HK virtual currency = property, will it be a "booster" for Web3?

Mainland my country’s criminal law does not explicitly deny that virtual currency constitutes “property”. The recent judgment in Hong Kong can also serve as a positive reference for the protection of criminal law on virtual currency in mainland my country.

Written by: Xiao Sa Legal Team

Core tip

1. Recent cases in Hong Kong believe that virtual currencies such as Bitcoin can be regarded as "property" in the legal sense. Protect the property interests of virtual currency holders.
2. Identifying virtual currency as property also opens up the possibility for the Hong Kong government to levy property taxes on virtual currency. In fact, the United States follows this approach in taxing virtual currency.
3. Mainland my country's criminal law does not explicitly deny that virtual currency constitutes "property". The recent judgment in Hong Kong can also serve as a positive reference for the protection of criminal law on virtual currency in mainland my country.

Expansion of the definition of "property" under the common law system

The dispute over whether virtual currency is “property” in the Hong Kong region of my country stems from the concept that “property” must be a physical object that can be owned under the common law system. At common law, all personal effects are either possessable or intangible. It is impossible for the law to know a third case other than these two (Colonial Bank v Whinney [1885] 30 Chi. D. 261). Guided by this conventional view, there are difficulties in viewing virtual currencies as a form of property: they are neither chosen in possession nor chosen in action. They are not possessable assets because they are virtual, intangible and cannot be possessed. They are not suable intangible assets because they do not embody any rights that can be enforced through litigation...Virtual currencies do not quite fall into either of these 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, which makes it particularly important to expand the ancient common law concept of "property". The original attempt was made by Judge Bryan, who in AA v Persons Unknown had the benefit of the UK Jurisdiction Working Group before him in November 2019 on the law on virtual currency assets and smart contracts statement:

"77. It is our view that the principle in Colonial Bank v Whinney (1885) 30 Ch D 261 cannot be regarded as limiting the scope of the recognition of property in law. It demonstrates the ability of the common law to extend traditional definitions and concepts , to accommodate new business practices..."

“83. Some important statutes of the 20th century defined property assuming that intangible property was not limited to indictable things. The Theft Act of 1968, the Proceeds of Crime Act of 2002 and the Fraud Act of 2006 all included property Defined to include things in action and other intangible property. Arguably, these statutes expand the definition of property for their own special purposes, but they at least indicate that intangible things are considered property even though they may not be in action Moreover, the Patents Act 1977 further provides in section 30 that a patent or application for a patent "is personal property (not belonging to a living animal)". This necessarily recognizes that personal property may include other than Possessions (patents obviously are not) and things in action.”

Judge Bryan adopted the legal statement's conclusion that "under the narrow definition of the term, a cryptoasset may not be a subject of action, but that does not mean that it cannot be considered property" and held that "virtual currencies like Bitcoin are property ".

The High Court of the Hong Kong Special Administrative Region has determined that virtual currency is property

The above-mentioned conclusions opened a precedent for recognizing digital currency as property under the common law system. On this basis, the High Court of the Hong Kong Special Administrative Region ushered in the first landmark ruling on virtual currency (Re Gatecoin Ltd. [2023] HKCFI 914 [2023] HKEC 1223, ruling of 31 March 2023), which found that virtual currencies are property and may be regarded as trust assets. Some people in the legal field believe that this move will help clarify the current regulatory framework for virtual currencies and help protect the property interests of virtual currency holders legally.

The case originated when Hong Kong-based virtual currency exchange Gatecoin announced its liquidation in 2019, trying to recover the controversial virtual currency from a cooperative payment service provider. In court, the liquidator asked the court whether the virtual currency held by Gatecoin could be regarded as "trust assets". If this part of the currency is not a trust asset, it will be directly returned to the creditor in full. It is reported that the exchange held virtual currencies worth over 140 million Hong Kong dollars (about 17.8 million U.S. dollars) in October 2020.

