National University of Study and Research in Law, Ranchi

International Case Laws Surrounding Regulation of

Cryptocurrencies and Dealing Questions Regarding their
Legitimacy

Submitted by: Debarati Pal, Roll No.: 1163, Semester IX B

Submitted to: Dr. M.R.S. Murthy, Associate Professor
Subject: Fintech Law and Policy

1
 TABLE OF CONTENTS

Introduction………………………………………………………………………………………..3

The Research Question………………………………………………………………………..…..3

Research Methodology……………………………………………………………………………3

Cases Regarding Cryptocurrency Assets and Property Rights…………………………………....4

I. AA v Persons Unknown………………………………………………………...………4

II. United States Securities and Exchange Commission (SEC) v. Ripple Labs…..……….6

III. Janesh s/o Rajkumar v Unknown Person…………………………………..………….8

IV. ByBit Fintech Ltd v Ho Kai Xin and others…………………………………………..9

V. SEC v. Terraform Labs. Pte. Ltd………………………………………………………11

VI. Wells Notice to Paxos, 2023…………………………………………………………12

Holistic Analysis of All Judgments to Recognise Legal Trends………………………………...13

Conclusion: Learnings for India…………………………………………………………………15

2
 Introduction

Cryptocurrencies are an exponentially growing facet that come within the domain of Fintech
laws. In this project, I have highlighted the landmark case laws on an international level that
have influenced the legal framework surrounding cryptocurrencies and have had a jurisprudential
impact in many jurisdictions regarding handling of cryptocurrencies.

The Research Question

Courts have examined various ideas around ownership of crypto assets and accountability of
web3 service providers such as centralised and decentralised exchanges. Judicial observations
have also raised fundamental questions around the nature of decentralised decision-making in
web3. In this research paper, the author explores how courts have approached the following
questions.

1. Crypto assets and property rights. What are crypto assets, and what rights do their holders
have? Can investors exercise property rights over their holdings? Can these assets be held
in trust?
2. Governance of web3 service providers. What kind of safety and governance mechanisms
are necessary for centralised service providers in web3? Can existing legal concepts like
intermediary liability and safe harbours apply over decentralised trading platforms?
3. The nature of decentralisation. How should decentralised decision-making arrangements
be classified and governed? What is the duty of developers of blockchains?

Research Methodology

The method of this research in “doctrinal” in nature with special reference to study of few
pertinent international case laws.

3
 Cases Regarding Cryptocurrency Assets and Property Rights

I. AA v Persons Unknown

Citation: [2019] EWHC 3556 (Comm) (AA v. Persons Unknown)

Court: England and Wales High Court

Year: 2019

Brief Facts:

A Canadian insurance company’s security systems were infiltrated by hackers who installed
malware that prevented the company from accessing its IT systems. They demanded that the
Company transfer Bitcoins to a specified account in exchange for the decryption software. The
Company was insured against certain cyber-related incidents by an English insurance firm. After
the ransom was paid, the insurer hired consultants who tracked the Bitcoin payments to a specific
address linked to the crypto asset exchange Bitfinex. While some had been transferred, 96
Bitcoins remained in the account. The insurer therefore sought a proprietary injunction to recover
the Bitcoins.1

The issue before the England and Wales High Court (EWHC) was whether Bitcoin can be treated
as a form of property.

Analysis

The EWHC stated that while a crypto asset might not fit the traditional definition of property in
UK law, it could nonetheless be treated as property. The traditional definition of property in UK
law is narrow. It includes: ‘things in possession’ i.e., capable of being possessed, or ‘thing in
action’ i.e., capable of being enforced by legal action. The EWHC observed that as intangible
assets which did not confer legally enforceable rights, crypto assets do not meet this definition.

