With more individuals owning, buying and transacting with cryptocurrency assets in recent years, the Singapore High Court’s (“High Court”) judgement in CLM v CLN [2022] SGHC 46 (“CLM”) appears to provide welcome relief for users of cryptocurrency in that it opens up or, rather, confirms that there are possible legal avenues available to settle disputes arising out of their cryptocurrency assets.
In CLM, the High Court addressed two novel areas of law. First, whether cryptocurrency could be the subject of a proprietary injunction and second, whether the courts could grant an interim order against unidentified persons. The High Court also addressed several other legal issues in the context of cryptocurrencies and provided a useful summary of the applicable laws.
In exploring the High Court’s decision, this article aims to first provide a case summary of CLM, in particular, how the High Court applied the existing legal framework in the context of cryptocurrency assets. Thereafter, this article discusses the implications of CLM on future litigation involving cryptocurrency.
Case Summary of CLM
Case Facts
CLM involved the alleged misappropriation of the Plaintiff’s cryptocurrency assets, specifically Bitcoin and Ethereum held in two (2) digital wallets (BRD and Exodus) (“Digital Wallets”), by unidentified First Defendants. The Second and Third Defendants, who are entities incorporated in the Cayman Islands and Seychelles respectively and who operate cryptocurrency exchanges (with operations in Singapore), were alleged by the Plaintiff to have controlled the Digital Wallets holding portions of the Plaintiff’s misappropriated assets.
In brief, the Plaintiff, a United States national, and seven acquaintances were on vacation at the Plaintiff’s apartment in Mexico (the “ Apartment ”). On the night of 7 January 2021, the Plaintiff and one of his acquaintances left the Apartment for a night out while the rest of his acquaintances stayed back. As the Plaintiff needed physical cash while he was already out, he called a person named “[E]” to retrieve the said cash from the Plaintiff’s safe at the Apartment. In opening the safe, the Plaintiff read the safe’s combination to [E] and [E] repeated it back to the Plaintiff out loud.
The next day, at or around 8:00pm, the Plaintiff discovered that his cryptocurrency assets were transferred out of his Digital Wallets without his authorisation. The Plaintiff claimed that the only way this could have been done was if someone had used his “recovery seeds” (i.e., information usually written down which is used to recover passwords to digital wallets) which were kept in his safe to access his Digital Wallets.
The Plaintiff claimed that some acquaintances were present with [E] and two other acquaintances were in a nearby bedroom during the call. As such, the Plaintiff claimed that these persons could have heard the combination to the safe when [E] repeated it back to him and subsequently accessed the safe to take the “recovery seeds”. However, the Plaintiff was unable to pinpoint who transferred out his cryptocurrency assets from his Digital Wallets and hence, commenced an action in the High Court against unidentified persons.
The Plaintiff then applied to court for the following:
(1) A proprietary injunction to prohibit the First Defendants from dealing with, disposing of, or diminishing the value of the misappropriated cryptocurrency assets.
(2) A worldwide freezing injunction (also known as a Mareva injunction) to prohibit the First Defendants from dealing with, disposing of, or diminishing the value of the misappropriated cryptocurrency assets.
(3) Disclosure orders against the Second and Third Defendant to assist with the tracing of the Plaintiff’s cryptocurrency assets and identification of the First Defendants.
The Plaintiff also applied to court to seek the court’s leave (i.e., permission) to add other persons as Defendants to the action because they were either persons believed to have participated in the theft or entities which received the stolen cryptocurrency assets.
In addressing the Plaintiff’s claims, the High Court had to deal with the following legal issues:
Issue 1: The Court’s Jurisdiction against Unknown Persons
As the First Defendants were unidentified when the Plaintiff first commenced the action, the High Court had to determine the first novel issue of whether it had the jurisdiction to grant interim orders against unidentified persons.
The High Court agreed with the authorities cited by the Plaintiff and held that the courts indeed have the jurisdiction to do so for the following reasons:
(1) Firstly, synonymous to the UK and Malaysia cases cited, there is nothing in Singapore’s Rules of Court (“ROC”) that requires the Defendant to be specifically named;
(2) Secondly, similar to Rule 3.10 of UK’s Civil Procedure Rules, Order 2 Rule 1 of the ROC expressly provides that even if the commencement of proceedings against unknown persons is in breach of the ROC, such a breach is not fatal and will not result in the nullification of the proceedings unless ordered so by the court.
