7 million should be preserved in the face of competing claims to ownership.
We await an opportunity for the Hong Kong courts to address the question of whether bitcoins can be classified as property. Such a scenario may well arise in the context of an insolvency situation.
Financial institutions in Hong Kong will no doubt take comfort from the first English court decision to confirm that actions to recover fraudulently transferred cryptoassets may well be given the court's sanction. In essence, this means that, following the Hong Kong court's decision in Nico Constantijn, the hiding place for fraudsters – in the face of coordinated international enforcement action – should become ever smaller.
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