In a pivotal ruling in the matter of GATE MENA DMCC (formerly known as HUOBI OTC DMCC) and HUOBI MENA FZE vs TABARAK INVESTMENT CAPITAL LIMITED and Christian Thurner, the Dubai International Financial Centre Courts (“DIFC”) has reiterated the position of the lower court that cryptocurrency is a property, albeit the third kind of property. The case set a precedent by recognizing and legitimizing cryptocurrencies within the legal framework of the DIFC, offering some sort of guidelines on how disputes involving fraud/loss of digital assets should be handled.
This development was significant because it addressed critical questions such as ownership, transferability, and enforceability of rights concerning cryptocurrencies in jurisdiction known for its robust financial and legal infrastructure. As a result, it has helped pave the way for more secure and regulated transactions involving digital assets in the region.
Facts of the Case
The first appellant, GATE MENA DMCC, formerly known as Huobi OTC DMCC (“Huobi DMCC”), is a licensed Over the Counter (OTC) trading platform for cryptocurrency. The second appellant, Huobi MENA FZE (“Huobi MENA”), a majority shareholder in Huobi DMCC, is a Dubai based entity focused on cryptocurrency trading in the Middle East, Africa, and Turkey. Pursuant to change in ownership of Huobi DMCC, Huobi DMCC and Huobi MENA had entered into an agreement dated September 23, 2021 for the assignment of Huobi DMCC’s claim in the proceedings to Huobi MENA. Huobi MENA is a part Huobi Global ‘group’, a prominent digital asset services provider.
The first respondent, Tabarak Investment Capital Limited (“Tabarak”), is a company registered in the DIFC. It is authorized by the Dubai Financial Services Authority (DFSA) to provide various financial services. The second respondent, is the director of investment in Tabarak.
In November 2019, Mr. Al Ali, the general manager of Huobi DMCC was introduced to Tabarak through an intermediary. The same intermediary also introduced Mr. Al Ali to Mr. Morozov (“Buyer”), as a potential buyer of large quantities of bitcoins (“BTC”). Mr. Morozov was representing a group of investors which used Navarcon s.r.o (“Navarcon”), a company registered in the Slovak Republic, as a corporate vehicle for the acquisition of, and trading in, BTC. Navarcon was already the clients of Tabarak.
On 3 February 2020, a transaction involving the sale of 300 BTC by Huobi to Navarcon was facilitated by Tabarak as an intermediary. Disputes arose when the BTC were allegedly transferred fraudulently before payment was made, resulting in Huobi’s loss of 300 BTC.
The buyer insisted on using the “cold” wallet for the transaction, and the transfer to another wallet was said to only occur once the 12-digit mnemonic phrase was used. This is in contrast to earlier discussion and agreement, wherein it was agreed that the BTC will be transferred to wallet held by Tabarak who would hold BTC as a custodian until the payment was made.
However, shortly after the meeting while the appellants were waiting for the transaction amount, nearly all of it, i.e., 299.99 BTC was transferred to another wallet, allegedly due to misuse of the wallet’s mnemonic phrase.
Initially, unsuccessful in its claim for breach of contract and negligence, appellants’ appeal has reopened the case for further trial. This landmark legal battle within the digital asset industry has prompted the DIFC to scrutinize key aspects of digital asset law and nature of cryptocurrencies in particular i.e. whether it can be termed as property.
The appeal seeks to overturn the initial judgment and establish Tabarak’s liability for the lost BTC transaction, based on alleged breaches of contractual, fiduciary, and regulatory duties.
Judgement and Analysis
The legal case under consideration is pivotal due to its exploration of fundamental legal principles in the context of digital assets. The case presented a significant opportunity for DIFC to address crucial questions surrounding digital asset law. Key issues include the adequacy of custodial responsibilities in safeguarding digital assets, the extent of contractual obligations in digital transactions, and the liability framework for negligence in digital asset custody.
Central to the dispute is the alleged unauthorized withdrawal of BTC from the custodial wallet, purportedly facilitated by the misuse of mnemonic information by Navarcon’s representatives. However, without going into the contractual breach and issues surrounding the same, this article focusses on the Court of Appeal’s ruling affirming that that BTC are property of the third kind, adopting Law Commission of England and Wales analysis of the common law position, in its Digital Assets: Final Report published on 27 June 2023 (“Law Commission Report”), demonstrating that crypto assets are self-evidently neither tangible property nor a thing in action that must be asserted by taking legal action or proceedings.
BTC as a property
In reaching this conclusion, the Court of Appeal was tasked with defining the concept of ‘possession’ within the context of digital assets. It determined that exerting control over digital assets, such as through possession of pertinent private keys, constitutes actual possession.
