Foong Cheng Leong

By Foong Cheng Leong
December 17, 2019
– Digital currencies can be used to raise funds, make purchases or traded online
– Anyone operating a digital assets exchange platform must obtain approval from the SC

DIGITAL currencies are a form of digital asset. They can be used to raise funds, purchase goods or services and even traded online instantaneously without any border restrictions.

Digital currencies are now traded on the Internet through, among others, digital assets exchange platforms. Due to their popularity, the prices of certain digital currencies such as Bitcoin are volatile.

Bank Negara Malaysia has declared that digital currencies are not legal tender in Malaysia. However, this does not mean that trading of digital currencies is illegal. Trading of digital currencies is legal in Malaysia but any person operating a digital assets exchange platform must obtain approval from the Securities Commission.

Currently, there are three Recognised Market Operators (RMOs) registered by the Securities Commission to operate digital asset exchanges in Malaysia.

In the meantime, the Securities Commission has also issued Public Consultation Paper No. 1/2019 Proposed Regulatory Framework for the Issuance of Digital Assets Through Initial Coin Offerings (ICOs).

The issuance or offering of certain digital assets to the public will require prior approval or authorisation from the Securities Commission and compliance with the relevant laws and regulations.

Capital Markets and Services (Prescription of Securities) (Digital Currency and Digital Token) Order 2019

The Capital Markets and Services (Prescription of Securities) (Digital Currency and Digital Token) Order 2019 was introduced to recognise certain digital currency and digital token as “securities” thus making securities laws such as the Capital Markets and Services Act 2007 applicable to them.

Reg 2 of the Order 2019 has defined digital assets as:

• Digital Currency: a digital representation of value which is recorded on a distributed digital ledger whether cryptographically-secured or otherwise, that functions as a medium of exchange and is interchangeable with any money, including through the crediting or debiting of an account; or
• Digital Token: a digital representation which is recorded on a distributed digital ledger whether cryptographically-secured or otherwise.

Not all digital currency or digital tokens are securities under the Capital Markets and Services Act 2007. Reg. 3 of the Order provides the relevant criteria. In respect of a digital currency, a digital currency which: —

1. is traded in a place or on a facility where offers to sell, purchase, or exchange of, the digital currency are regularly made or accepted;
2. a person expects a return in any form from the trading, conversion or redemption of the digital currency or the appreciation in the value of the digital currency; and
3. is not issued or guaranteed by any government body or central banks as may be specified by the Securities Commission,
4. is prescribed as securities for the purposes of the securities laws.

As for digital token, a digital token which represents a right or interest of a person in any arrangement made for the purpose of, or having the effect of, providing facilities for the person, where: —

1. the person receives the digital token in exchange for a consideration;
   the consideration or contribution from the person, and the income or returns, are pooled;
2. the income or returns of the arrangement are generated from the acquisition, holding, management or disposal of any property or assets or business activities;
3. the person expects a return in any form from the trading, conversion or redemption of the digital token or the appreciation in the value of the digital token;
4. the person does not have day-to-day control over the management of the property, assets or business of the arrangement; and
5. the digital token is not issued or guaranteed by any government body or central banks as may be specified by the Securities Commission,
   is prescribed as securities for the purposes of the securities laws

Foreign cases

While laws and regulations are being drafted by Governments to deal with digital assets, digital asset disputes are slowly creeping into Courts and the Courts have been applying existing traditional laws into modern technology.

In the English case of Vorotyntseva v Money-4 Ltd (t/a Nebeus.com) [2018] EWHC 2596 (Ch), the High Court dealt with a freezing order against a cryptocurrency platform operator and its directors to restrain them from dissipating their assess. The claimant in this case had deposited a substantial quantity of Bitcoin and Ethereum cryptocurrencies with the operator and became concerned when the operator in this case become uncontactable.

Similarly, in the Hong Kong case of Nico Constantijn Antonius Samara v Stive Jean Paul Dan [2019] HKCFI 2718, the Hong Kong High Court granted a freezing injunction against a French cryptocurrency trader from disposing of his assets in Hong Kong in a dispute over Bitcoin trading on a trading platform. The Plaintiff in this case had money held by the French cryptocurrency trader in his Citibank account in Hong Kong.

