Reed Smith In-depth

The Hong Kong courts have confirmed1 crypto-assets are “property”, removing any doubt that industry participants enjoy the certainty and legal protection afforded to assets of that status.

The decision also touches upon issues of custody, segregation and ownership, which are highly relevant to exchanges as well as customers and liquidity providers looking to protect their assets.

Background: crypto-assets as legal property

For businesses issuing, transacting in, or custodying digital tokens, the question of whether a crypto-asset is property is of vital importance. It determines whether courts or tribunals will treat as legal, valid and enforceable, transfers of assets, or security granted over them. It will also govern what happens to the asset in the event of fraud, theft or breach of trust.

Therefore, industry players seeking legal certainty over the effectiveness of transfers or loans of digital assets, or the legal right to recover them from hacking or exploitation, will aim to do business under laws which recognise such rights.

Jurisdictions seeking to encourage digital innovation have likewise sought early clarity on this issue. In November 2019, the UK Jurisdiction Taskforce issued a Legal Statement on Cryptoassets and Smart Contracts (the "Legal Statement") confirming that crypto-assets could be property. The authors found that a crypto-asset was capable of satisfying the four-part test for property in the English case of National Provincial Bank v. Ainsworth,2 namely that it: (1) be definable, (2) be identifiable by third parties, (3) be capable in its nature of assumption by third parties, and (4) have some degree of permanence and stability.

Later decisions of courts of common law jurisdictions have further pointed to an emerging consensus that digital assets can be treated as a type of intangible property. This includes decisions in England and Wales,3 Singapore,4 the BVI,5 Australia,6 New Zealand,7 Canada8 and the United States.9

The Hong Kong court has previously granted proprietary relief over crypto-assets,10 suggesting that it takes the same view. Nonetheless, there has until now been no judicial discussion or express finding by the Hong Kong courts that crypto-assets are property.