(3) Thirdly, like Order 89 of the Malaysian Rules of Court, Order 81 of the ROC allows for a reference to persons unknown in summary proceedings for possession of land. The High Court then saw no reason why this principle could not be extended to apply to interim orders.
That being said, in CLM, the High Court explained that in order for interim orders to be granted against unidentified Defendants, the description of the unidentified persons would have to be “sufficiently certain as to identify both those who are included and those who are not”.
As such, the High Court found that the Plaintiff’s description of “[a]ny person or entity who carried out, participated in or assisted in the theft of the Plaintiff’s Cryptocurrency Assets on or around 8 January 2021, save for the provision of cryptocurrency hosting or trading facilities” was sufficiently certain.
Issue 2: Whether a Proprietary Injunction can be granted over Cryptocurrency Assets
After confirming that the court has jurisdiction to grant interim orders against unidentified persons, the High Court in CLM had to determine the second novel issue of whether cryptocurrency assets could be the subject of a proprietary injunction.
As laid down by the Court of Appeal (“COA”) in Bouvier v Accent Delight [2015] 5 SLR 558 (“Bouvier”), in order for the court to grant a proprietary injunction, the applicant would have to prove that (1) there is a serious question to be tried; and (2) the balance of convenience lies in favour of granting the injunction.
With the above, in examining the High Court’s approach in CLM, the second limb of the test (whether the balance of convenience lies in favour of granting the injunction) will be explored first. The crux of the matter i.e., whether cryptocurrencies are capable of giving rise to proprietary rights, will then subsequently be addressed when exploring the High Court’s approach with regards to the first limb of the test (whether there is a serious question to be tried).
In relation to the second limb, Bouvier explains that the balance of convenience would be “assessed by considering the potential prejudice that the applicant may suffer if the injunction is not granted, against the prejudice to the respondent in the event that the injunction is granted and the applicant’s hypothesis is refuted at the trial”.
In this regard, the High Court found that the balance clearly laid in favour of granting the proprietary injunction against the Defendants. This is because, if the injunction was not granted, there is a real risk that the Defendants would dissipate the cryptocurrency assets, defeating a potential judgement obtained in the Plaintiff’s favour. Conversely, if the Plaintiff’s claim was later rejected, the First Defendants can be easily compensated by way of damages for their inability to deal with their cryptocurrency assets.
Sub-Issue 2: Whether Cryptocurrencies are capable of giving rise to proprietary rights
In relation to the first limb set out in Bouvier, the requirement would be satisfied as long as “the plaintiffs have a seriously arguable case that they [have] a proprietary interest” in the cryptocurrency assets. As such, the High Court had to first deal with the issue of whether cryptocurrency assets were capable of giving rise to proprietary rights (also known as property rights) and to answer this question, the High Court went back to basic legal principles.
The High Court referred to the classic definition of a property right as put forth in the case of National Provincial Bank Ltd v Ainsworth [1965] AC 1175 (“ Ainsworth ”), which states as follows:
“[I]t must be definable, identifiable by third parties, capable in its nature of assumption by third parties, and have some degree of permanence or stability.”
The High Court then looked at both local and foreign legal authorities on whether cryptocurrencies satisfy the classic definition of a “property right”.
The High Court first referred to a relatively recent local decision, B2C2 Ltd v Quoine Pte Ltd [2019] 4 SLR 17 (“B2C2”), where the Singapore International Commercial Court held that cryptocurrencies satisfied the four requirements set out in Ainsworth and were found to have the “fundamental characteristic of intangible property as being an identifiable thing of value”7.
This issue then went up to appeal in Quoine Pte Ltd v B2C2 Ltd [2020] 2 SLR 20 (“Quoine”), however, the COA in Quoine did not decisively rule on this matter. Nevertheless, the COA did lend credence to the view that cryptocurrencies are capable of giving rise to property rights by observing that “[t]here may be much to commend the view that cryptocurrencies should be capable of assimilation into the general concepts of property”.
The High Court in CLM then referred to the New Zealand case of Ruscoe v Cryptopia Ltd (in liq) [2020] 2 NZLR 809 which succinctly explained why cryptocurrencies satisfied the classic definition of a property right in Ainsworth:
“[Firstly,] the right must be “definable” – the asset must hence be capable of being isolated from other assets whether of the same type or of other types and thereby identified (Ruscoe at [104]). To this end, cryptocurrencies are computer-readable strings of characters which are recorded on networks of computers established for the purpose of recording those strings, and are sufficiently distinct to be capable of then being allocated to an account holder on that particular network (Ruscoe at [105]).
