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Hill Dickinson Hong Kong advises on settlement of HK$310m crypto derivatives dispute

By April 26, 2023 No Comments
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HDHK acted for a sophisticated trader who dealt in a high volume of crypto derivatives on a prominent crypto currency exchange at a price perceived to be attractive. The trades resulted in a paper profit of around HK$310m within two months.  However, the said exchange then unilaterally adjusted its customer ledger and withdrew the entire profits from our client’s account without consent.  HDHK advised the client in relation to commencing arbitration at the Hong Kong International Arbitration Centre under the HKIAC Rules 2018 and represented the client in negotiations with the said exchange and its Magic Circle legal advisors. HDHK then successfully extracted a highly favourable outcome, with the settlement paid in bitcoins.  This led to a variety of considerations and further negotiations surrounding the precise bitcoin transfer mechanism, the reversibility thereof, virtual asset regulations and anti-money laundering concerns.   

This matter is significant as it concerns an unsettled debate as to the circumstances in which crypto transactions on centralised exchanges are / should be reversible when there is alleged to be unusual market activity.

In 2019, the Singapore International Commercial Court issued a landmark judgment on the same topic, B2C2 Ltd v Quoine Pte Ltd [2019] SGHC(I) 03.  The decision concerned seven orders for the sale of Ethereum in exchange for Bitcoin placed by market maker B2C2, which were automatically executed by Quoine exchange’s automated trading software at a rate of approximately 250 times the market exchange rate, in B2C2’s favour.  Once Quoine realised that a serious technical error had occurred, it cancelled B2C2’s trades by reversing the transactions.  B2C2 brought a claim against Quoine based on contractual breach and breach of trust.  Quoine’s defence was that it was entitled to reverse the trades since they were entered into by mistake and were therefore void. The Singapore Court found in B2C2’s favour.

Notwithstanding the above, how the same legal issues would be dealt with under Hong Kong law remains far from certain.  This is particularly because there is limited case law on the interplay between traditional legal principles, and relatively newer concepts surrounding cryptocurrency and new technology, and the regulatory framework for virtual asset trading platforms is still developing in Hong Kong.

Blockchain technology has been around for nearly a decade and a half. However, its mainstream adoption and use outside of cryptocurrencies is relatively novel. Still, it has proved to be the most disruptive technological innovation in recent memory. Multiple industries have discovered – and are continuing to discover – new use cases, implementing decentralised immutable databases to create market advantages across those multiple new use cases.

Cryptocurrency, the original use case for blockchain technology, is any digital currency that operates by utilising the secure, immutable decentralised database that blockchain technology affords. Cryptocurrencies are volatile but now well established, with new assets being minted every day. New use cases in both transactional and investment deals are increasingly common. 

We have been working with blockchain technology and those uses for over a decade. We are trusted advisors to a wide range of clients within the technology sector and to those sectors which are not technology driven but simply want to use it to enhance their offerings or make them more secure or efficient. This includes those businesses whose principal technology employs use of a blockchain and/or some form of tokenisation/cryptocurrency. Our team can meet the full scope of your requirements – be it regulatory, transactional, dispute resolution or data protection advice around blockchain, cryptocurrencies, non-fungible tokens (NFTs), social tokens, DeFi and special forms of decentralised finance and decentralised autonomous organisations (DAOs) and gamification.

How our Blockchain and cryptocurrency lawyers can help you

Blockchain

What is blockchain?

Whereas traditional databases are centralised, blockchain databases decentralise data so there is no single master copy, no single authority to effect or validate changes and, most importantly, no possibility of anyone amending information on it. Like any database, it can be completely public and open, or only accessible – in terms of reading and/or writing to the database – by those with approved credentials. Not having a central validating authority allows great efficiency and cost-cutting. 

A number of industries are already using a blockchain to assist in the creation, management and record-keeping of data. Use cases include: 

  • Real estate – to process real estate transactions and registers of ownership.
  • Health – as a viable method of managing patient records. 
  • Business – to manage supply chain information. 
  • Legal – to create, execute and maintain legal documentation and contracts. 
  • Intellectual property – to track intellectual property rights and registers of ownership.
  • Insurance – to make applications and claims more efficient.
  • Finance – to record financial transactions.
  • Cryptocurrency and NFTs – cryptocurrencies use blockchain technology to keep a record of transactions of the particular currency and blockchain is used as an easy way to verify ownership of NFTs and securities for money. 
  • Shipping and logistics – to trade documentation and tracking. 

How can we help?

Our team understands the technology and the many legal issues that arise from using this technology. We can advise on technology contracts, taxation, financing, anti-fraud measures and many other areas because we have a keen knowledge and experience of the use of this technology for our clients, going back over a decade.

Cryptoassets

What are cryptoassets?

Crypto assets are any digital assets that are cryptographically secured and can be transferred, stored and traded on a blockchain. These can be regulated, as in the case of e-money tokens and security tokens, or unregulated, as with cryptocurrencies and some social tokens. Unregulated tokens like Bitcoin, Ethereum and Tether have recently seen massive rises in popularity.

How can we help?

As cryptocurrency becomes increasingly common as a usable form of currency, our expert team of technology lawyers will provide you with strategic guidance on all facets of cryptoasset management and control. This includes advice on the ownership of cryptocurrencies and fraudulent activity that can surround it; advice on crypto asset transactions; taxation; advice on launching NFT platforms; regulatory advice on security and social/utility tokens; and advice on crypto asset investments.