Will Courts Accept Cryptocurrency As A Security For Costs? – Fin Tech

In a recent English High Court decision, Tulip Trading
Limited v Bitcoin Association for BSV [2022] EWHC 2 (Ch) and [2022] EWHC 141 (Ch), the Court refused the
claimant’s request for security for costs to be paid in
Bitcoin. This is the first English case where a party to litigation
has sought to provide security in the form of cryptocurrency and
provides helpful guidance on the interaction between cryptocurrency
and security for costs. Tulip Trading Limited discusses
the considerations the Courts may take into account to determine
whether Bitcoin or other forms of cryptocurrencies will be accepted
as an alternative form of security for costs. It will be
interesting to see how the Hong Kong Courts may approach this issue
if a similar request is made in the future.

Background: The English decision in Tulip Trading
Limited

The Defendants applied for, and obtained, an order for security
for the costs of the jurisdiction application. The Claimant sought
to provide the security in the form of Bitcoin, by transferring the
relevant cryptocurrency to its solicitors, who would give written
confirmation to the Court and the Defendants that they held the
Bitcoin (see the earlier blog post on the English decision here).

The Court set out the principles in Infinity Distribution
Ltd (in administration) v Khan Partnership LLP [2021] EWCA Civ
565 to determine the form of security to order where a claimant
proposes an alternative form of security, namely that the Court
shall:

1. have regard to all the relevant circumstances;




2. seek to give effect to the overriding objective of the English
   Civil Procedure Rules, including “ensuring that the
   parties are on an equal footing and ensuring that the matter is
   dealt with fairly“;




3. strike a fair balance between the interests of the parties;
   and




4. where two forms of security would provide equal protection, all
   else being equal, order the form that is least onerous to the
   Claimant.

The Court also cited Monde Petroleum SA v Westernzagros
Ltd [2015] 1 Lloyd’s Rep. 330, which requires that
security “should be in a form which enables the defendant
to recover a costs award made in its favour at the trial from funds
which are readily available, such that
there is little risk of delay or default in enforcement“
(emphasis added).

The Court took notice of the high level of volatility in the
value of Bitcoin (a position which was accepted by the claimant)
and held that Bitcoin did not meet the criteria in Monde
Petroleum. Providing security in the form of Bitcoin would not
result in protection for the Defendants equal to a payment into
court or first class guarantee. The highly volatile nature of
Bitcoin will expose the Defendants to a risk to which they would
not be exposed with the usual forms of security. In other words,
this was not a case where all other things are equal.

Will Hong Kong Courts allow cryptocurrency as an alternative
form of security for costs?

Under Order 23 rule 2 of the Rules of the High Court (Cap. 4A),
where an order is made requiring any party to give security for
costs, the security shall be given in such manner, at such time,
and on such terms (if any) as the Court may direct. The usual form
of security provided in Hong Kong is by way of payment into Court
or a bank guarantee. The rules have not expressly prescribed what
other forms of security is acceptable. The Court of First Instance
in Sunni International Ltd v Kao Wai Ho Francis [2021] 1
HKLRD 841 has considered a request for an alternative form of
security, namely, an undertaking to charge shares in a private
company in lieu of security for costs. The Court similarly referred
to Monde Petroleum (above) and held that the undertaking
offered was not sufficient as the security could not be realised
with relative ease.

At present, there are currently no Hong Kong authorities dealing
with a request to provide cryptocurrency as security for costs.
Nevertheless, in view of the principle in Monde Petroleum
(above) that was applied in both Tulip Trading in the
English Court and Sunni International in the Hong Kong
Court, we believe the decision in Tulip Trading will
provide helpful guidance to the Hong Kong Court on such
request.

In addition, the following considerations may also be relevant
if the Hong Kong Court is faced with a request to provide
cryptocurrency as security for costs in the future:

1. the decision in Tulip Trading only concerns payment of
   Bitcoin as security for costs but does not deal with the general
   question of whether payment of other cryptocurrencies as security
   for costs may be permitted. The considerations may be different if,
   for example, a relatively non-volatile cryptocurrency is offered,
   such as stablecoin (being a cryptocurrency designed to peg with the
   value of a particular fiat currency such as the US Dollars) or even
   yield-bearing stablecoin tokens deposited in a Decentralised
   Finance (DeFi) protocol (being a token whose value is supposed
   (though not guaranteed) to stably increase over time as interests
   accrues over the underlying stablecoin tokens);




2. further, if a plaintiff owns substantial amount of stablecoin
   or yield-bearing stablecoin tokens, this may be relevant to the
   question of whether the plaintiff will be unable to pay the
   defendant’s costs, and hence, whether security for costs should
   be ordered in the first place; and




3. apart from the issue on volatility, accessibility of the
   cryptocurrency may also be relevant. In practice, transfers and
   realisations of cryptocurrency are complicated by the fact that
   ownership of digital assets are attributed by control of
   “private keys” (i.e. cryptographic passwords used to
   authorise blockchain transactions), which can potentially be
   stolen, exposed, compromised or lost. This will induce extra risk
   of delay or default in enforcement to enable the defendants to
   recover costs. The parties may have to consider appointing a
   trustworthy custodian to mitigate this risk.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.