[Secondly,] the right must be “identifiable by third parties”, which requires that the asset must have an owner being capable of being recognised as such by third parties (Ruscoe at [109]). An important indicator is whether the owner has the power to exclude others from using or benefiting from the asset (Ruscoe at [110]). In this vein, excludability is achieved in respect of cryptocurrencies by the computer software allocating the owner with a private key, which is required to record a transfer of the cryptocurrency from one account to another (Ruscoe at [112]).
[Thirdly,] the right must be “capable of assumption by third parties”, which in turn involves two aspects: that third parties must respect the rights of the owner in that asset, and that the asset must be potentially desirable (Ruscoe at [114]). The fact that these two aspects are met by cryptocurrencies, is evidenced by the fact that many cryptocurrencies, certainly BTC and ETH, are the subject of active trading markets (Ruscoe at [116]).
[Fourthly,] the right and in turn, the asset, must have “some degree of permanence or stability”, although this is a low threshold since a “ticket to a football match which can have a very short life yet unquestionably it is regarded as property” (Ruscoe at [117]). In this respect, the blockchain methodology which cryptocurrency systems deploy provides stability to cryptocurrencies, and a particular cryptocurrency token stays fully recognised, in existence and stable unless and until it is spent through the use of the private key, which may never happen (Ruscoe at [118]).”
After examining the authorities and mainly relying on the case of Ruscoe, the High Court concluded that cryptocurrency assets satisfied the definition of a property right and were, therefore, capable of being the subject of a proprietary injunction.
As both requirements for a proprietary injunction as per Bouvier were satisfied, the High Court granted the proprietary injunction over the Plaintiff’s cryptocurrency assets to prevent the First Defendants from dealing with, disposing of, or diminishing the value of the said cryptocurrency assets.
Issue 3: Whether a Mareva Injunction can be granted over Cryptocurrency Assets
In addition to the proprietary injunction, the Plaintiff also sought a worldwide freezing injunction (Mareva worldwide injunction) to retrain the First Defendants from dealing with, disposing of, or diminishing the value of, their assets up to the value of the stolen cryptocurrency assets.
In order for the court to grant a Mareva injunction as per Bouvier, the Plaintiff must prove that (1) he has good arguable case on the merits of its claim; and (2) there is a real risk of dissipation of the assets by the Defendant in order to defeat a potential judgement against him.
Additionally, for Mareva worldwide injunctions (as opposed to a domestic freezing injunction), there is a consideration of whether the Defendant would have sufficient assets in Singapore to satisfy the potential judgement. The fewer the assets, the greater the necessity to take protective measures against the assets located outside of Singapore.
In applying these principles, the court found that:
(1) The Plaintiff had a good arguable case because it is trite law that that where a person misappropriates the property of another without consent, a constructive trust arises by operation of law.
(2) There is a real risk of dissipation as the First Defendants had already dissipated the assets through a series of digital wallets to hinder the Plaintiff’s tracing efforts. Furthermore, there is a heightened risk of dissipation given that cryptocurrencies can be easily transferred with a click of a button to anonymous persons.
(3) The First Defendants are unlikely to have sufficient assets in Singapore to cover the Plaintiff’s claim which is valued around US$7 million. Furthermore, it is unlikely for the First Defendants to keep all of the stolen cryptocurrency assets in Singapore.
As such, the High Court granted the Mareva worldwide injunction against the First Defendants.
Issue 4: Disclosure Orders against Cryptocurrency Exchanges
The High Court explained that its jurisdiction to grant ancillary disclosure orders (the purpose of which is to support the Mareva worldwide injunction) is found under section 4(10) of the Civil Law Act, relying on Sun Electric v Menrva Solutions [2020] 4 SLR 978. For ease of reference, section 4(10) of the Civil Law Act states that:
“A Mandatory Order or an injunction may be granted or a receiver appointed by an interlocutory order of the court, either unconditionally or upon such terms and conditions as the court thinks just, in all cases in which it appears to the court to be just or convenient that such order should be made.”
The High Court then found that it was just and convenient to grant the disclosure orders as it would assist the Plaintiff to find out more information on his stolen cryptocurrency assets as well as to identify the unidentified First Defendants.
