High Court Delivers Judgement on User Assets at Hacked Exchange Cryptopia

Hacked cryptocurrency exchange Cryptopia today informed its users that the High Court of New Zealand has delivered its judgment on the status of their compromised assets.

In a tweet thread published on April 8, the exchange shared the 74-page court document detailing the judgment, summarizing:

“Today, 8 April 2020, Justice Gendall delivered his judgment finding firstly, cryptocurrencies are “property” [...] and secondly, that account holders' cryptocurrency were held on multiple trusts, separated by individual crypto-asset type. This means that the cryptocurrencies are beneficially owned by the account holders and are not assets of the company.”

Some creditors to get less than 50% of claims

As previously reported, the now-defunct Cryptopia was the target of a security breach in January 2019, which continued for two weeks after its detection until the exchange managed to regain control of its wallets. 

In today’s judgment, Justice Grendall revealed that users’ assets on the exchange had been held in multiple trusts, each of which grouped together account holders holding a particular type of digital asset. 

The result is that account holders within each specific group are treated as the co-beneficiaries of the same trust. 

As to whether crypto assets qualify under New Zealand’s trust law, Justice Grendall firmly concluded that crypto is “a species of intangible personal property and clearly an identifiable thing of value.” 

As property, crypto assets are therefore, “without question [...] capable of being the subject matter of a trust.” Should the liquidators succeed to recover the stolen assets, the judgment therefore holds that:

“They are to be dealt with pro rata within each specific trust for the digital asset concerned according to the amounts recovered assessed against the amounts stolen.”

While account holders will be reimbursed, Justice Grendall determined that the pool of liquidated assets available to creditors is likely to be around NZD 5.4 million [$3.22 million]. 

This amounts to less than 50% of the value of their claims, given that the total value of all creditors’ claims is an estimated NZD 12.7 million [$7.57 million], NZD 5 million ($2.9 million) of which is being sought by the tax authorities.

Identity troubles

A further detail in the judgment refers to cases where the assigned liquidator, Grant Thornton, might be unable to ascertain the identity of a particular account holder. In such instances, the affected digital assets are to be dealt with pursuant to New Zealand’s Trustee Act.

This is particularly relevant in light of a revelation from Grant Thornton in August 2019. The firm then explained that some Cryptopia customers did not have individual wallets and their funds were pooled together, as the exchange kept details of customer holdings in its database. 

As a consequence, the firm said it was impossible to determine individual ownership by relying on wallet keys.

At the time, Grant Thornton assured users that it was working to “reconcile the accounts of over 900,000 customers, many holding multiple crypto-assets, millions of transactions and over 400 different crypto-assets [...] one-by-one.”

In December, Grant Thornton revealed it had recovered almost $11 million and disbursed $2.46 million to certain preferential creditors. However, the firm said it was still “not practicable to estimate a completion date for the liquidation,” adding that “no detailed reconciliation” process between customer databases and crypto assets held in wallets “had ever been completed.”