Will HK cryptocurrency = property be the strong needle of Web3?
Can HK cryptocurrency as property fuel Web3?
Author: Xiao Sa Legal Team
China’s criminal law does not explicitly deny that virtual currency constitutes “property,” and recent judgments in Hong Kong can also play a positive role in protecting virtual currency criminal law in mainland China.
Key points
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Recently, Hong Kong’s ruling class believes that virtual currencies such as Bitcoin can be regarded as “property” in the legal sense. Some legal professionals believe that this move will help clarify the current regulatory framework for virtual currencies in the Hong Kong government and help protect the property interests of virtual currency holders from a legal perspective.
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Recognizing virtual currencies as property also opens up the possibility of the Hong Kong government levying property taxes on virtual currencies. In fact, the United States follows this approach in taxing virtual currencies.
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China’s criminal law does not explicitly deny that virtual currency constitutes “property,” and recent judgments in Hong Kong can also play a positive role in protecting virtual currency criminal law in mainland China.
Expansion of the definition of “property” under the common law system
The controversy in the Hong Kong region of China over whether virtual currencies belong to “property” stems from the concept that “property” under the common law system must be a tangible object that can be owned. In common law, all personal items are either occupiable or intangible. The law cannot know of any third situation other than these two (Colonial Bank v Whinney [1885] 30 Chi. D. 261). Guided by this traditional view, it is difficult to regard virtual currencies as a form of property: they are neither occupiable assets (chose in possession) nor intangible assets (chose in action). They are not occupiable assets because they are virtual, intangible, and cannot be occupied. They are not intangible assets that can be obtained through litigation because they do not reflect any rights that can be enforced through litigation… Virtual currencies do not belong entirely to these two categories (AA v Persons Unknown [2020] 1 WLUK 91).
It is worth noting that the definition of property under the common law system seems to be a bit “impractical” in the Web3 era, which makes it particularly important to expand the ancient common law concept of “property.” The person who first attempted this was Judge Bryan, who benefited from the legal statement on virtual currency assets and smart contracts issued by the UK Judicial Jurisdiction Working Group in November 2019 in the AA v Persons Unknown case.
“77. Our view is that the principle in Colonial Bank v Whinney (1885) 30 Ch D 261 should not be taken as limiting the scope of identifying property in the law. It shows that common law has the ability to extend traditional definitions and concepts to accommodate new commercial practices…”
“83. Some important statutes of the 20th century assumed that intangible property was not limited to choses in action. The Theft Act 1968, the Proceeds of Crime Act 2002 and the Fraud Act 2006 all defined property to include things in action and other intangible property. It may be said that these statutes extended the definition of property for their own particular purposes, but they at least show that the concept of intangible things as property, even if they may not be choses in action, presents no conceptual difficulty. In addition, the Patents Act 1977 further provides in section 30 that a patent or patent application “is personal property (not being a thing in action)”. This must recognise that personal property can include things other than choses in possession (which a patent clearly is not) and choses in action.”
Justice Bryan adopted the conclusion of the legal statement, “While it is possible to describe the term ‘property’ in narrow, technical terms… it is not always appropriate to do so… assets such as Bitcoin are property”, and held that “virtual currencies like Bitcoin are property”.
Hong Kong High Court Rules Virtual Currency is Property
The above conclusion opened the door to the recognition of digital currencies as property under the common law system. On this basis, the Hong Kong High Court welcomed its first landmark ruling on virtual currency (Re Gatecoin Ltd [2023] HKCFI 914 [2023] HKEC 1223, decision of March 31, 2023), which ruled that virtual currency is property and can be regarded as trust property. Some legal professionals believe that this move will help clarify the current regulatory framework for virtual currencies and protect the property interests of virtual currency holders from a legal perspective.
The case originated from Gatecoin, a Hong Kong-based virtual currency exchange, announcing its liquidation in 2019, and attempting to recover disputed virtual currencies from a cooperating payment service provider. In court, the liquidator asked whether the virtual currencies held by Gatecoin could be regarded as “trust property”. If this part of the currency is not trust property, it will be returned to the creditors in full. It is reported that the exchange held virtual currencies worth over HKD 140 million (about USD 17.8 million) in October 2020.
