Will HK cryptocurrency be the “shot in the arm” for Web3 as a property?
Can HK cryptocurrency boost Web3's value?
Our country’s criminal law does not explicitly deny that virtual currency constitutes “property”. Recent judgments in Hong Kong can also serve as a positive reference for the criminal law protection of virtual currency in mainland China.
Written by: Xiao Sa Legal Team
Core Points
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Recently, a Hong Kong court ruled that virtual currencies such as Bitcoin can be regarded as “property” in the legal sense. Some legal experts believe that this is beneficial for clarifying the current regulatory framework for virtual currencies in the Hong Kong government, and for protecting the property interests of virtual currency holders from a legal perspective.
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Recognizing virtual currency as property also opens up the possibility of the Hong Kong government levying property taxes on virtual currency, in fact, the United States follows this approach in taxing virtual currency.
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Our country’s criminal law does not explicitly deny that virtual currency constitutes “property”. Recent judgments in Hong Kong can also serve as a positive reference for the criminal law protection of virtual currency in mainland China.
Expansion of the Definition of “Property” Under the Common Law System
The controversy over whether virtual currency belongs to “property” in Hong Kong, China, originates from the concept that “property” must be a tangible object that can be owned under the common law system. In common law, all personal items are either capable of being possessed 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 currency as a form of property: they are neither assets capable of being possessed (chose in possession) nor intangible assets (chose in action). They are not assets capable of being possessed because they are virtual, intangible, and cannot be possessed. They are not intangible assets that can be obtained through litigation because they do not reflect any rights that can be enforced by litigation…Virtual currency does not completely belong to either of 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 somewhat “unworkable” in the Web3 era, making it particularly important to expand the ancient common law concept of “property”. The first person to make this attempt was Judge Bryan, who, in the case of AA v Persons Unknown, benefited from a legal statement on virtual currency assets and smart contracts issued by the UK jurisdiction working group in November 2019:
“77. Our view is that the principles in Colonial Bank v Whinney (1885) 30 Ch D 261 cannot be regarded as limiting the scope of identifying property in law. It shows that common law has the ability to expand traditional definitions and concepts to accommodate new business practices…”
“83. Some important regulations of the 20th century assume that intangible property is not limited to actionable things. The Theft Act 1968, the Proceeds of Crime Act 2002 and the Fraud Act 2006 all define property to include things in action and other intangible property. It can be said that these regulations expand the definition of property for their own special purposes, but they at least show that it is not conceptually difficult to regard intangible things as property, even if they may not be actionable. 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 necessarily recognizes that personal property may include things other than chattels (which a patent clearly is not) and choses in action.”
Judge Bryan adopted the conclusion of the legal statement, “Cryptocurrency, like Bitcoin, may not be a thing in action under this term’s narrow definition, but that does not mean that it cannot be regarded as property”, and considered that “virtual currency like Bitcoin is property”.
The High Court of the Hong Kong Special Administrative Region recognizes that virtual currency is property
The above conclusion under the common law system opened the way for the recognition of digital currencies as property. On this basis, the High Court of the Hong Kong Special Administrative Region ushered in a landmark ruling on virtual currency (Re Gatecoin Ltd [2023] HKCFI 914 [2023] HKEC 1223, judgment of March 31, 2023), which recognized virtual currency as property and could be considered a trust asset. 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 Hong Kong cryptocurrency exchange Gatecoin announcing its liquidation in 2019, attempting to recover disputed cryptocurrency from a collaborating payment service provider. In court, the liquidator questioned whether the virtual currency held by Gatecoin in court could be regarded as “trust property”. If this portion of the currency is not trust property, it will be returned directly to the creditors in full. It is reported that the exchange held virtual currency worth over HKD 140 million (approximately USD 17.8 million) in October 2020.
In the Gatecoin case, presiding judge Linda Chan believes that Hong Kong should follow in the footsteps of other common law jurisdictions and adopt a broad definition of “property” to keep up with the times. Therefore, virtual currency meets the four criteria of “property”:
Definable
Because the public keys assigned to cryptocurrency wallets are easily identifiable, sufficiently distinct, and can be uniquely assigned to individual account holders.
Identifiable by a third party
Only the holder of the private key can access and transfer cryptocurrency from one wallet to another.
Has the nature of ownership that can be acquired by third parties
It can and is the subject of an active trading market, in which case (a) the owner’s rights to the property are respected, and (b) it has potential benefits for third parties such that they wish to acquire ownership of the property.
Has a certain degree of permanence or stability
The entire life history of cryptocurrency can be found in the blockchain.
According to cases in the UK, Singapore, and the British Virgin Islands, virtual currency is not only information, but also an item with tradable value, and its owners have exclusivity, and there is no public policy against the court recognizing virtual currency as having property status. In addition, Hong Kong courts have already issued interim injunctions against virtual currency ownership, and have never argued that virtual currency is not “property”. The judge therefore ruled that “virtual currency should be regarded as property”.
Recognizing virtual currencies as property is of great significance in protecting the property interests of relevant holders. For example, in 2022, when Singapore recognized virtual currencies as property, its judicial authorities had the power to issue injunctions when adjudicating a virtual currency theft case, protecting the stolen virtual property worth approximately SGD 9.6 million. In Hong Kong, although virtual currencies have always been assumed by the public to be “property,” there was no legal precedent or argument to support this before the ruling in this case. 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 trial court, and the possibility of a future appeal overturning the conclusion cannot be ruled out.
Recognizing virtual currencies as property provides a legal basis for their taxation
Of course, everything has two sides. Recognizing virtual currencies as property is certainly more advantageous to the property rights and interests of virtual currency holders, but it also provides a legal basis for the government to tax virtual currencies and their related businesses. In fact, the United States has taken the lead in the issue of virtual currency taxation. The Internal Revenue Service (IRS) of the US Department of the Treasury began to establish 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-level tax supervision system. Subsequently, the IRS issued Notice 2014-21- Virtual Currency Guidance (hereinafter referred to as “Notice 2014-21”), which recognized digital currencies that can be exchanged for legal currencies as “property” and further clarified that the 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 need to report to the IRS; third-party payment institutions that use digital currencies as payment methods, if their transaction amount exceeds $20,000 within a year, or if the number of transactions for a single customer exceeds 200, need to submit the relevant transaction information to the IRS. The Sajie team believes that the Hong Kong government’s recognition of virtual currencies as property will also push forward the taxation of virtual currencies and their related business activities, just like the United States.
Conclusion
It is worth noting that while virtual currency is recognized as property in the Hong Kong legal system, the prohibition-based regulatory model for virtual currency in mainland China will not change. Any virtual currency-related business in mainland China is illegal, which actually reflects the conflicting property protection between the two regions. However, there may be room for reconciliation at least in the field of criminal law. The definition of “property” in mainland China’s criminal law system is not as strict as that in typical continental law countries such as Germany and Japan. In short, under the criminal law system in mainland China, property is not limited to having a physical form, which is similar to the definition of property in Hong Kong. Perhaps in the future, there will be deeper cooperation between mainland China and Hong Kong in cracking down on virtual currency crimes and protecting virtual currency property under the attribute of property.
