Bitcoin: Not just relevant to Russian oligarchs
The world has acted swiftly to cut off Russia’s access to traditional banking methods. However, oligarchs and their cryptocurrency seem to be a very different story. Because it is anonymous, flexible and decentralised, digital currency is much harder to control.
These features also raise novel issues within our local legal system such as the Court’s power to make an asset preservation order (“APO“) for the holding of passwords to Bitcoins. This was the outcome in the recent decision of Chen v Blockchain Global Ltd; Abel v Blockchain Global Ltd [2022] VSC 92 (“Blockchain Global“), where the Supreme Court of Victoria made an APO for the holding of passwords to Bitcoins worth $10.3 million.
Blockchain Global is one of the first Australian cases where an APO has been applied to a digital currency.
There is a sense that digital currency is beyond the law’s reach and tailored for cowboy type activity. However, this decision demonstrates the Court’s power and willingness to apply rules designed for traditional assets to this novel form of currency.
Background: An additional layer to protect the Bitcoins’ passwords
Blockchain Global relates to the shutdown of the ACX, a digital currency exchange. According to the Australian Financial Review, around 200 users of the ACX claim to have lost 176 Bitcoins in the collapse.
A separate but related dispute revealed 117.33 Bitcoins in a password-protected hard drive, giving recovery hope to users. Settlement in this contractual dispute meant that the Bitcoins were at risk of being dissipated. A freezing order has previously been made over the Bitcoins. However, given the importance of retaining passwords, a further application was made for an APO to protect the Bitcoins.
Asset Preservation Orders
The Supreme Court has power to make an APO under Rule 37.01.
The rule is expressed in general terms. The Court is able to make orders in whatever form is necessary to preserve property until determination of a proceeding. The relevant property or asset can belong or be controlled by a non-party as long as it relates to a question in the proceeding. The Court will not consider the merits of a particular claim (see Greenberger v State of Victoria [2008] VSC 357 at [13] (Forrest J)).
The Decision in Blockchain Global : The passwords and the assets were at risk of being dissipated
Justice Attiwill (at [35]–[37]) was satisfied that an APO was justified, would preserve the Bitcoins until the issues in dispute are determined and prevent a hollow outcome if the asset was to be dissipated. The Court identified these Bitcoins’ features:
- Bitcoin has no central authority;
- the security wallet is a ‘2 of 2’ wallet, meaning that 2 out of 2 signatories need to authorise transactions to make transfers out of the wallet;
- the security wallet is only accessible by the 2 signatories who enter their respective ‘seed phrases’ (12-worded passwords) into software to gain access;
- if a seed phrase is lost, forgotten or corrupted, the Bitcoins would become inaccessible, totally destroying their value; and
- the value of the Bitcoins depends entirely on the confidentiality of the seed phrases. ([9])
The Court held that there was a real risk that the Bitcoins may be destroyed and the entire value lost. This is because one of the signatories could not recall his seed phrase and only had one record of it on a piece of paper which was in China in a location which, even if it could be located, could not be considered safe and recoverable. ([38])
In practical terms, it appears that Justice Attiwill’s orders making the APO will require the signatories to:
- copy their seed phrases into a document; and
- give their documents to their respective solicitors to be placed in envelopes and securely stored ([34]).
The Court indicated that future orders to verify the seed phrases recorded on the documents would be addressed at a subsequent hearing. We look forward to providing a further update once that decision is delivered.
~ with Mark Pennini, Associate
