Unexpected Situations When Trading Cryptocurrency

Despite the recent meltdowns, the cryptocurrency market is still alive and well and continues to see record levels of trade and investment even in the retail market. We have compiled below some legal evaluations of unexpected situations one might face in the cryptocurrency market.

Receiving an unexpected transfer of cryptocurrency

Imagine waking up one day to find that someone had transferred 10 bitcoins (worth over S$270,000 today) to your cryptocurrency wallet. Are you legally entitled to spend your newfound wealth?

The short answer is no.

This situation can be likened to a scenario where fiat currency was mistakenly paid to a wrong bank account. The Singapore Courts have repeatedly applied the doctrine of “unjust enrichment” to allow the recovery of such mistaken payments. There is little reason for the Courts to depart where cryptocurrency is concerned.

As an aside, we would also caution that there have been many reported cases of cryptocurrencies being used in the transfer of funds related to illegal activities including money laundering. We would strongly encourage everyone to report an unknown transfer of cryptocurrency to the relevant authorities.

Sending cryptocurrency to the wrong wallet

What happens if the reverse happens and you mistakenly send cryptocurrency to the wrong wallet?

As explained at paragraph 4 above, there is a legal right (at least under Singapore law) to recover the mistaken transfer. That said, in practice, recovery attempts are costly and difficult.

First, while you may be aware of the unique address/identifier of the cryptocurrency wallet to which the mistaken transfer was made, it is unlikely that you will be aware of the identity of the person behind the wallet.

Without knowing who this person is, you may not be able to contact the wallet holder to ask for a return. Commencing a civil claim is also difficult where the defendant is unknown.

Various legal mechanisms may be considered such as disclosure orders to require cryptocurrency exchanges to disclose information and freezing orders to prevent the dissipation of the cryptocurrency.

In the recent case of v. CLN and others. [2022] SGHC 46, the Singapore High Court granted freezing orders against unknown persons (this was a case involving theft of cryptocurrency and the identities of the defendants were not known) as well as disclosure orders against two cryptocurrency exchanges.

However, these mechanisms are costly and may face practical difficulties where the transfer has been made to a wallet that is not “linked” to any cryptocurrency exchanges or where the cryptocurrency exchange is based in difficult jurisdictions (for example jurisdictions where user privacy is of utmost concern).

Second, it appears that many cryptocurrency exchanges are unable and/or unwilling to reverse any mistaken transfers. For example, Coinbase, a leading cryptocurrency exchange, has stated under the FAQ section that “If you sent funds to the wrong address, you’ll need to contact the receiving party and ask for their cooperation in returning the funds. If you do not know the owner of the address, there are no possible actions you can take to retrieve the funds.

Given the difficulties above, where the mistaken transfer is not for a large sum, the chance of a successful recovery does not justify the cost involved.

Glitches by cryptocurrency exchange

In or around 15 December 2021, Coinbase suffered a glitch in which the price of certain cryptocurrencies skyrocketed from $0.78 to close to $10,000,000, leading some to comment that Christmas had arrived early. Fortunately for Coinbase, the affected cryptocurrencies were non-tradable at that time, meaning that no trades were conducted at the inflated price.

What if the cryptocurrencies were tradable at the time of the glitch? Would a person who sold at an inflated price be entitled to keep the sale proceeds? After all caveat emptor (buyers beware) right?

The answer is not so straightforward.

To start with, when a bitcoin is sold on an exchange, the more common scenario is that the bitcoin is being purchased by the exchange itself rather than by a paired buyer. In the former scenario, the sale of the bitcoin forms a purchase contract between you and the exchange incorporating the exchange’s standard terms.

These terms may contractually allow the exchange to cancel, correct, clawback or reverse any transactions even after the sale proceeds have been withdrawn. In such a scenario, the exchange can claw back the sale proceeds.

What if there are no such terms? The mechanism developed by the law of contract is called the doctrine of “unilateral mistake”. If the requirements of this doctrine are met, the Courts will void (i.e. cancel) the contract and order a reversal.

A classic example is the case of Chwee Kin Keong v Digilandmall.com Pte Ltd [2005] 1 SLR 502. com made a mistake when listing printers on their website and listed them for S$66 whilst the same printers were advertised on the official HP website for close to S$4,000.00. The buyers bought over 100 printers. The Singapore Court of Appeal held that the buyers must have known that this absurdly low pricing was due to an error and voided the contract for “unilateral mistake”.

Going back to our hypothetical scenario, if it can be shown that the seller had actual knowledge of the exchange’s mistake (for example if he announced it on a trading group chat and encouraged others to seize the opportunity) or if he ought to have known of the mistake (for example if the purchase price was obviously wrong), the Courts may void the purchase contract and reverse the sale.

The situation becomes a lot more nuanced when the inflated sale was carried out by algorithms without human intervention. The difficulty lies in trying to ascribe “knowledge” to these algorithms.

While the Singapore Courts have grappled with this issue (in Quoine Pte Ltd v B2C2 Ltd [2020] SGCA(I) 02) in a situation where deterministic algorithms were concerned (i.e. software which will do as programmed and are not able to develop their own response), the verdict is still out for smart AI-driven trading systems.

If you need help with resolving a cryptocurrency-related dispute or have any queries, please feel free to reach out to JTJB.

Samuel Lee

Associate

JTJB Singapore Office
E : samuellee@jtjb.com
T : 6220 9388