1
Jenna Rennie, “Recovering the ransom: High Court confirms Bitcoin status as property” White & Case, February
10, 2020, https://www.whitecase.com/insight-alert/recovering-ransom-high-court-confirms-bitcoin-status-property

4
However, the EWHC found crypto assets to be a kind of property because they meet Lord
Wilberforce’s classic definition of the term which was laid down in the landmark case of
National Provincial Bank v Ainsworth [1965] 1 AC 1175 (Ainsworth case). The EWHC held that
crypto assets are “definable, identifiable by third parties, capable in their nature of assumption by
third parties, and having some degree of permanence.”2

The EWHC thus adopted the reasoning of the UK Judicial Taskforce’s (UKJT) 2019 legal
statement on crypto assets and smart contracts, which stated that the Ainsworth case served as
“an important and authoritative description of the necessary characteristics of property”. The
UKJT stated that although crypto assets are not strictly a “thing in possession”, nor a “thing in
action”, they represent more than mere information – which is not treated as property under
English law. Thus, crypto assets can be treated as a novel kind of intangible asset which amounts
to “property”.3

2
UK Jurisdiction Taskforce, “Legal statement on cryptoassets and smart contracts,” Nov. 2019, Para 39,
https://www.blockchain4europe.eu/wpcontent/uploads/2021/05/6.6056_JO_Cryptocurrencies_Statement_FINAL_W
EB_111119-1.pdf.
3
Staff report, “UKJT Legal Statement on Cryptoassets and Smart Contracts aims to give market confidence that
England & Wales is a crypto-friendly jurisdiction,” Herbert Smith Freehills, December 16, 2019,
https://hsfnotes.com/tmt/2019/12/16/ukjt-legal-statement-on-cryptoassets-and-smart-contracts-aims-to-give-market-
confidencethat-england-wales-is-a-crypto-friendly-jurisdiction/.

5
II. United States Securities and Exchange Commission (SEC) v. Ripple Labs

Citation: 20 Civ. 10832 (AT)(SN) (SEC v. Ripple)

Court: United States District Court, Southern District of New York

Year: 2022

Brief Facts

Ripple, a blockchain company, launched a crypto asset XRP in 2012 to enable cost-effective
cross border transactions. In December 2020, the SEC had filed a lawsuit before the US District
Court for the Southern District of New York against Ripple and two of its executives, Bradley
Garlinghouse and Christian Larsen for alleged violations of US law by selling unregistered
securities.4

The SEC claimed that XRP is a security under US law, and that Ripple illegally raised $1.3
billion by selling unregistered securities. 15 The issue before the court was whether XRP tokens
sold by Ripple constituted a “security”, and therefore in violation of the US Securities Act, 1933.

Analysis

The SEC relied on the ‘Howey test’ to claim that XRP is a security under US law. The Howey
test is a fourpronged judicial test that was established by the US Supreme Court in SEC v. W.J.
Howey Co. in 1946. It is used to determine whether a transaction qualifies as an ‘investment
contract’ under the US Securities Act, 1933.16

The court found that XRP was not an unregistered security offering when sold to the public.
However, it held that arrangements between Ripple and institutional investors to sell XRP
tokens, pursuant to written agreements, amounted to ‘investment contracts’ under US law. In the
latter context, the XRP transactions involved an investment in a common enterprise with a
reasonable expectation of profits based on the efforts of others; they were thus liable to be
regulated as securities.

4
Scott Mascianica, et al., “SEC v. Ripple: When a Security Is Not a Security,” Holland & Knight Alert, July 20,
2023, https://www.hklaw.com/en/insights/publications/2023/07/sec-v-ripple-when-a-security-is-not-a-security.

6
Many crypto assets are designed and structured in a manner similar to XRP; (unlike Bitcoin, or
even Ethereum). The court’s ruling that XRP sold to the public does not amount to an investment
contract sets a crucial precedent for all such tokens, especially in US courts.

In October 2023, the SEC dropped claims of aiding and abetting the company in violating federal
securities laws in its XRP transactions against the two executives of Ripple.17

7
III. Janesh s/o Rajkumar v Unknown Person

Citation: [2022] SGHC 264 (Janesh v. Unknown Person)

Court: High Court of Singapore

Year: 2022

Brief Facts

The claimant, Janesh, owned a Bored Ape NFT (the Bored Ape Yacht Club (BAYC) ID #2162).
The claimant sought a loan from the defendant with the NFT as a collateral under an escrow
mechanism. The loan period was 30 days, with interest payable at 45 percent per annum.