In the Singapore case of B2C2 Ltd v Quoine Pte Ltd [2017] SGHC(I) 11, the Singapore International Commercial Court held that the operator of a virtual currency exchange platform was liable for breach of contract and breach of trust in reversing trades made at an abnormal exchange rate. For the first time, the Singapore International Commercial Court applied the law of contract to virtual currencies, finding that virtual currencies have the hallmark characteristics of property and applying the law of unilateral mistake to a case involving algorithmic trading.

Digital currency dispute finally lands in our Court

In 2018, a cryptocurrency trader was sued by two cryptocurrency-exchange related providers for the return of Bitcoins mistakenly transferred to him.

This case is important to the digital currency industry because our Court has decided for the first time that:

– cryptocurrency trading is not illegal in Malaysia;
– digital currency is a form of an intangible asset; and
– digital currency is a “thing” that that has to be returned if it is mistakenly delivered.

The facts of the case of Luno Pte Ltd & Anor v Robert Ong Thien Cheng (Sessions Court Civil Suit No. BA-B52NCVC-389-12/2017) (Unreported) are as follow.

The 1st Plaintiff conducts its business as an online wallet and exchange of digital currencies, also known as cryptocurrencies including Bitcoin, under the trade name of Luno.

Every registered customer of Luno will be allocated a Luno account known as ‘Luno Wallet’ whereby they are able to buy, sell, send, receive and store cryptocurrencies.

The 1st Plaintiff wholly owns the 2nd Plaintiff and the 2nd Plaintiff acts as the intermediary regional operating centre of the 1st Plaintiff which holds the bank account that accepts deposits from Luno customers in Malaysia.

After the customer deposits a sum to the account held by 2nd Plaintiff, the 1st Plaintiff will allocate the deposit to the customer’s respective Luno wallet for them to utilise to trade cryptocurrencies.

The Defendant is a registered user of Luno and has been allocated a Luno Wallet. On Oct 30, 2017, the Defendant deposited RM300,000.00 into the bank account held by the 2nd Plaintiff which was subsequently transferred into the said Luno Wallet and reflected therein accordingly.

At that juncture, the Defendant had a total of RM300,228.58 and 0.616814 Bitcoin in his said Luno Wallet. On Nov 1, 2017, the Defendant converted RM300,228.00 contained in the said Luno Wallet into 10.70163257 units of Bitcoins, leaving the total number of Bitcoins in his said Luno Wallet to be 11.31844657.

On the same day, the Defendant requested for 11.3 Bitcoins to be withdrawn from the said Luno Wallet to be to his Bitfinex e-wallet account and his request was duly carried out. The Defendant’s Bitfinex account is managed and operated by iFinex Inc. (BVI) (‘Bitfinex’), another third party cryptocurrency online trading platform unrelated to the Plaintiffs.

On Nov 1, 2017, the 1st Plaintiff mistakenly transferred an additional 11.3 Bitcoins onto the Defendant’s Bitfinex Account after having transferred the initial 11.3 Bitcoins on the same day.

The 1st Plaintiff notified the Defendant of the mistakenly transferred additional 11.3 Bitcoins on Nov 2, 2017 via email dated Nov 2, 2017. The 1st Plaintiff requested for 11.3 Bitcoins to be returned to the 1st Plaintiff as it was Bitcoins that were mistakenly transferred into the Defendant’s Bitfinex Account. The Defendant acknowledged and admitted that he is required to return the additional 11.3 Bitcoins that were mistakenly transferred to him. In this regard, the Defendant had offered to pay the 1st Plaintiff cash of RM300,000.00 at the end of November 2017, about one month after the mistaken transfer. However, this was not acceptable to the Plaintiffs as the value of Bitcoins fluctuates day-to-day.

