How the decision impacts the entire industry and new developing areas of the law.

by Edmund Yong

[Continued from Part 1]


I walked into the chambers of Messrs Moideen & Max at Gateway Kiaramas on a Monday morning. The reception lounge came with brocade wallpaper, ambient lighting and a soft cream-colored rug. I was shown to the conference room where a team-autographed Liverpool FC jersey in a large silver frame hung proudly on the wall: this is the pièce de résistance, not the law books.

Ed:       Thanks for your time. When you decided to take this on, did you have a sense that it will be a precedent-setting or landmark case?

Faisal:   Yes, we did. But our main concern was finding a solution for our client’s legal issue.

Ed:       How did you prepare for this? I mean, what kind of research or jurisdiction did you rely on? This was two years ago when the case law was even less developed back then, and the digital asset trading industry is hardly established.

Faisal:   We prepared for it by relying on existing local jurisprudence, predominantly on contractual principles as there was not much support we could have drawn from foreign legislation then considering cryptocurrency is still an evolving and developing concept. The challenge was to fit cryptocurrency dispute within the existing legal framework.

Ed:       The annotator Foong Cheng Leong for Digital News Asia observed that “digital asset disputes are slowly creeping into Courts and the Courts have been applying existing traditional laws into modern technology.” Do you agree?

Faisal:   Yes. The Courts have no choice given that there is currently no specific legislation applicable. However, laws are not static and this case is evidence that laws are flexible enough to adapt to new circumstances and facts if there is willingness to interpret the law and expand its application to new set of circumstances.

Ed:       Given the absence of legislation, it does seem fair and reasonable to expect some judicial activism in a case like this. You think it should have gone further?

I mean, the Courts gave a wide reading for the word “anything” in the Contracts Act which is great. But what will help the industry is to have the legal status of bitcoins ascertained and whether it can actually be considered personal property.

Faisal:   We are of the view that the Court had appropriately considered the current set of legislation and precedents in the context of the case at hand and had given effect to such legislation and precedents as far as it could have in deciding on the matter which is of a novel nature in Malaysia.

Ed:       Sorry to drill this further, want to get your thoughts on this. The literature on property law seems to be divided whether possession is required, especially when physical possession is impossible?

It gets more complicated as CMS Order 2019 now classifies bitcoin as a security, which the learned High Court cited as well in this case. How do you show legal title or possession for security when bitcoins are generally anonymized with no ownership information? 

Faisal:   Technology is evolving more rapidly than ever. I think that it is high time that the legislature and regulatory bodies keep up with time and attempts to regulate the ownership of cryptocurrency to avoid being restrained by the concept of physical possession. The Courts have dealt with the issue thus far, but a proper legislation on the matter would be of great assistance.

The issue of legal title or possession of such security also ought to be ironed out between the financial and securities regulating bodies and the blockchain platforms. However, it might be pertinent to note that the proof of ownership may not be the most pressing issue at hand compared to the manner that such cryptocurrency transactions should be dealt with.


Ed:       What surprised us is that the Court even applied principles of equity in this case – at one point, it found that a “constructive trust” is imposed on the defendant when he became aware of his receipt of the additional bitcoins.

Was this your strategy all along? The line of argument clearly worked as the judgment had explored concepts like unjust enrichment and natural justice.

Faisal:   Yes. We maintain the position that cryptocurrency has value attached to it even if it is not formally recognised as legal tender in Malaysia. It is undeniable that money is used to purchase the cryptocurrency, on that basis, no one ought to be able to retain something purchased for value without having provided valuable consideration for it.

[Note to our readers: “Constructive trust” is a concept under the laws of equity, which is different from the laws of contract which many of the points had so far centered on. For instance: equity recognizes that whilst the legal ownership of the money may have passed to the person you mistakenly transferred to, the beneficial ownership of the money remains with you. Beneficial ownership is like the right to benefit from that thing you own, which was not transferred because you did not intend for the mistaken person to get your money. This case seems to open the door for equitable claims in the future.]

Ed:       One remarkable ruling was on whether the plaintiff had locus standi in recovering the bitcoins. It seems to take a cue from banking law – that bitcoins held in exchanges are similar to money held in banks. Customers have ‘in personam’ claims against the bank like debtor and creditor i.e. the exchange is the legal owner of the funds. Is our understanding correct?

If so, this gives clarity on the fundamental nature of a digital asset account, with implications on adjacencies like crypto walleting and custody solutions; and will be cited in ages to come.

