Download This PaperCryptocurrencies Entrusted to An Exchange Provider: Shielded from the Provider’s Bankruptcy?
Charl Hugo (ed.) Annual Banking Law Update 2018: Recent Legal Developments of Special Interest to Banks (Juta, 2018) at pp. 1-21.
21 Pages Posted: 1 May 2020
Date Written: July 31, 2018
Abstract
Cryptocurrency exchanges, i.e. online platforms where customers exchange their cryptocurrencies for other cryptocurrencies or fiat currencies, are routinely targeted by hackers, which often result in a massive drain of cryptocurrencies. The heists can be large enough to bring down the exchanges to their knees. The customers of an exchange who have entrusted it with cryptocurrencies would have a contractual right to claim their return. If the exchange is wound up, however, personal claims (such as a contractual claim) brought in bankruptcy proceedings would not yield to them a full recovery. It is, therefore, practically important to examine whether the cryptocurrencies entrusted to an exchange are shielded from the bankruptcy of the exchange provider, so that the customers can obtain a full recovery. Under most, if not all, legal systems, the answer to this question would be unclear because cryptocurrencies are a novel asset and because the legal relationships between an exchange provider and its customers have not been sufficiently scrutinised. This article will seek to improve legal clarity by presenting an analytical framework, identifying issues, and pointing to possible solutions.
It will begin by examining the law of Japan, possibly the only country in the world where the matter has been litigated. Following a hacking attack, Mt Gox, the world’s biggest operator of a Bitcoin exchange at that time, became insolvent. After the opening of bankruptcy proceedings, one of its former customers filed a suit against the bankruptcy trustee in Japan, seeking a full recovery of the Bitcoins he had entrusted to the exchange. Rather than relying on a personal claim, the plaintiff asserted ownership over what he saw as “his Bitcoins”. His claim was, however, dismissed by the Tokyo District Court for reasons to be examined in this article. More recently, other customers filed a suit in Japan by trying another legal avenue to obtain a full recovery. They are arguing that their Bitcoins had been held by the exchange on trust for them.
After presenting an analysis under Japanese law, this article will explore its relevance to other legal systems. Since Japanese law belongs to the family of civil law systems, the analysis concerning the ownership of cryptocurrencies would have direct relevance to other civil law systems in the context of rei vindicatio (vindication of property). It would also inform the debate whether cryptocurrencies are “property” in terms of the tort of conversion in common law systems. The analysis concerning whether an exchange holds cryptocurrencies on trust for its customers would be useful to all the common law systems of which the law of trusts forms an integral part as well as any civil law systems which, like Japanese law, have introduced the concept of trusts.
Keywords: cryptocurrency, cryptoasset, exchange, bankruptcy, Mt.Gox, trust, ownership, rei vindicatio, tort of conversion
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