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Cryptopia ruling favors cryptocurrency account holders over creditors

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Account-holders on the failed cryptocurrency exchange Cryptopia have cause for hope following a judgment made last week by a New Zealand High Court that deems that cryptocurrencies are ‘property’ that was owned by individual account holders on the platform. The full 74-page judgment document can be viewed here.

The Christchurch based exchange went into liquidation in May 2019 following a complex hack incident in January 2019, where US$18 million worth of user funds was removed from the exchange. An investigative report by local media, Stuff, suggested that there were personal conflicts and tensions between the Cryptopia founding, and executive teams. To date, no one has been charged over the theft.

The ruling is a major win for the exchange’s liquidators, Grant Thronton, who have been working over the last year to achieve a result. The ruling favors customers, not the exchange’s creditors and means Grant Thornton can now begin a reconciliation process to return lost funds to customers. The process is expected to take time due to issues involving the database that Cryptopia was using to manage account holder balances, and due to problems with the KYC/AML practices used by the exchange when it was operational.

Judge Gendall explained in his ruling that, “the tussle which is before the Court is one between the creditors of Cryptopia on the one hand, and the account holders who have invested in various digital assets (“the account holders”) on the other.”

The court ruled that firstly, cryptocurrencies were property as defined by Section 2 of the company act, and secondly, that cryptocurrencies could form the subject matter of a trust. The judge outlined a number of factors as to why cryptocurrencies meet the definition of “property” under New Zealand law.”

For example, the ruling viewed cryptocurrency as ‘identifiable’ in ownership because as Judge Gendall explains;

_“It is also the case, as I see it, that the public key so allocated to a cryptocurrency account might also be argued to be more readily identifiable than some asserted rights for example to copyright (which is acknowledged as “property”) where issues of originality may be at play.” _

The ruling also made other key points such as cryptocurrency meets the ‘Some degree of permanence or stability’ requirement of S 2 of the companies act because;

_“The blockchain methodology which cryptocurrency systems deploy also greatly assists in giving stability to crypto coins. The entire life history of a crypto coin is available in the public recordkeeping of the blockchain. A particular crypto coin stays fully recognized, in existence and stable unless and until it is “spent” through the use of the private key, which may never happen.” _

The second part of the ruling, which held _“that account holders' cryptocurrency were held on multiple trusts, separated by individual crypto-asset type. This means that the cryptocurrencies are beneficially owned by the account holders and are not assets of the company”_, is important given the way Cryptopia would manage customer balances.

Cryptopia’s liquidation is complicated because it did not assign its user’s individual crypto balances to distinct wallets. It managed larger wallets and dispersed funds based on a self-managed SQL database. The court clarified that “The liquidators as I understand it are still in the process of reconciling this database.”

Issues arose as creditors strongly disputed whether the digital assets were held “on trust” for the platform’s account holders. Judge Gendall explained in his ruling that "Cryptopia is a trustee for the account holders of the cryptocurrency it held for those parties as set out in the SQL database" over number of pages, he outlined the services that cryptocurrency exchanges provide to customers, namely to connect buyers and sellers of cryptocurrency by managing pools, or ‘Trusts’ of account holders cryptocurrency.

Judge Gendall also considered factors like Cryptopia being a trustee to itself (trading on its own platform) and Cryptopia needing to create multiple ‘trusts’ for individual crypto assets it added to its platform.

Both sections of the ruling are unprecedented and positive for the retail crypto community. Gaining a ruling over a group of creditors will feel like a major win for Cryptopia’s account holders and Grant Thornton. Additionally, Judge Gendnall’s balanced judgement provides useful precedent to deal with similar issues of property rights between account holders and cryptocurrency exchanges.



OhNoCrypto

via https://www.ohnocrypto.com

Aditya Das, Khareem Sudlow