Janesh requested that the loan period be extended briefly, and sought to restructure the loan
arrangement. Though the defendant was cooperative at first, they later changed their stance and
issued an ultimatum - that they would foreclose the Board Ape NFT if the claimant failed to
make a full repayment within two days.

Following the claimant's failure to do so the defendant took possession of the Bored Ape NFT.
The claimant, therefore sought an injunction from the High Court of Singapore to restrain the
defendant from dealing with the NFT.

Analysis

The High Court of Singapore found that NFTs could be regarded as property since they met the
criteria set out in the Ainsworth case.

● Definable – Once a piece of art is minted into an NFT, it gets a unique identification code
on the blockchain which is verifiably distinguishable from that of other NFTs.
● Identifiable by third parties – The presumptive owner is the one controlling the wallet
linked to the NFT. Like other crypto assets, exclusivity is achieved because one cannot
access an NFT without the owner’s private key.
● Capable of assumption by third parties – The owner of an NFT has the exclusive ability
to transfer it to a third party. NFTs are the subject of active trading in web3 marketplaces
and trading venues.

8
 ● Possessing some degree of permanence or stability –NFTs stored in DLT systems of
different types have the same degree of permanence and stability as money in bank
accounts.

IV. ByBit Fintech Ltd v Ho Kai Xin and others

Citation: [2023] SGHC 199 (ByBit case)

Court: High Court of Singapore

Year: 2023

Brief Facts

The claimant, a Seychelles company, owned and operated a crypto asset exchange. It paid its
employees in fiat currency, crypto assets, or a combination of both. The claimant engaged
WeChain Fintech Pte. Ltd. (WeChain) as its payroll service provider. The Defendant, an
employee of WeChain, was responsible for processing the payroll of the Claimant’s employees.

The dispute arose when the claimant discovered that irregular payments were made to four
crypto addresses controlled by the defendant. The irregular payments totalled 4,209,720 in
United States Dollar Tether (USDT), a widely adopted stablecoin. The claimant alleged that the
defendant manipulated the account information on claimant’s payroll files, and consequently
caused the claimant to transfer USDT to wrong addresses. The claimant alleged that an
institutional constructive trust was created by virtue of the defendant’s fraudulent act.

The issue before the High Court of Singapore was whether USDT is property which is capable of
being held on trust.

Analysis

The High Court of Singapore declared a constructive trust over the USDT, and held the claimant
to be the legal owner of such assets. The court observed that crypto assets can be defined,
identified, and possessed by humans, and can be traded and valued as holdings.

9
The court made a significant deviation from the earlier position set in common law by UK
courts. It classified crypto assets within one of the two traditional definitions of personal
property i.e., ‘things in action’, and ‘things in possession’.

It referred to common law jurisprudence about property rights and observed that “all personal
things are either in possession or action. The law knows no ‘tertium quid’ (unidentified third
element) between the two. The court held that a holder of a crypto asset has “in principle an
incorporeal right of property recognisable by the common law as a thing in action.” Thus,
although crypto assets can be transferred without the assistance of the legal system, they
nonetheless are ‘things in action’.

10
V. SEC v. Terraform Labs. Pte. Ltd

Citation: 23-cv-1346 (JSR) (S.D.N.Y.) (SEC v. Terraform)

Court: United States District Court, Southern District of New York

Year: 2023

Brief Facts

The SEC sued Terraform Labs and its co-founder, Kwon Do-hyung (Do Kwon) in February,
2023. SEC alleged that the defendants engaged in fraudulent conduct, made misleading
statements, and committed fraud by deceiving investors about the stability of their stablecoin
TerraUSD (UST). TerraUSD (UST) is a decentralised and algorithmic stablecoin of the Terra
blockchain built by Terraform Labs.

SEC claimed that they falsely credited UST’s algorithm for its price stabilisation which was
marketed as pegged to US dollar though another crypto asset - Luna. It also claimed that
Terraform Labs made misleading claims about the efficiency of the price stabilisation algorithm
used in UST.

Terra collapsed in May 2022, destroying billions of dollars in investor wealth, particularly for
investors residing in emerging markets and developing economies.

