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

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.