Cryptocurrency now defined as Property by Chinese Law: Analysis of Hogan Lovells Report

On April 19th, according to a report released by law firm Hogan Lovells, the Hong Kong court in China defined cryptocurrency as property that assets can be held on trust in Gatecoin related cases.

The Hong Kong court defined cryptocurrency as property that can be held on trust in Gatecoin related cases

Introduction

Cryptocurrencies have gained unprecedented attention in recent years, with investors and enthusiasts flocking to realize returns in a deregulated market. Despite the immense popularity and growing intrigue, the question of how authorities recognize these digital assets has long been a topic of debate, with jurisdictions worldwide proposing and implementing varied interpretations. As of April 19th this year, the Hong Kong court enforced a definitive ruling on the subject, classifying cryptocurrency as property. The decision was based on two cases involving Hong Kong-based cryptocurrency exchange, Gatecoin, and was outlined in a report by international law firm Hogan Lovells. This article explores the implications of the Hong Kong court defining cryptocurrency as property and the potential implications for the global cryptocurrency market.

Background

The concept of cryptocurrencies dates back to the late 2000s when Bitcoin, the first-ever and most popular digital currency, was released. It allowed for a decentralized ledger of all transactions, with no need for central authorities like banks. Cryptocurrencies were designed to be pseudonymous and secure, making them an attractive and innovative investment option while simultaneously posing regulatory challenges for governments worldwide.
The regulatory landscape has remained murky for digital assets like cryptocurrencies, with countless jurisdictions taking varied approaches. Innovative jurisdictions such as Malta and Switzerland have implemented comprehensive regulatory frameworks to support the growth of the digital asset market, while others like China and India have actively discouraged widespread adoption, citing security concerns and potential risks.

The Hogan Lovells Report

On April 19th, two cases involving Hong Kong-based cryptocurrency exchange, Gatecoin, concluded in the High Court of the Hong Kong Special Administrative Region. The first case saw Gatecoin’s founder, Aurelien Menant, held liable for breach of trust, while the second case saw a liquidator of the company, Ravipass Chawla, authorised to take control of the company’s assets, including cryptocurrencies.
The court’s decision was based on the fact that cryptocurrencies could be defined as property under the rules of Equity and that assets could be held on trust. The ruling was outlined in a report by international law firm Hogan Lovells, which stated that “Hong Kong law does not recognise cryptocurrencies as money or currency, but it does not rule out categorising them as property”.
This highlights the first significant judicial ruling on cryptocurrencies in Hong Kong, outlining that if a case involves holding assets in cryptocurrencies on trust, they will now be treated in the same way as property.

Implications for the Cryptocurrency Market

The Hogan Lovells report and the court’s ruling defining cryptocurrencies as property is a significant victory for the cryptocurrency market. The decision instils legal certainty and security for investors and crypto-based businesses operating in Hong Kong, a significant hub for cryptocurrency trading in Asia. The ruling will also likely impact cryptocurrencies’ legal recognition worldwide, as other jurisdictions may follow Hong Kong’s example.
The move could also pave the way for increased mainstream adoption of cryptocurrencies, with increased recognition and legal certainty likely resulting in a surge in investment in the sector. Finally, the move could bring about significant legal implications for cryptocurrencies’ tax treatment, particularly concerning the rules of trusts, affecting numerous crypto-based businesses with operations in Hong Kong.

Conclusion

The Hong Kong court’s decision and Hogan Lovells report defining cryptocurrency as property is undoubtedly a game-changer in the crypto economy, bringing about enhanced legal settlement, more security and promoting cryptocurrency as a legitimate asset class. By providing regulatory clarity, Hong Kong is allowing businesses and investors to gain confidence in the crypto sector, opening new frontiers and enhancing its position as a hub for cryptocurrency trading.

FAQs

1. Does the Hogan Lovells report apply only to Hong Kong?
Yes, the Hogan Lovells report applies to Hong Kong, but it could have broader implications resulting in other jurisdictions following in Hong Kong’s footsteps.
2. How will the new ruling affect cross-border cryptocurrency trades?
Cross-border trades may see a positive impact resulting from increased recognition of cryptocurrency commodities through the Hogan Lovells report.
3. How will the reclassification of cryptocurrencies impact their regulation?
The regulation of cryptocurrencies remains a contentious issue globally. With this new classification in Hong Kong, it is possible that other jurisdictions may follow suit, positively impacting cryptocurrencies’ regulatory status worldwide.