The ruling builds upon a global recognition that digital assets are subject to conventional property laws akin to other forms of tangible and intangible property. The Court of Appeal and the initial verdict referenced influential precedents, including the English Cases of AA v Persons Unknown and Tulip Trading v Bitcoin Association, in establishing the legal status of digital assets. However, departing from the English law, the Court of Appeal noted that the position under DIFC law may be different. The Courts of Appeal noted the definition of property under the Personal Property Law DIFC Law No. 9 of 2005 (“Personal Property Law”) which state property is “anything which is capable of being owned and transferred and as the context requires denotes either the property itself or title to the property”. Basis the definition, the Court of Appeal, opined that crypto assets are “capable of being owned and transferred” and constitute property within the meaning of the Personal Property Law.
Control as a concept
While recognizing BTC as property marks progress, the ruling lacks in-depth exploration of the intricate nuances associated with this classification. BTC and other cryptocurrencies present unique challenges to traditional property categorizations, which typically distinguish between tangible (choses in possession) and intangible (choses in action) assets. The court’s classification of BTC as a distinct form of property does not adequately resolve potential legal ambiguities that could emerge in future cases involving diverse digital asset types.
The court’s examination of control over BTC is noteworthy. The judgment cites the Law Commission’s Report which suggests that control, rather than possession, is the more apt concept for digital assets:
“A person in control of a data object stands in the same type of factual relationship to that object as a person in possession stands to a tangible object…”
This recognition is significant for the cryptocurrency community as it acknowledges how cryptocurrencies are practically held and transferred. Accepting control as akin to possession provides a more accurate legal framework for resolving disputes involving digital assets.
Despite the positive move towards recognizing control as pivotal, the judgment lacks clarity in defining the parameters of control. The criteria for establishing control over digital assets remain ambiguous, particularly in contexts involving multi-signature wallets and shared custodial arrangements. The court could have provided more detailed guidance on what constitutes control in various scenarios to mitigate potential legal disputes.
Custodial Responsibilities
The Court of Appeal’s assessment also addresses the duties held by custodians of BTC, examining whether Tabarak owed a custodial obligation towards Huobi’s BTC holdings. The Court of Appeal relying on control construct noted that “Someone who exercises control over a crypto asset in which another has superior title, with the consent of that other, may be considered a custodian of the asset.”
Nevertheless, the court’s scrutiny of custodial responsibilities appears somewhat cursory considering the same was not fully argues before it. It does not sufficiently delve into the complexities of custodial arrangements, particularly regarding the allocation of control and accountability among different parties. A more comprehensive examination of the contractual obligations and fiduciary duties of custodians would have enhanced the judgment, especially given the dynamic nature of the cryptocurrency landscape.
Indian Perspective
Despite the geographical remoteness between Dubai and jurisdictions like India, decisions from DIFC carry international significance. Recently, in March 2024, the DIFC brought The Digital Assets Law, DIFC Law No. 2 of 2024 (“Digital Assets Law”), however, the said was not made applicable to the case as it did not have retrospective effect and thus, the common law as it stood at the time of the judgement was applied. Therefore, the implication of the Digital Assets Law in the courtroom is yet to be seen.
Since the Indian legal system has not comprehensively addressed the nature of cryptocurrencies, it is crucial and timely to examine the status of these digital assets within the framework of Indian law.
The ambiguity surrounding the legal and economic classification of cryptocurrency is evident from the varied approaches adopted by businesses and regulatory frameworks globally. In India, although some businesses have started accepting BTC for transactions, the lack of explicit legal acknowledgment and a clear regulatory position from bodies such as the Reserve Bank of India and the Securities and Exchange Board of India contributes to its uncertain status. However, as stated in the Law Commission Report, there might be some value in considering cryptocurrencies as a third class of property that is separate from tangible and intangible property.
Unlike, the ‘property’ definition in the Personal Property Law, none of the Indian law have defined property so open ended which can possibly include digital assets. While, the General Clauses Act, 1897 does define “immovable property”, however, the definition appears to have no room for interpretation to include digital assets.
The existing Indian legislations, such as the Reserve Bank of India Act, 1934, Foreign Exchange Management Act, 1999, Coinage Act, 2011, Transfer of Property Act and Payments and Settlement Act, 2007, establish a legal framework defining currency and legal tender but do not fully address the intricate nature of cryptocurrencies. The fluctuating value, speculative characteristics, and diverse applications of cryptocurrencies ranging from investment vehicles to mediums of exchange complicate their classification within the current legal framework. The ambiguity stems from cryptocurrencies’ inherent attributes, which blur the lines between established categories of assets.
In summary, the path of cryptocurrencies through global legal systems has seen notable progress alongside significant hurdles. Precedent-setting cases across jurisdictions highlight courts’ efforts to adapt traditional legal doctrines to the unique realm of digital assets. Whether acknowledging cryptocurrencies as property or adjudicating damages payable for loss virtual currencies, the legal framework around the world is evolving to incorporate these innovations, albeit with complexities.
Author: Anish Jaipuriar
Co-Authors: Hardik Sabbarwal and Kritika Shrivasatava