The issue before the United States District Court in the Southern District of New York was
whether Terraform Labs and Do Kwon sold unregistered securities and engaged in fraudulent
conduct to deceive investors.

Analysis

Do Kwon and the SEC have sought summary judgements from the court in October and
November of 2023 respectively. Terraform and Do Kwon claimed that the SEC had not proved
that the company was selling securities, even after a two-year investigation. Whereas the SEC
claimed that Terraform was indeed selling securities as there was: (a) pooling of money in a
common enterprise, (b) with an expectation of profit, and (c) predominantly due to the efforts of
promoters – thereby satisfying Howey test.

11
VI. Wells Notice to Paxos, 2023

Brief facts

Paxos Trust Co., is an issuer of stablecoins such as Paxos Dollar (USDP). It partnered with
Binance, a leading web3 service provider, in September 2019 to build BUSD, a US
Dollar-collateralized stablecoin. However, Paxos operations came under scrutiny when the SEC
reportedly planned to initiate regulatory action against the company for violating investor
protection laws. In February 2023, the SEC issued a Wells Notice to Paxos, alleging that BUSD
is an unregistered security.

Paxos in response “categorically disagreed” with the SEC's position that BUSD is a security and
expressed its preparedness to “vigorously litigate” if necessary. Further, Paxos announced it
would stop minting new BUSD tokens and would end its relationship with Binance, while
ensuring that customers could still redeem the stablecoin for at least a year.

Analysis

The SEC's prospective lawsuit against Paxos represents a significant moment in the regulatory
oversight of stablecoins. It underscores the operational complexities and regulatory challenges in
managing stablecoins like BUSD, and highlights the increasing uncertainty with classifying them
as securities.

Specifically, the Wells Notice flags discrepancies in maintaining collateral for the stablecoins.
Representatives from Binance reportedly stated that the alleged inconsistencies were due to
delays in gathering appropriate capital and that the process behind maintaining collateral has
since been improved.

This lawsuit could have far-reaching implications for investor protection and the stability of the
crypto-asset market. It might set a precedent for the treatment of similar crypto-assets under US
securities law, potentially influencing the regulatory approach towards other stablecoins and
digital assets. The case could also be a catalyst for clearer regulatory guidelines, which are
critical for the continued growth and stability of the web3 ecosystem.

12
 Holistic Analysis of All Judgments to Recognise Legal Trends

❖ Crypto assets are increasingly recognised as property around the world

Common law courts have established that crypto assets are property, and holders of crypto assets
have legally enforceable property rights over the same. The High Court of Singapore as well as
the UKJT aligned on the position that crypto assets are ‘property’ in that they are “definable,
identifiable by third parties, capable in their nature of assumption by third parties, and have some
degree of permanence.”

Moreover, the High Court of Singapore also ruled that crypto assets meet the traditional
definition of property in common law.

❖ There is an ongoing discussion on whether crypto assets are securities or payments

mechanism

The SEC has asserted its jurisdiction over different kinds of crypto assets by classifying them as
‘investment contracts’ under the US Securities Act of 1933. SEC v. Ripple Labs, and SEC v.
Terraform Labs, underline the challenge in transplanting traditional legal tests, such as the
Howey test, to determine the nature of and classify crypto assets.

Regulators like the SEC treat crypto assets under securities laws because of the way they are
marketed to the public – as profit-bearing instruments without adequate disclosures – and not
based on inherent characteristics. On the other hand, countries such as the Bahamas, Cayman
Islands, Gibraltar, and Japan recognize crypto assets as modes of payments mechanisms, which
adds another layer of complexity to the discourse.5

Consensus on the nature of crypto assets is crucial since it affects how they are taxed and
regulated. For example, if crypto assets are property, they may be subject to capital gains tax and
stamp duties around the world. Governments and policymakers should provide clarity on the
issue of taxonomy and classification. In this regard, they should refer to proposals forwarded by
SSBs such as the IMF.

❖ Stablecoins are treated separately owing to their characteristics

5
PricewaterhouseCoopers, PwC Global Crypto Regulation Report 2023, December 19, 2022,
https://www.pwc.com/gx/en/new-ventures/cryptocurrency-assets/pwc-global-crypto-regulation-report-2023.pdf.

