Navigating the Legal Landscape of Cryptocurrencies: The Challenge of Locating and Classifying Digital Assets

Introduction

The meteoric rise of cryptocurrencies over recent years has firmly cemented their place in the global financial ecosystem. On March 6, 2024, Bitcoin briefly reached an unprecedented all-time high of $69,000, underscoring the growing significance of digital currencies. As their adoption widens, the frequency and complexity of disputes involving cryptocurrencies are expected to escalate, presenting formidable legal challenges for courts worldwide.

A pivotal issue that courts will inevitably confront is the determination of the location of cryptocurrencies. This determination is critical for addressing matters related to regulatory compliance, jurisdictional authority, and the provision of various legal remedies.

Cryptocurrencies as Property

Courts have been rigorously examining whether cryptocurrencies can be classified as property. In the landmark case of David Ruscoe and Another v. Cryptopia Ltd (Ruscoe), the High Court of New Zealand addressed this question and concluded that cryptocurrencies meet the criteria for intangible property as outlined by Lord Wilberforce in National Provincial Bank Ltd. v. Ainsworth. The court in Ruscoe held that cryptocurrencies are “definable,” “identifiable by third parties,” “capable of assumption by third parties,” and have “some degree of permanence or stability,” thus satisfying the essential requirements for property classification.

This precedent was subsequently upheld in Singapore, where the court in CLM v. CLN and Others (CLM) concurred with Ruscoe and determined that stolen cryptocurrency assets could be subject to proprietary injunctions as they constitute intangible property.

Locating Cryptocurrencies

The challenge of locating cryptocurrencies is inherently intricate due to their intangible nature. Unlike physical assets, cryptocurrencies exist solely as records within a decentralized computer network. The Singapore High Court, in cases such as ByBit Fintech Ltd v. Ho Kai Xin and Others and Cheong Jun Yoong v. Three Arrows Capital Ltd and Others (Three Arrows), has adopted the position that the location of a cryptocurrency should be determined by the residence of its owner, specifically the individual who controls the private key associated with the cryptocurrency wallet.

In Three Arrows, the court reasoned that since a cryptocurrency lacks physical presence and exists as a network record, its effective manifestation is through the exercise of control over it. Treating cryptocurrencies as choses in action (intangible rights to property) supports the conclusion that their situs (location) is where they can be effectively enforced or recovered, which is the place where the person controlling the private key resides and can be sued.

Conversely, courts in England have taken a slightly different approach. In the case of Lavina Deborah Osbourne v. Persons Unknown and Another (Osbourne), the English High Court ruled that cryptocurrencies should be treated as located at the place where the owner is domiciled, rather than their residence.

Residence vs. Domicile

The concepts of residence and domicile are distinct legal constructs. Residence refers to physical presence in a locality, whereas domicile involves both physical presence and the intention to establish that locality as one’s permanent home. Domicile is defined as the place where a person has their true, fixed, permanent home and principal establishment, and to which they intend to return whenever they are absent.

Determining domicile can be a complex process, requiring proof of genuine intention and clear abandonment of any previous domicile. As noted by the court in Three Arrows, identifying domicile can be challenging in difficult cases, and uncertainties around its determination could unnecessarily impede the exercise of jurisdiction where it should have been validly exercised.

The Singapore courts’ approach of using residence as the determining factor for locating cryptocurrencies appears more practical, aligning with the notion of exercising control over the asset. However, the English courts’ domicile-based approach in Osbourne may prove more effective in certain cases, particularly when enforcement and jurisdiction are more straightforward in the owner’s domicile.

Implications and Future Challenges

As the prevalence of cryptocurrencies continues to expand, courts and legislators will need to cultivate a nuanced understanding of their nature to address the intricate legal questions that will inevitably arise. The resolution of these issues will have far-reaching implications for the regulation and treatment of digital currencies in the legal realm.

One key challenge will be balancing legal certainty with the flexibility to adapt to the rapidly evolving landscape of cryptocurrencies. Legislation and regulations may be necessary to establish clear guidelines for locating and classifying cryptocurrencies while allowing judicial interpretation to address unique cases and circumstances.

Additionally, the growth of decentralized finance (DeFi) and the emergence of new types of digital assets, such as non-fungible tokens (NFTs), will likely pose further challenges for courts and lawmakers. Developing a comprehensive legal framework that can accommodate these innovations while protecting the rights of all parties involved will be crucial.

International cooperation and harmonization of laws may also become increasingly important as cryptocurrencies transcend national borders. Consistent approaches to locating and regulating digital assets could help mitigate conflicts and ensure a more predictable legal environment for businesses and individuals operating in the crypto space.

Context of the United Arab Emirates (UAE)

In the UAE, the legal landscape surrounding cryptocurrencies is evolving rapidly. The UAE has been proactive in establishing a regulatory framework for digital assets, aiming to position itself as a global hub for cryptocurrency and blockchain technology. The Dubai Multi Commodities Centre (DMCC) and the Abu Dhabi Global Market (ADGM) have introduced comprehensive regulations for crypto-assets, providing legal clarity and fostering innovation.

The UAE’s approach to classifying and locating cryptocurrencies may draw insights from international precedents while tailoring solutions to fit its unique legal and economic context. For instance, determining the location of cryptocurrencies based on the residence of the owner could align with the UAE’s regulatory practices and enhance the enforceability of legal remedies.

As the UAE continues to refine its legal framework for cryptocurrencies, it will be essential to incorporate best practices from global jurisdictions while addressing the specific needs and challenges of the local market. This approach will ensure that the UAE remains at the forefront of cryptocurrency regulation, providing a robust legal environment that supports innovation and protects the interests of all stakeholders.

Conclusion

As the crypto landscape continues to evolve, courts, lawmakers, and legal professionals must remain vigilant and adaptable, continuously refining their understanding and approaches to address the complex legal issues surrounding these novel digital assets. The UAE, with its proactive regulatory stance, is well-positioned to lead the way in developing a comprehensive legal framework for cryptocurrencies, setting a benchmark for other jurisdictions to follow.

Published By Hassam Raoon