Issue 5: Adding Additional Defendants to the Action
As a result of the Plaintiff’s subsequent investigations and disclosures by the Second and Third Defendants, the Plaintiff managed to identify two (2) persons within the First Defendants. Hence, the Plaintiff sought the High Court’s leave to add these two (2) identified persons as the Fourth and Fifth Defendants to the action, and amend his Writ of Summons to include his claims against them.
The Plaintiff also discovered that some of his stolen cryptocurrency assets were transferred to another cryptocurrency exchange and a digital payment services company. Hence, the Plaintiff likewise sought the court’s leave to add these entities as the Sixth and Seventh Defendants.
In order for the Plaintiff to add additional Defendants to the action, the requirements under Order 15 Rule 4(1) of the ROC have to be satisfied. Firstly, there has to be a common question of law or fact that arises in all of the actions. Secondly, the Plaintiff’s rights to relief have to arise out of the same transaction or series of transactions.
For ease of reference, Order 15 Rule 4(1) of the ROC is reproduced below:
4.—(1) Subject to Rule 5(1), 2 or more persons may be joined together in one action as plaintiffs or as defendants with the leave of the Court or where —
(a) if separate actions were brought by or against each of them, as the case may be, some common question of law or fact would arise in all the actions; and
(b) all rights to relief claimed in the action (whether they are joint, several or alternative) are in respect of or arise out of the same transaction or series of transactions.
In relation to the first requirement, the Court found that it was clear that there would be common questions of law and fact which would arise between the First Defendants and the additional Defendants. Namely:
(1) For the Fourth and Fifth Defendants, the common questions that arise would be “whether the theft had occurred in the first place, and whether the defendants have any factual or legal basis to retain the stolen assets.”; and
(2) For the Sixth and Seventh Defendants, like the Second and Third Defendants, they were also involved in the transfer of the stolen cryptocurrency assets. Additionally, the Plaintiff’s right of disclosure against the Sixth and Seventh Defendants were predicated on, among other things, his proprietary interest in the stolen assets. This same interest is also a crucial element of the Plaintiff’s claim against the First Defendants.
With regards to the second requirement, the High Court in CLM found that the Plaintiff’s rights to relief against all the additional Defendants clearly arose out of the same transaction involving the existing Defendants, namely the theft and dissipation of the stolen assets.
As both requirements were satisfied, the High Court allowed the Plaintiff’s requests.
Issue 6: Service of Documents to the Additional Defendants outside of Singapore
As the Fourth to Seventh Defendants were located outside of Singapore, the Plaintiff had to apply for the court’s leave to serve the necessary documents onto them.
The High Court referred to the Court of Appeal’s decision in Zoom Communications v Broadcast Solutions [2014] 4 SLR 500 (“Zoom Communications”), which laid down the requirements for service out of Singapore. Namely:
(1) The Plaintiff’s claim must fall within one or more of the categories in Order 11 Rule 1 of the ROC;
(2) The claim must have a sufficient degree of merit; and
(3) Singapore must be the proper forum for the dispute.
In relation to the first requirement, the High Court found that the claim fell within Order 11 Rule 1(a) of the ROC for the Sixth and Seventh Defendants because they have wholly owned subsidiaries in Singapore. For the Fourth and Fifth Defendants, the High Court found that the claim fell within Order 11 Rule 1(c) of the ROC as they were “proper parties” to the Plaintiff’s claim. This means that, had the Fourth and Fifth Defendants been in Singapore, they would have been properly added as a Defendant to the Plaintiff’s action which was precisely what the court found (see Issue 5 above).
For ease of reference, Order 11 Rules 1(a) and 1(c) of the ROC are reproduced below:
1. Provided that the originating process does not contain any claim mentioned in Order 70, Rule 3(1), service of an originating process out of Singapore is permissible with the leave of the Court if in the action —
(a) relief is sought against a person who is domiciled, ordinarily resident, carrying on business or who has property in Singapore;
(c) the claim is brought against a person duly served in or out of Singapore and a person out of Singapore is a necessary or proper party thereto
In relation to the second requirement, the High Court found that there was a serious question to be tried because the disclosed documents showed that the Fourth and Fifth Defendants were likely involved in the theft. Additionally, the the Plaintiff would similarly have a claim for disclosure against the Sixth and Seventh Defendants like in the case of the Second and Third Defendants (see Issue 4 above).