Faisal:   Yes. The ultimate owner may be the traders; however, the exchanges hold the role of the custodian of the cryptocurrency it has under its platform. For example, if a bank mistakenly transfers funds to a wrong account holder, you cannot possibly say that the bank does not have the necessary locus standi to recover the wrongfully transferred funds.

[Note to our readers: This is an important position that will be referenced in future cases. The customer relationship for a centralized DAX like Luno is framed like a banking relationship – any money paid to the credit of a customer’s account is the bank’s money. The bank is the debtor and the customer the creditor. Nonetheless, how this applies in the context of other innovative DAX models that are decentralized (peer-to-peer) or escrow-based like Paxful or Remitano is not considered here.]

[Generally under banking law, “the banker is entitled to rectify any incorrect entry before the customer relies (in good faith) and acts upon such entry.” This is because “the Court will not permit a customer to knowingly take advantage of an erroneous credit entry”. That said, the bank has the duty to its customers keep accurate accounts (Weerasooria).]

Ed:       It seems that the ruling that bitcoin is a form of commodity in intangible form can potentially open up to other possibilities. For example, bitcoin is scripted code which could be arguably treated as a “documentary intangible” just like cheques.

Purely for imagination sake, do you think there is a chance for bitcoins to be recoverable in tort by a claim of conversion?

Faisal:   It may be possible in an instance where the bitcoins allocated in a particular trader’s account were utilized and/or dealt with in a manner without the prior consent or authorization of the trader.

[Note to our readers: Where bitcoins are stored with a centralized exchange, the normal avenue for claims for lost bitcoin is breach of contract, which is fairly straightforward. If this is not within the centralized exchange, and bitcoins are stolen by someone or lost due to hacking, logically the claim will be conversion under tort law. However, this is an uncertain area as it depends on how local laws classify or define the proprietary nature of bitcoin.]

[The Singapore International Commercial Court applied the laws of contract in what has since become the country’s landmark case on cryptocurrency: B2C2 Ltd v Quoine Pte Ltd [2017] SGHC(I) 03. Unlike the Luno case, the exchange Quoine managed to reverse the trades (after a technical glitch in quotes) and directly deducted the amount from the customer’s account. The customer claimed that the reversal was wrongful. The long and short of it, Quoine has a contractual clause in its risk disclosure statement that enabled it to cancel any transaction that “took effect based on an aberrant value’; and the question was whether there was breach of contract and breach of trust in reversing the trades.]


Ed:       How satisfied is your client with the outcome? It’s interesting how the price volatility of bitcoin plays a role this case. When we look at the Mt Gox bankruptcy case and the lengthy recovery process that ensued. The Tokyo District Court ultimately let the bitcoins owed be reimbursed at current prices.

Faisal:   Yes, they are satisfied with the outcome of the case so far. On a more serious note, without express legislation, there are currently no right or wrong answers to such legal issues. What is essential is that no party is put to unnecessary and unjust expense when the price of cryptocurrency is still extremely volatile. In this case, I am of the view that my client was rightfully awarded what it had lost.

Ed:       We won’t ask for comments on the appeal process as it is still ongoing. The legal certainty that this ruling brings is conducive to industry growth and attracts foreign investors. In your opinion, what areas should our legislature focus on to grow this further?

Faisal:   Primarily, our legislature should take an active step in defining the parameters of legal accountability of the exchange platforms and the governing the enforceability and validity of cryptocurrency transactions. Traditional contract laws can be applicable as can be seen in this case but of course having specific legislation to deal with such transactions removes any doubt. The legislature should also deal with unregulated exchange platforms where a large volumes of cryptocurrency transactions are still facilitated.

Ed:       Nowadays, exchanges carry comprehensive clauses on error trades and reversals in their Terms of Use (see Part 3 of this article). Would you say the industry has learnt its lesson?

Faisal:   Yes. However, with that being said, it is essential for the industry to step up in upholding its standard operating procedures and taking a higher level of accountability in their respective blockchain technology to minimize errors.

Ed:       Finally, two questions: Did you have any prior experience in trading cryptocurrencies before this case?

Faisal:   Frankly speaking, I have no personal experience of trading cryptocurrencies. It is not part of my personal investment strategy at present although given more certainty this could change.

Ed:       There are many aspiring lawyers who are trying to make a mark for themselves in this nascent space. Even large law firms are trying to draw in crypto files. Any advice?

Faisal:   I don’t normally offer advice to my competitors. That’s is just bad business strategy.

Ed:       Touche! Just wasted my last question.

Faisal:   Try again.

Ed:       Okay I’ve got one. Is the Liverpool jersey your lucky charm for this case? They are having a winning streak.

Faisal:   (smiles)

[Click here for Part 3]