A recent decision by the English High Court has confirmed that the cryptocurrency USDT is capable of being property under English common law. This decision has significant implications for the treatment of cryptocurrency in the context of property tracing and legal remedies in the event that one's cryptocurrency is scammed or stolen.
Summary of facts and claims
In D’Aloia v Persons Unknown Category A and others, the claimant was allegedly induced into transferring cryptocurrency totaling around £2.5m, some in the form of Tether (USDT), to the first defendant via an online exchange operated by the sixth defendant, Bitkub.
Once the USDT had been received, it was transferred between various accounts on the exchange multiple times, before being passed through a digital wallet owned by Bitkub, in which the claimant’s funds were mixed with those of many other users.
Finally, it was transferred to the seventh defendants, also persons unknown, and withdrawn as fiat currency.
Believing that he had been defrauded by the first and seventh defendants, whose identities remained unknown, the claimant brought claims against various cryptocurrency exchanges with which the seventh defendants had held accounts, including Bitkub.
Supporting claims of unjust enrichment and breach of constructive trust against the sixth defendant, the claimant submitted that he could trace and/or follow some of the USDT which had been transferred through the sixth defendant’s wallet.
Two of the key issues that arose between the parties were:
whether USDT could be classed as property subject to tracing and following: and
whether common law tracing and following was permissible when the funds had been mixed.
What did the judge say?
First of all, Deputy Judge Farnbill of the High Court held that USDT was a class of assets which attracted property rights for the purpose of English law - i.e. the cryptocurrency was property. This type of property sits outside of the traditional categories of property, being either a chose in action, or a chose in possession. This view is consistent with that of the UK Law Commission and the draft legislation recently proposed to clarify the legal status of cryptoassets as capable of being property under UK law.
Secondly, Farnbill DJ held that in theory, where the USDT had been held by Bitkub in a mixed fund, it was impermissible for the claimant to trace it at common law in support of his unjust enrichment claim. However, where each individual USDT maintained a distinct identity even when mixed, it could be characterised as a persistent thing. In the latter case, a claimant could in principle follow the currency through different wallets and mixtures. Unfortunately, the claimant had failed to demonstrate with sufficient evidence that any portion of his USDT had entered Bitkub's wallet. This was fatal to his unjust enrichment claim.
Implications of treating cryptocurrency as property
Arguably, no one area of law so fundamentally affects the legal nature of cryptocurrency as that of property law. The recognition of cryptocurrency as property is critical to the application of private law to transactions involving them (e.g. trust issues and judicial remedies as discussed above), with consequences not only for users of distributed ledger technology systems, but also third parties dealing with those users.
The issue alao has implications across a number of other areas of law including criminal law (e.g obtaining property by deception) and taxation. Interestingly, its implications for AML laws may be limited by the fact that the definition of “property” under current legislation excludes at least some “digital currencies”. In any event, resolving the "property question" in relation to cryptocurrency is thus of critical importance.
The D'Aloia case adds to an ever growing body of common law decisions across multiple jurisdictions recognising that cryptocurrency is a type of property. While we are yet to see a definitive legal ruling on this issue in Australia, the latest judgment is likely to be influential when the Australian Courts are asked to determine this issue.
Written by Jake Huang and Steven Pettigrove
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