In the Gatecoin case, presiding judge Linda Chan believes that Hong Kong should adopt a broad definition of “property” in line with other common law jurisdictions to keep up with the pace of technological development. Therefore, virtual currency meets the 4 major criteria as “property”:
Definable
Because the public key assigned to a cryptocurrency wallet is easily identifiable, sufficiently distinct, and can be uniquely assigned to individual account holders.
Identifiable by third parties
Only the holder of the private key can access and transfer cryptocurrency from one wallet to another.
Possessing qualities of ownership that can be acquired by third parties
It can and is the subject of an active trading market, in which (a) the owner’s rights to the property are respected, and (b) it has potential benefits to third parties such that they wish to acquire ownership of the property themselves.
Possessing some degree of permanence or stability
The entire life history of a cryptocurrency can be found on the blockchain.
Based on cases in the UK, Singapore, and the British Virgin Islands, virtual currencies are not only information, but also items with tradable value, possess exclusivity, and there is no public policy that opposes the court’s recognition of virtual currencies as property. In addition, there is a precedent in Hong Kong courts for an interim injunction on ownership of virtual currency, and virtual currency has never been argued not to be “property”. The judge therefore ruled that there was nothing inappropriate about “treating virtual currency as property”.
Recognizing virtual currency as property has significant implications for the protection of the property interests of relevant holders. For example, in 2022, after Singapore ruled that virtual currency was property, its judicial authorities had the authority to issue an injunction in a virtual currency theft case to protect the victim’s stolen virtual property worth approximately SGD 9.6 million. In the case of Hong Kong, although virtual currency has always been assumed by the public to be “property”, there was no legal precedent or argument to support this before this ruling. Therefore, the focus of this ruling is to turn this “argument” into a “real legal precedent”. It should be noted that this case was only ruled by the original court and it cannot be ruled out that there may be a possibility of reversal in future appeals.
Identification of property attributes may provide a basis for taxing virtual currency
Of course, there are two sides to everything. Identifying virtual currency as property is certainly more beneficial for protecting the property rights of virtual currency holders, but it also lays a legal basis for the government to tax virtual currency and related businesses. In fact, the United States has already taken the lead in taxing virtual currency. The Internal Revenue Service (IRS) of the United States Federal Treasury Department began building a taxpayer reporting system for the digital currency field as early as 2014. The system aims to include digital currency-related transactions in the federal taxation regulatory system. Subsequently, the IRS issued Notice 2014-21, Virtual Currency Guidance, which identified digital currencies that can be exchanged for legal currency as “property” and further clarified that tax principles related to property apply to the process of mining, holding, and trading digital currencies; taxpayers who receive digital currency values of $600 or more for providing goods or services must report to the IRS; third-party payment institutions that use digital currency as a payment method need to submit relevant transaction information to the IRS if the transaction amount exceeds $20,000 or the number of transactions for a single customer exceeds 200 within a year. The Sajie team believes that the Hong Kong government’s identification of virtual currency as property will also promote the taxation of virtual currency and related business activities, just like the United States.
Conclusion
It is worth noting that although virtual currency is recognized as property under the Hong Kong legal system, the prohibitive regulatory model of virtual currency in mainland China will not change. Any virtual currency-related business in mainland China is illegal, which actually reflects the conflict in property protection between the two regions. However, there may be room for reconciliation in the criminal law field at least. The definition of “property” in mainland China’s criminal law system is not as strict as that in typical Continental legal system countries such as Germany and Japan. In other words, under the mainland China’s criminal law system, property is not limited to tangible objects, which is similar to the definition of property in Hong Kong. Perhaps in the future, the mainland and Hong Kong will have more in-depth cooperation in cracking down on virtual currency crimes and protecting virtual currency property under the attribute of virtual currency as property.
