Cryptocurrency

Will courts accept cryptocurrencies as a guarantee of costs? – Finnish technology

Will courts accept cryptocurrencies as a guarantee of costs?  - Finnish technology

 

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In a recent decision by the High Court of England, Tulip Trading Limited v. Bitcoin Association for BSV [2022] EWHC 2 (Ch) i [2022] EWHC 141 (Ch), the Court rejected the plaintiff’s request to secure the costs to be paid in bitcoins. This is the first English case in which a litigant has tried to provide security in the form of cryptocurrency and provides useful guidance on the interaction between cryptocurrency and cost security. Tulip Trading Limited discusses considerations that courts may take into account to determine whether Bitcoin or other forms of cryptocurrency will be accepted as an alternative form of security for costs. It will be interesting to see how the courts in Hong Kong could approach this issue if a similar request is made in the future.

Background: English decision in Tulip Trading Limited

Defendants requested and received an order to secure the costs of the request for jurisdiction. The plaintiff tried to ensure security in the form of Bitcoin, by transferring the relevant cryptocurrency to his lawyers, who would give written confirmation to the Court and defendants that they own Bitcoin (see an earlier blog post on the decision in English here).

The Court set out the principles in Infinity Distribution Ltd (administered) v. Khan Partnership LLP [2021] EWCA Civ 565 in order to determine the form of security for the order when the plaintiff proposes an alternative form of security, ie that the Court:

    1. take into account all relevant circumstances;

 

    1. seek to achieve the main aim of the English rules of civil procedure, including “ensuring that the parties are on an equal footing and ensuring that the matter is resolved fairly“;

 

    1. to establish a fair balance between the interests of the parties; and

 

    1. where two forms of security would provide equal protection, with all other things being equal, determine the form that is least difficult for the plaintiff.

 

The court also cited Monde Petroleum SA v. Westernzagros Ltd [2015] 1 Lloyd’s Rep. 330, which requires that security “should be in a form that allows the defendant to recover the costs awarded in his favor at trial from funds that are easily accessibleso there is a small risk of delays or delays in enforcement“(Emphasis added).

The Court noted the high level of volatility in the value of Bitcoin (a position accepted by the plaintiff) and concluded that Bitcoin did not meet the criteria in World Petroleum. Providing security in the form of Bitcoin would not result in protection for defendants equal payment to the court or a first-class guarantee. The very unstable nature of Bitcoin will expose defendants to a risk they would not be exposed to with the usual forms of security. In other words, this was not the case where all other things were equal.

Will Hong Kong courts allow cryptocurrencies as an alternative form of security for costs?

Pursuant to Order 23, Rule 2 of the Rules of the High Court (Cap. 4A), when an order is issued requiring any party to provide a guarantee of costs, the guarantee shall be given in such a manner, at that time and under such conditions (if any). has) as the Court may determine. The usual form of insurance provided in Hong Kong is court payment or bank guarantee. The rules do not explicitly specify which other forms of security are acceptable. Court of First Instance in Sunni International Ltd v. Kao Wai Ho Francis [2021] 1 HKLRD 841 considered the request for an alternative form of insurance, ie the obligation to collect shares of a private company instead of insuring costs. The court looked back in a similar way World Petroleum (above) and considered that the offered obligation was not sufficient because the insurance could not be realized with relative ease.

There are currently no Hong Kong authorities dealing with the requirement to provide cryptocurrency as cost insurance. However, given the principle in World Petroleum(above) this has been applied in both Tulip Trading in an English court and Sunni International in a court in Hong Kong, we believe in the decision Tulip Trading will provide useful guidance to the Hong Kong court on such a request.

In addition, the following considerations may also be relevant if a Hong Kong court is faced with a requirement to provide cryptocurrency as security for future expenses:

    1. decision in Tulip Trading it only concerns the payment of Bitcoin as a cost insurance, but does not address the general question of whether the payment of other cryptocurrencies may be allowed as a guarantee of costs. Considerations may be different if, for example, a relatively unchanging cryptocurrency is offered, such as stablecoin (which is a cryptocurrency designed to bind to the value of a particular fiat currency such as the US dollar) or even stable coin tokens that yield a yield deposited in Decentralized Finance (DeFi) protocol (which is a token whose value should (although not guaranteed) grow steadily over time as interest accrues on underlying stablecoin tokens);

 

    1. furthermore, if the plaintiff possesses a significant amount of stablecoin or yield token, this may be relevant to the question of whether the plaintiff will be able to pay the defendant’s costs and therefore whether cost insurance should be ordered in the first place; and

 

    1. in addition to the issue of volatility, the availability of cryptocurrency may also be relevant. In practice, cryptocurrency transfers and realizations are complicated by the fact that ownership of digital assets is attributed to “private key” control (i.e., cryptographic passwords used to authorize blockchain transactions) that could potentially be stolen, disclosed, compromised, or lost. This will lead to the additional risk of delays or delays in enforcement in order to enable defendants to collect costs. The parties may need to consider appointing a trustee to mitigate this risk.

 

The content of this article aims to provide a general guide to the subject. You need to seek expert advice on your specific circumstances.

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