In the Gatecoin case, the presiding judge Linda Chan believed that Hong Kong should follow other jurisdictions of common law jurisdiction and adopt a broad definition of "property" to adapt to the development of the times. Therefore, virtual currency meets the four major criteria of being "property":

definable

Because the public keys assigned to cryptocurrency wallets are easily identifiable, sufficiently distinct, and uniquely assignable to individual account holders.

Recognizable by third parties

Only the holder of the private key is able to access and transfer cryptocurrency from one wallet to another.

has the property of being capable of being owned by a third party

It can be, and is, the subject of an active trading market where (a) the owner's rights to the property are respected, and (b) it is potentially beneficial to third parties such that they wish to acquire the property for themselves ownership of property.

has some degree of permanence or stability

The entire life history of cryptocurrencies can be found in the blockchain.

According to the cases of the United Kingdom, Singapore, and the Virgin Islands, virtual currency is not only information, but an item with tradable value, the owner is exclusive, and there is no public policy against courts recognizing that virtual currency has property status. In addition, the Hong Kong court has issued a precedent for an interlocutory injunction on the ownership of virtual currency, and has never proposed that virtual currency is not "property". The judge thus concluded that there was nothing wrong with treating "virtual currency as property."

Identifying virtual currency as property is of great significance to the protection of the property interests of relevant holders. For example, in 2022, when Singapore determines that virtual currency is property, its judiciary will have the right to hear a case of virtual currency theft A restraining order was issued to protect the victim's stolen virtual property worth approximately S$9.6 million. As far as Hong Kong is concerned, although virtual currency has always been regarded as "property" by the public by default, there are no legal precedents and arguments to support this before the judgment of this case. Therefore, the focus of this judgment is to turn this "argument" into "true law". It should be noted that this case was only decided by the Court of First Instance, and it cannot be ruled out that the possibility of reversing the conclusion in future appeals cannot be ruled out.

The identification of property attributes provides the possibility for virtual currency taxation

Of course, everything has two sides. Recognizing virtual currency as property is of course more conducive to the protection of the property rights of virtual currency holders, but it also lays a legal basis for the government to tax virtual currency and its related businesses. In fact, the United States has taken the lead in taxing virtual currencies. The Internal Revenue Service (IRS, hereinafter referred to as the "Internal Revenue Service") of the US Federal Department of the Treasury began to establish a taxpayer reporting system in the field of digital currency as early as 2014. The system aims to incorporate digital currency-related transactions into the tax regulatory system at the federal level. Subsequently, the US Internal Revenue Service issued the "2014-21 Notice - Virtual Currency Guidelines" (hereinafter referred to as the "2014-21 Notice"), which identified digital currencies that can be converted into legal tender as "assets" and further Clarified that the taxation principles related to property apply to the mining, holding and trading of digital currency; taxpayers who accept digital currency worth more than $600 for the provision of goods or services need to declare to the IRS; third-party payment institutions use digital currency If currency is used as the means of payment, if the transaction amount exceeds 20,000 US dollars within one year, or the number of transactions for a single customer exceeds 200, it is necessary to submit relevant transaction information to the US Internal Revenue Service. Sister Sa’s team believes that the Hong Kong government has determined that virtual currency constitutes property, and the next step will be to promote the taxation of virtual currency and related business activities, just like the United States.

Write at the end

It is worth noting that although virtual currency is recognized as property under the jurisdiction of Hong Kong, the prohibition-type regulatory model for virtual currency in mainland my country will not change. Any business related to virtual currency in mainland China is illegal. This actually reflects Although there is conflict in property protection between the two places, there may be room for reconciliation of this conflict at least in the field of criminal law. The definition of "property" in the mainland's criminal law is not as strict as the criminal laws of typical civil law countries such as Germany and Japan. The definition of the concept of property in different regions has the same purpose. Perhaps in the future, under the attribute of virtual currency as property, the mainland and Hong Kong will have more in-depth cooperation in combating virtual currency crimes and protecting virtual currency property.