13
Circle, the issuer of a popular stablecoin USD Coin (USDC) highlights that asset pegged to the
US dollar, such as BUSD or USDC are not securities. Stablecoins do not amount to ‘investment
contracts’ under US law since there is no expectation of profit among holders.6 According to
Circle, payment stablecoins do not have the “features of an investment contract” on their own.

Stablecoins maintain price stability either through reserve assets or via algorithms. Governments
and regulators pay special attention to stablecoins due to their potential to act as a currency
equivalent.

The IMF notes how USD-denominated stablecoins might be used as a hedge against inflation or
store of value in some emerging markets and developing economies.7 The stablecoins that hold
safe and liquid assets as reserves and offer direct legal claims on the issuer can indeed serve this
purpose. However, many algorithmic stablecoins have proven to be volatile.8

It remains to be seen how the jurisprudence around stablecoins develops. Currently, the BCBS
prudential standards recommend that banks deploy more conservative capital treatment
restrictions in respect of algorithmic stablecoins with ineffective stabilisation mechanisms.9

❖ NFTs have implications in intellectual property law as copyrightable works

NFTs can be regarded as property, as illustrated in Janesh v. Unknown Person. However, their
legal treatment must be aligned with other legal concepts such as copyright law. In India,
copyright vests with the author of an artistic work. Even if the artistic work is sold as an NFT,
the copyright would vest with the original author or artist, unless it is assigned.10 Authors of
artistic works must explicitly and unconditionally assign the copyright to a purchaser of the work
under a written agreement. Once the assignment is duly made, the assignee is treated as the
owner of the copyright under the Indian Copyright Act, 1957.

6
Teuta Franjkovic, “Circle Steps into Binance vs SEC Case — Asserts Stablecoins Aren’t Securities,” CCN,
September 29, 2023, https://www.ccn.com/news/circle-says-stablecoins-are-not-securities-binance-sec/.
7
International Monetary Fund, Elements of Effective Policies for Crypto Assets, February 23, 2023,
https://www.imf.org/en/Publications/Policy-Papers/Issues/2023/02/23/Elements-of-Effective-Policies-for-Crypto-As
sets-530092?cid=pr-com-PPEA2023004.
8
Financial Stability Board, “Review of the FSB High-level Recommendations of the Regulation, Supervision and
Oversight of “Global Stablecoin” Arrangements,” October 11, 2022,
https://www.fsb.org/wp-content/uploads/P111022-4.pdf.
9
Section 19, Indian Copyright Act, 1957.
10
Ibid.

14
The mode of assignment of a copyright varies across jurisdictions. The requirement to execute a
signed written agreement in India may pose challenges especially where an NFT changes hands
multiple times. In cases where NFTs are acquired without the corresponding copyright, the
purchaser may have a valid title to the NFT, but will lack the right to commercialise it by, say
issuing merchandise containing the artistic work.

Conclusion: Learnings for India

Having reviewed some of key case laws over the last decade, we discuss some learnings for
policymakers in India to consider. First, crypto assets are a unique asset class consisting of
heterogeneous tokens such as NFTs, stablecoins etc. The diverse opportunities they present, and
the varying risks they pose should be harnessed and mitigated respectively under proportionate
rules. Second, that existing money laundering, KYC and suspicious transaction reporting rules
can go a long way in bringing regulatory visibility over the web3 ecosystem. Third, that the
nuances of decentralised and interconnected DLT systems and platforms is yet to be understood
in its entirety. India should look to foster global cooperation in this regard.

By recognizing the use of crypto assets as collateral, the high court of Singapore allowed the
possibility for jurisprudence to develop around integrating crypto assets into financial systems,
creating new avenues for traditional finance to intersect with crypto lending and DeFi. However,
SEC’s application of the Howey test in cases like SEC v. Ripple labs and SEC v. Terraform Labs.
underlines the inherent heterogeneity among crypto assets. Not all crypto assets carry and confer
the same rights – just as not all types of physical property are the same.

15