As for the third requirement, the High Court found that Singapore was the most appropriate forum to hear the Plaintiff’s claim because (1) the Second and Third Defendants are based in Singapore and have complied with the disclosure orders; and (2) the Sixth and Seventh Defendants have wholly owned subsidiaries in Singapore and would likely comply with the disclosure orders. Hence, this was sufficient to satisfy the third requirement and it did not matter that the Fourth and Fifth Defendants are foreign nationals.
As all three requirements as set out in Zoom Communications were satisfied, the High Court allowed the Plaintiff to serve the necessary documents out of Singapore onto the Fourth to Seventh Defendants.
Sub-Issue 6: Substituted Service of Documents outside of Singapore
The Plaintiff had requested for the court’s leave to serve the necessary documents to the Fourth and Fifth Defendants by email instead of the default personal service.
The High Court explained that the ROC provides for substituted service out of Singapore. Under Order 62 Rule 5(1) of the ROC, the court may order substituted service if “it appears to the Court that it is impracticable for any reason to serve that document personally on that person” and under Order 11 Rule 3(1) of the ROC, it states that Order 62 Rule 5(1) of the ROC “shall apply in relation to the service of an originating process out of Singapore”.
The High Court found that personal service was impractical and allowed the Plaintiff’s request of service by email for the following reasons:
(1) Firstly, the physical whereabouts of the Fourth and Fifth Defendants were unknown. It was also unlikely that they would willingly come forward to accept service. The Fourth and Fifth Defendants had also used Virtual Private Networks when assessing their digital wallets to avoid being located;
(2) Secondly, service by email would likely alert the Fourth and Fifth Defendants to the lawsuit as they had recently used those email addresses to open accounts with the Second and Third Defendants; and
(3) Thirdly, and most importantly, service by email would likely reach the Fourth and Fifth Defendants as all of their communications between them and the Second and Third Defendants were done by email. Their physical addresses used when opening accounts with the Second and Third Defendants are likely to be fake given that there was no verification process in place by the Second and Third Defendants.
As the High Court found that service by email is the only practical way of service, the High Court waived the requirement of the Plaintiff showing at least two reasonable attempts at personal service as required by paragraph 33(2) of the Supreme Court Practice Directions.
Brief Discussion on the Implications of CLM on Cryptocurrency Litigation
Despite the recognition of cryptocurrencies being capable of giving rise to proprietary rights, the High Court in CLM as well as the courts in the B2C2 cases failed to explore the implications of affording such rights. As such, this section sets out briefly the impact of such a recognition on future litigation involving cryptocurrency assets.
One of the positive implications of cryptocurrency litigation would be reducing the need for parties to litigate as to whether cryptocurrencies constitute a “property”, saving parties both time and legal costs. CLM adds to the growing list of authorities supporting the view that cryptocurrencies are in fact capable of giving rise to property rights.
While parties are always free to argue that CLM should be overruled, by examining the direction the Singapore Courts in B2C2 and CLM have taken with regards to cryptocurrency assets, we are of the view that the proposition that cryptocurrencies are capable of giving rise to property rights would be here to stay.
Following from this, CLM opens up or, rather, makes it certain that existing legal remedies would apply in disputes raised by / against users of cryptocurrency. For example, cryptocurrencies could be the subject of proprietary or Mareva injunctions as seen in CLM. Cryptocurrencies could also be the subject of trusts as argued in B2C2 (note: the COA did not find that an express trust arose over the cryptocurrencies in B2C2 because the “certainty of intention” requirement to create a trust was not satisfied). That being said, it would still be possible for a trust to be created over cryptocurrencies as long as all the requirements are satisfied.
As there are many different causes of actions and remedies involving property rights, users of cryptocurrency should obtain informed legal advice on their available routes and remedies, which often would be dependent on the specific facts of each case.
Concluding Thoughts
CLM’s recognition of cryptocurrencies as capable of giving rise to property rights provides comfort to users of cryptocurrency, knowing that their legal rights in relation to their cryptocurrency assets are now more certain and better defined under the law.
Additionally, CLM’s confirmation that interim orders can be awarded against unidentified persons would certainly help future claimants, not just in disputes relating to cryptocurrency, but in all other claims involving an unidentified Defendant.
With that, we look forward to the future development of the law on cryptocurrency, with CLM hopefully paving the way for further discussions on cryptocurrency and its place in the law.
