This note considers two basic questions surrounding cryptocurrencies (and other digital assets), namely:

• what type of asset is a cryptocurrency; and
• where is that asset located?

These questions arose in the recent judgement of Fetch.AI Ltd & Anor v Persons Unknown Category A & Ors¹, an ongoing fraud case in which, in short, it is alleged that persons unknown accessed the claimants’ accounts at Binance Holdings Limited/Binance UK Limited² and traded cryptocurrencies at an undervalue, resulting in losses to the value standing to the claimants’ accounts of £2.6 million.

What is a cryptocurrency?

While Jesse J noted that “It’s all about the money”, and one could be forgiven for thinking that the clue was in the name, the fact is that with cryptocurrencies it’s not. The various cryptocurrencies such as Bitcoin, Ethereum, Dogecoin and Tether etc, currently making their volatile way through the market landscape, are not money. Cryptocurrency assets credited to an account are regarded as property for the purposes of English law. As Pelling J, succinctly put it:

“They are, to put it no higher for present purposes, a chose in action, and a chose in action, as a matter of English law, is generally regarded as property.”

Where is a cryptoasset located?

Following on from the determination that cryptocurrency was property, Pelling J had to consider whether – again in short – the claim was maintainable under English law and that England would be the proper place to litigate such claim as being the law of the country in which the damage occurred.

To answer this question, Pelling J first had to consider the lex situs of the cryptocurrency. The claimants submitted that it was property located in England, because that was the country where the owners of the assets concerned were located. In agreeing to this reasoning, Pelling J adopted the conclusions reached by Butcher J in Ion Science v Persons Unknown³ at paragraph 13:

“…lex situs of a cryptoasset is the place where the person or company who owns it is domiciled. That is an analysis which is supported by Professor Andrew Dickinson in his book Cryptocurrencies in Public and Private Law at para.5.108. There is apparently no decided case in relation to the lex situs for a cryptoasset. Nevertheless, I am satisfied that there is at least a serious issue to be tried that that is the correct analysis.”

The relevant paragraph of the textbook to which Butcher J referred says the following:

“That analogy with goodwill supports the submission that the benefits accruing to a person who is a participant in a cryptocurrency system such as Bitcoin or Ripple (i) are a species of intangible property in the English conflict of laws, which (ii) arises from the participation of an individual or entity in the cryptocurrency system, and (iii) is appropriately governed by the law of the place of residence or business of the participant with which that participation is most closely connected. Rather than deciding a fictional situs, the choice of law rule can be more straightforwardly, and appropriately, expressed in the terms that the proprietary effects outside the cryptocurrency system of a transaction relating to cryptocurrency shall in general be governed by the law of the country where the participant resides or carries on business at the relevant time or, if the participant resides or carries on business in more than one place at that time, by the law of the place of residence or business of the participant with which the participation that is the object of the transaction is most closely connected.”

Of course, establishing where a legal person “resides or carries on business” is easier said than done in our cross-frontier trading world. In determining that English courts were appropriate in this instance, Pelling J looked to the principles identified and summarised in Adams v Cape Industries⁴.

However, we wish to look at the wider implications for the trading of this asset class if the lex situs is determined by where the relevant legal owner is domiciled.

Notwithstanding the ongoing disapproval of cryptoassets by global regulators, the genie is very much out of the lamp (and not going back in) with regards to investment and trading interest in this class of asset. As a result, market participants (in growing numbers) are looking at how to incorporate cryptoassets into their investment strategies.

The lex situs of property/assets being bought, sold, transferred, pledged and/or secured has always been a key component in any risk assessment of a transaction. In addition, it is a fundamental component of contractual performance to comply with the jurisdictional requirements by which the relevant property/asset that is the object of any such transaction is governed – whether that is being able to deliver all right, title and interest in and to the asset in question free of any liens, restrictions or other encumbrances or being able to perfect secured rights over the asset in accordance with the local legal requirements in the jurisdiction in which the asset is located.

Older readers may remember the debate as to the proper lex situs of securities when dematerialisation first occurred in the markets. This discussion surrounding cryptoassets is more nebulous: at least with dematerialisedsecurities, there were clear and logical options for the lex situs – e.g. the Issuer’s registered office, the Registrar’s office or the Central Securities Depository’s location. With cryptoassets, however, where do you start? They only exist as lines of digital code and can be accessed from any node anywhere in the world. And besides, the underlying distributed ledger technology is by design not dependent on being in any one central place, jurisdiction or location.

In Ion Science Butcher J commented that there are as yet no decided cases in relation to the lex situs of cryptoassets. However, there is perhaps more than a hint of the beginning of a body of opinion in this area, and this body is looking at where the legal person who owns the cryptoasset is located: at, again as Butcher J noted, “there is at least a serious issue to be tried that this is the correct analysis.” This seems logical, but also seems to be a significant departure from the orthodoxy.

Practical implications

For parties interested in entering into commercial contracts involving the transfer (by sale or as collateral or as security etc) of cryptoassets, there are a few useful steps that could be taken to bring more certainty into your contractual arrangements:

• agree and establish the domicile of all the parties involved and the capacity in which each is acting⁵;
• agree/confirm the jurisdiction(s) for performance of the contractual obligations⁶; and
• ensure the effective (and timely) completion of all the necessary formalities (if any) for THE delivery or perfection of security etc in the jurisdiction in which the party who owns the cryptoasset being transferred or secured is domiciled.

Accordingly, if Party A, who is domiciled in London, England and acting as principal, is using Bitcoin to secure a cash loan from Party B, who is based in Guernsey and also acting as principal, Party B should make sure it completes the necessary formalities for perfecting and prioritising its security against third parties in accordance with English legal requirements (to the extent there are any). If, on the other hand, Party A (while still in London) is acting as agent for a New York based principal, then Party B should consider what (if any) legal requirements there are to establish and perfect its security in accordance with New York law.

If you wish to discuss this topic in more detail, please contact your relationship partner or Damian Morrris at damian.morris@chanceryadvisors.com.

Notice: This publication, which we believe may be of interest to our clients and friends of the firm, is for general information only. It is not a full analysis of the matters presented and should not be relied upon as legal advice. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. Readers should not act upon the content of this publication without seeking advice from professional advisers. © 2021 Chancery Advisors Limited. All rights reserved.

1 [2021] EWHC 2254 (Comm)
2 The eagle-eyed of you will no doubt have spotted that Binance UK Limited is the same entity that was issued with a Supervisory Order on 25 June 2021 by the FCA, who at the time also noted that it “was not capable of being effectively supervised.” Last week, however, the FCA updated its position and noted that the firm had complied with all aspects of the FCA’s requirements, broadly giving it the green light for operations in the UK.
3 (unreported) (21 December 2020)
4 [1990] Ch 433
5 Perhaps this seems obvious, but with Group structures and multiple associated and affiliated entities often operating off the same systems, this is often not clear, as the Fetch.AI Ltd case demonstrates.
6 This need not be the same as the governing law of the underlying contract.