The Defendant, although admitting to receiving the additional 11.3 Bitcoins and acknowledging the need to return them, has failed, refused and/or neglected to do so. The Plaintiffs initiated this action against the Defendant to recover the mistakenly transferred 11.3 Bitcoins by returning the said 11.3 Bitcoins and if the Defendant fails to do so, the sum of RM810,837.00 equivalent to 11.3 Bitcoins calculated based on the Luno exchange market price of RM71,756.00 per Bitcoin at the time of the filing of the action.

The Defendant argued that, among others, Bitcoins are not a “thing” capable of being returned as envisaged under s. 73 Contracts Act 1950, and that transfer was actually a mistake.

S. 73 provides: –

Liability of person to whom money is paid, or thing delivered, by mistake or under coercion
A person to whom money has been paid, or anything delivered, by mistake or under coercion, must repay or return it.

The Defendant also alleged that all 22.6 Bitcoins in his Bitfinex account were converted into B2x CST futures on an “automated setting” allegedly prior to his knowledge of the mistakenly transferred additional 11.3 Bitcoins. Therefore, he would not be able to return the Bitcoins.

A counterclaim was filed by the Defendant on the ground that the 1st Plaintiff had ‘colluded’ with Bitfinex and/or ‘interfered’ Bitfinex’s decision in suspending the Defendant’s Bitfinex Account that in turn resulted in his alleged losses of B2x CST futures. He sued for 169,6267258 units of B2x CST futures or the sum of RM806,071.87 being the sum equivalent.

The learned Sessions Court Judge granted the Plaintiffs’ claim and ordered the return of the Bitcoins or its equivalent in Ringgit Malaysia as of the date of filing of the action. He held: –

