Jocelyn Chi and Anson Li, managing directors in Kroll’s Global Restructuring team, are the joint and several liquidators of Gatecoin (“Liquidators”) appointed by the High Court of Hong Kong SAR (“HK Court”). Gatecoin was a cryptocurrency exchange incorporated and based in Hong Kong which owned and operated an online platform for the trading of cryptocurrencies by its customers since January 2015. Prior to the liquidation, the company was one of Hong Kong’s first and well-established cryptoassets exchanges with over 10,000 active customers globally. At the height of the bull market in 2017, the number of cryptocurrencies which Gatecoin was handling was worth hundreds of millions of U.S. dollars.
An important task for the Liquidators has been to determine the capacity in which the cryptocurrency exchange held the cryptocurrency assets recovered by the Liquidators and, in particular, whether these assets were assets of the exchange or whether the cryptocurrency exchange held the cryptocurrency assets on trust for their customers.
The Liquidators’ traditional role requires recovering and taking custody of all assets upon the winding up order, adjudicating creditors’ claims and ensuring an equitable distribution of the assets in accordance with the provisions of the Hong Kong Companies (Winding Up and Miscellaneous Provisions) Ordinance.
The Liquidators had received claims from Gatecoin’s creditors indicating that the currencies (including both fiat and cryptocurrencies) deposited in their accounts maintained with Gatecoin (“Currencies”) were held on trust for them by Gatecoin and should not be treated as Gatecoin’s assets.
Trust claims made by stakeholders in the winding up rendered it important to establish whether cryptocurrency assets are property as intended by the relevant law and regulations of Hong Kong and whether they could be the subject of trusts of the nature claimed; this, in turn, determines what assets would potentially be available to the creditors and the form in which they may be paid or returned to creditors.
In order to confirm whether the Currencies were held on trust by Gatecoin, amongst other things, the Liquidators applied to the HK Court seeking the HK Court’s direction in respect of the ownership of the Currencies. The application was heard by the Honourable Madam Justice Linda Chan on 23 February 2023, and Her Ladyship handed down a swift and informative decision (“Decision”) on 31 March 2023.
Her Ladyship observed that "like other common law jurisdictions, our definition of 'property' is an inclusive one and intended to have a wide meaning" and the appropriateness of applying and following practice in other jurisdictions that cryptocurrency is "property" and is capable of forming the subject matter of a trust; and, in this particular case, a trust has been established in respect of a specific category of customers by reference to their account opening documents and terms (but not others). This decision puts Hong Kong on par with other jurisdictions such as the UK, the British Virgin Islands, Singapore, Canada, Australia, New Zealand and the U.S.
The Honourable Madam Justice Linda Chan’s landmark decision has brought clarity on the treatment of cryptocurrency assets in Hong Kong insolvency cases.
You can read the full Decision here.