Cryptopia operated a cryptocurrency platform established in 2014 which suffered a large scale hack in early 2019, resulting in the loss of nine per cent of digital assets held through the platform, and subsequent liquidation. A new judgment (see here) obtained by the liquidators, has now been released confirming how distributions will be paid out to account holders.
Who needs to read it? Why?
This decision is relevant for cryptocurrency holders and industry participants as it indicates the process that may be followed when it comes to reimbursing hacked accounts following liquidation.
Please see our previous news alert on the Cryptopia hack here for further background.
The High Court’s findings
Complexities encountered
Justice Palmer noted that there were “significant challenges in assessing the nature and value” of the assets held on trust after Cryptopia’s liquidation. This was because Cryptopia had pooled the crypto holdings in its own wallet, so transactions that involved a change in beneficial ownership were not recorded on the blockchain but instead were on an internal ledger. Cryptopia had also failed to undertake “any detailed reconciliation between the cryptocurrency balances recorded in its database against each customer’s wallets and those cryptocurrencies actually held in Cryptopia’s wallets”. This meant liquidators had to reconcile between the internal ledger and the company’s wallet.
Method of distribution
The accepted approach for distribution to account holders was as follows:
(a) Account holders would be asked to provide, in the claims portal, a wallet address (their own core wallet, an account with a custodial wallet, or an account with another exchange).
(b) The wallet address would be screened to identify any risks such as money laundering or terrorist financing.
(c) The liquidators would create one transaction per cryptocurrency to be transferred to each account holder. It would be signed, broadcast and confirmed by blockchain.
(d) Transaction fees, set by the blockchain, would be deducted automatically.
(e) A receipt would be uploaded to the claims portal.
There was a question as to whether this process would apply to accounts held by Cryptopia itself. Justice Palmer confirmed that was the case.
For account holders in “restricted jurisdictions” where transfer of cryptocurrency could constitute a criminal offence (such as China, Vietnam, Egypt and others) the liquidators would convert those account holders’ holdings to a fiat currency reasonably available in that jurisdiction, and then transfer that currency to a bank account provided by the account holder.
A significant issue was that only 13.87 per cent of account holders had registered their claims through the claims portal. Given this low registration rate, Justice Palmer approved the following process for account holders to make a claim:
(a) An interim distribution will be made to encourage more account holders to register their claims.
(b) A “soft cut-off”, at least 90 days after the Court’s Orders and more than 60 days after notice of the cut-off date was given. After that, the liquidators can proceed as if the only beneficiaries are those who have registered a claim in the portal. By that time, it will have been almost three and a half years since the claims portal was launched in December 2020.
(c) After that, trust administration costs would be allocated to trusts. Holdings of account holders who have not registered will be treated as “unclaimed holdings”. The liquidators can proceed as if those account holders do not exist.
(d) A final cut-off date, after which the liquidators can proceed on the factual basis that any account holder, who has engaged with the claims portal but not completed it, has abandoned their claim. The holdings of account holders who have not completed the claims process would be treated as “abandoned holdings” (and part of the pool of unclaimed holdings).
(e) If, at that stage, unclaimed holdings remain in trusts that suffered losses in the hack, the liquidators would consider distributing a top-up to account holders in those trusts on a pari passu basis and up to a maximum of 100 per cent of their account balance as at 14 January 2019.
The liquidators sought a direction that any account holder who has been invited to, but not completed, balance acceptance by two months before the final cut-off, will be deemed to have accepted their balance and will have the opportunity to provide their payment details. This would not extinguish any account holder’s beneficial entitlement but would permit the liquidators to proceed with distribution without retaining assets to accommodate those interests. Neither would those interests bear trust administration costs which would be borne by the “unclaimed” holdings.
The Court granted this direction, and stated that the proposed process and timing was “sensible, efficient, and fair to all involved”.
Our view
Resolving the Cryptopia liquidation has been a protracted process, however, it reflects a careful stepping through of the practical and technical challenges raised by the different claims on the remaining assets. This judgment, for Cryptopia’s account holders, will be a welcome further step forward.
What next?
If you have any questions in relation to the development and regulation of cryptocurrency, please contact one of our experts.
This article was co-authored by Elise Plunket, a Solicitor in our Banking and Financial Services team.
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