1. The Defendant admitted that the mistakenly transferred 11.3 Bitcoins does not belong to him and thus, he is under a duty to return the same. There are also contemporaneous documents to show that the Defendant had agreed to return the mistakenly transferred 11.3 Bitcoins, albeit in the form of cash. In this regard, the Defendant had offered to pay the 1st Plaintiff the sum of RM300,000.00 and this is evident from his email dated Nov 2, 2017 to the Plaintiffs. In another email dated Nov 4, 2017, the Defendant stated that the price of Bitcoin was volatile and high and requested for more time for the Bitcoin to settle at a better rate for him to repay back the mistakenly transferred 11.3 Bitcoins. It is thus obvious to the Court that the reason why he refused to repay back the mistakenly transferred 11.3 Bitcoins was due to the very high rate and it was on that basis he had requested for the price to settle so that he can buy it at a lower rate.
2. The Defendant claimed that the offer to pay the sum of RM300,000.00 was out of ‘goodwill’ for the mistakenly utilising the mistakenly transferred 11.3 Bitcoins and therefore the Plaintiffs are estopped from claiming it. The Court found that estoppel does not apply herein as the Plaintiffs have never indicated that they are agreeable to the alleged ‘goodwill’ payment.
3. The Defendant contended that cryptocurrency is illegal in Malaysia and therefore, the Plaintiffs are not entitled to recover the same. The learned Sessions Court Judge dismissed his contention. He held that whilst cryptocurrency is not recognised as legal tender in Malaysia, this does not mean that the Plaintiffs’ operation is illegal. In fact, the 1st Plaintiff is registered as a reporting entity with Bank Negara Malaysia and this is supported by contemporaneous documents. The fact that the 1st Plaintiff is registered as a reporting entity to Bank Negara on cryptocurrency is in itself proof that the 1st Plaintiff’s operations are not illegal. If the 1st Plaintiff’s operations are deemed illegal by Bank Negara, reasonably the 1st Plaintiff would not be registered as a reporting entity. Further, the fact that the Bank Negara Malaysia put forth the initiative to have cryptocurrency exchanges registered as reporting institutions is indicative that the trading of cryptocurrencies is not illegal in Malaysia. Further, this recognises that cryptocurrencies carry value that may be exchanged with real money despite not being recognised as legal tender.
4. The Defendant argued that the said 11.3 Bitcoins do not belong to the Plaintiffs and therefore the Plaintiffs do not have any locus to commence this action to recover the 11.3 Bitcoins. The Court rejected this argument as the position of the Plaintiffs in “holding” the cryptocurrency (i.e. Bitcoins) is akin to that of the bank where customers deposit the monies. As such, if the bank had mistakenly transferred monies into another person’s account, this does not mean that the bank has no locus to initiate an action to recover the monies.
5. The Defendant contended that the Malaysian Court has no jurisdiction to hear the Plaintiffs’ claim. In this regard, the Defendant claims that the Plaintiffs’ claim is subject to Singapore law. The Court rejected this contention. The terms and conditions containing the jurisdiction clause in Singapore do not apply to the present case as the new terms and conditions only took effect after the incident. In this regard, the present case is governed by the old terms and conditions which does not contain any jurisdiction clause. Further, there is no basis in the Defendant’s contention as he has now submitted to the jurisdiction of the Malaysian Court by filing his counter claim against the Plaintiffs. In any event, the Court found that the purported terms and conditions that the Defendant is now seeking to rely on does not apply to him as it is expressly stated on Luno’s website that the new terms and conditions are to take effect after the incident.
6. The Court found that cryptocurrency although is not money in the legal sense, is a form of commodity as real money is used to purchase the cryptocurrency. Accordingly, cryptocurrency falls within the definition of “anything” under s. 73 of the Contracts Act 1950. There is value attached to Bitcoin in the same way as shares do. Bitcoin may not be currency or money per se, but it is a form of commodity, albeit in an intangible form. Accordingly, the Defendant is bound in law and/or equity to return the additional 11.3 Bitcoins to the Plaintiffs that never belonged to the Defendant.
7. The Defendant claimed that all 22.6 Bitcoins in his Bitfinex account were converted into 82x CST futures on an “automated setting”, allegedly prior to his knowledge of the mistakenly transferred additional 11.3 Bitcoins. The Court did not accept the Defendant’s allegation as it was not substantiated with any reliable evidence.
8. In view of the Defendant’s actual knowledge and awareness prior to converting 22.6 Bitcoins to B2x CST futures, the Defendant is bound by principles of natural justice and equity to return the mistakenly transferred 11.3 Bitcoins to the Plaintiffs. the Defendant cannot be allowed to be unjustly enriched at the expense of the 1st Plaintiff.
9. The Defendant is claiming an alleged bona fide change of position on the basis that the 11.3 Bitcoins are no longer available as the B2x CST futures purchased by him did not materialise and its value is now close to nil. However, the Court found that this altered position of the Defendant was self-induced and not bona fide due to the established fact that the Defendant conducted the transaction to convert all 22.6 Bitcoins to B2x CST futures despite realising that something was “amiss”. He cannot claim the defence of bona fide change of position as he utilised the additional 11.3 Bitcoins in his Bitfinex Account to purchase another type of cryptocurrency.
10. The Court found that when the Defendant became aware of his receipt of the additional 11.3 Bitcoins, the principles of equity comes into play whereby if his conscience would be affected upon learning of the mistake, the Defendant is then imposed a constructive trust by the laws of equity which he is then placed under a fiduciary as a constructive trustee.
11. The Defendant argued that the Plaintiffs are unable to “recover” the 11.3 Bitcoins due to the Risk Warning which is found on the Luno Exchange website which states that all transactions that occurs under the Luno Wallet of any user is irreversible. The Court found that the Defendant’s interpretation of the Risk Warning is misplaced. It is to be observed that the Risk Warning stating that the transactions is irreversible applies to those transactions between users and the 1st Plaintiff is still entitled and able to ask for the “return” of the 11.3 Bitcoins. The Defendant’s claimed that once monies have been mistakenly transferred to someone, the monies should be left with them and according to the Defendant pursuant to a “common position accepted in the cryptocurrency world”. The Court could not accept the argument as there was no evidence of this “common position accepted in the cryptocurrency world”. It is clear that the Defendant had agreed to return or repay back the mistakenly transferred 11.3 Bitcoins and this argument on “irreversibility” was only raised at this juncture to defeat the Plaintiffs’ claim. At the time when the Plaintiffs demanded the return of the mistakenly transferred 11.3 Bitcoins, the Defendant never raised any issue that the same cannot be returned due to the Risk Warning. the Defendant’s position is an afterthought and he is now estopped from reneging his earlier position.
12. In respect of the Defendant’s counter claim, the Court found that the Defendant has failed to lead any evidence to substantiate his allegation that the 1st Plaintiff had colluded with Bitfinex and/or interfered in Bitfinex’s decision in suspending the Defendant’s Bitfinex Account that in turn resulted in his alleged losses of B2x CST futures. The 1st Plaintiff have no control or authority over the conduct and management of Bitfinex and/or the Defendant’s Bitfinex Account. All the Plaintiff did was to notify Bitfinex on the mistaken transfer and requested Bitfinex to hold the funds belonging to the Defendant in his Bitfinex account in order to preserve status quo pending negotiations and their attempts to reclaim the 11.3 Bitcoins from the Defendant and nothing more.

