In the recent judgment in Nico Constantijn Antonius Samara v Stive Jean Paul Dan [2022] HKCFI 1254, the Hong Kong Court granted proprietary relief to a victim of misappropriated bitcoins, including the recovery of the sale proceeds and the fruits of such.

Factual background

The Plaintiff orally agreed that the Defendant would sell the Plaintiff’s 1,000 bitcoins, as sales agent, for a 3% commission.

As the Plaintiff (being a non-resident) could not open a Hong Kong bank account to handle the sale proceeds, he agreed that they should be deposited into the Defendant’s account in Hong Kong, from which the funds would be transferred to the Plaintiff’s bank account in Germany.

The Defendant gave the Plaintiff access to the Hong Kong bank account, by providing him with the login details and security token. The Plaintiff could then make transfers of funds to his account in Germany.

Between June and September 2017, some of the bitcoins were traded. The main way in which this was done was through the Defendant’s nominated bitcoin wallet. The Plaintiff transferred some bitcoins from his personal bitcoin wallets into the Defendant’s bitcoin wallet, so that they could be traded by the Defendant. The agreed arrangement was that the proceeds of sale would be transferred to the Hong Kong bank account. Since November 2017, the Plaintiff was unable to gain online access to the Defendant’s Hong Kong bank account.

As a result, the Plaintiff claimed against the Defendant, as his sales agent, for failing to account for the sale of the bitcoins and the sale proceeds.

Injunctions

In November 2019, a Mareva injunction was granted by the court freezing the Defendant’s assets, including the bitcoins remaining in the Defendant’s wallet.

Subsequently, documentary disclosure was given by the Defendant’s bank. Based on those documents, the Plaintiff was able to trace the sale proceeds of the bitcoins. Subsequently, upon the Plaintiff’s application, the court, in January 2021, granted a proprietary injunction over the remaining bitcoins and the sale proceeds.

Trial – Court findings

The court found that:-

  1. Agency principal relationship was established between the plaintiff and Defendant for the sale of the bitcoins.
  2. The Plaintiff transferred the bitcoins to the Defendant’s nominated bitcoin wallet and entrusted him to sell the same on his behalf as his sales agent.
  3. The Defendant had been in breach of his fiduciary duties as agent, for failing to account to the Plaintiff for his bitcoins and sale proceeds.
  4. By reason of the Defendant’s blatant breaches of his fiduciary duties as agent, which amounted to repudiatory breaches of the Agency Agreement, the Defendant was not entitled to any commission in respect of the sales. Thus, all sale proceeds and fruits of such found due were ordered to be paid over to the Plaintiff.

The court granted:-

  1. A declaration that the bitcoins transferred by the plaintiff to the Defendant’s account, the sale proceeds and the fruits of such were held by the Defendant on trust for the Plaintiff absolutely.
  2. An order for all necessary accounts, inquiry and directions as to what was due to the Plaintiff.
  3. An order that the Defendant do transfer the property and/or pay the amount found due to the Plaintiff upon the taking of the accounts, inquiry and directions.
  4. An order that the Defendant pay equitable compensation to the Plaintiff.

Takeaway points

It seems that the High Court has recognised cryptocurrency as property. Hence in this case, the High Court declared that the bitcoins were held on trust and proprietary remedies were granted over the bitcoins. Another interesting feature of this case is that a public bitcoin ledger, an open distributed ledger using blockchain technology, which shows bitcoin transaction records, was admissible at trial and accepted by the court. This means that victims of cryptocurrency fraud are able to prove ownership and a tracing exercise can be conducted when disputes involve cryptocurrency.