On appeal to the High Court (Shah Alam High Court Civil Appeal No. 12BNCVC-91-10/2018), the learned High Court Judge dismissed the appeal and upheld the Sessions Court Judge’s decision. In addition, his Lordship held: –

1. While cryptocurrency is not ‘money’ (i.e.,: legal tender) as we know in the traditional sense, it has been recently defined as a form of ‘security’ by s. 3 of the Capital Markets and Services (Prescription of Securities) (Digital Currency and Digital Token) Order 2019 which had defined digital currency as a form of “security”. It cannot be disputed that it is a form of ‘commodity’ as real money is used to purchase the cryptocurrency. In this regard, there is indeed value attached to the Bitcoin in the same way as value is attached to ‘shares’. The Contracts Act 1950 having been drafted some seven decades ago ought to be construed to reflect changes in modern technology and commerce. In view of the aforesaid, the High Court held that the term ‘anything’ in s. 73 is plainly wide enough to cover Bitcoins. The mistaken transfer of the 11.3 Bitcoins was a result of a technical glitch and not due to a mistake of fact or law.
2. In relation to the argument that Plaintiffs lack the locus standi to initiate an action for the recovery of the 11.3 Bitcoins, the learned High Court Judge held that up until the point the Bitcoins are assigned to a specified user, it is just a pool of Bitcoins that Luno has full custody and control of. Hence, it was incorrect to suggest that the Plaintiffs were not the legal and beneficial owners of the 11.3 Bitcoins.
3. The crux of this appeal turns on the correct interpretation of s. 73 of the Contracts Act, 1952 and the application of s. 73 to the instant facts. The terms are plainly wide enough to be invoked for the return the 11.3 Bitcoins wrongly or mistakenly transferred into the account of the Defendant.
4. The Plaintiffs’ cryptocurrency online exchange is not illegal and/or contrary to public policy. There was no material or evidence before the Court below that. Although cryptocurrency is not recognised as legal tender in our jurisdiction, the Plaintiffs’ whole operation is not illegal and cannot sustain the claim for restitution.
5. In respect of the counterclaim, the learned High Court Judge agreed with the Sessions Court Judge that the Defendant’s allegation had not been substantiated on the proven facts and evidence.

Closing

To put this case in simple words, this is a case where the Plaintiff had mistakenly transferred Bitcoins to the Defendant and the former wants the latter to return it. The Defendant on the other hand claimed that he is unable to do so as he no longer has it.

Unlike the usual tangible products, this is a case which deals with digital currency which has very volatile value.

The Plaintiff had also demanded that if the Defendant is unable to return the 11.3 Bitcoins, he had to pay the sum of RM810,837.00 equivalent to 11.3 Bitcoins calculated based on the Luno exchange market price of RM71,756.00 per Bitcoin at the time of the filing of the action.

The Court held that, among others, the Defendant had a duty to return the Bitcoins and there is no evidence that he no longer has those Bitcoins. 

The matter is now pending appeal at the Court of Appeal.

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First published on Digital News Asia on 17 December 2019.