Huobi v Tabarak: DIFC Court of Appeal delivers landmark judgment concerning digital assets

This article examines the reasoning of the DIFC CoA in making those findings. Given the DIFC is a common law jurisdiction and the developing nature of the jurisprudence surrounding bitcoin and other cryptocurrencies, the judgment will be of specific relevance to other common law jurisdictions. In this regard, the judgment brings the DIFC in line with other common law jurisdictions, such as England & Wales, Hong Kong SAR and Singapore.  Indeed, in a recent, similarly landmark, ruling in Hong Kong, the Honourable Madam Justice Linda Chan undertook a forensic analysis (albeit in the context of a liquidation) of cryptocurrency and of the jurisprudence recognising its proprietary nature in multiple common law jurisdictions.²

Factual background

The dispute centres around the sale of 300 Bitcoin ("BTC") in early 2020 by Huobi, a digital exchange licensed by the DMCC (one of Dubai’s free zones), to a third party, Navarcon s.r.o. (“Navarcon”), a Slovakian company represented by two Russian individuals, collectively referred to in the judgment as “the Buyer”).

Huobi procured the services of Tabarak, a financial services firm registered in the DIFC, to act as intermediary in the proposed transaction in exchange for a commission fee.  This is a common arrangement in transactions involving the sale and purchase of digital assets.

Under the terms of the initial agreement, Tabarak was to facilitate the transaction and essentially act as custodian of the BTC by holding it in escrow in a wallet held by Tabarak until payment by Navarcon was finalised.

At a meeting held on 3 February 2020 to finalise the trade, however, the Buyer insisted that a physical hardware wallet (also known as a "cold wallet") be used instead of Tabarak's wallet. When Huobi and Tabarak acquiesced to this "change of plan" and were waiting for the transaction amount to be received, the 300 BTC was transferred to another wallet and the payment from the Buyer was never received.

It subsequently transpired that the Buyer had fraudulently circumvented the security arrangements by use of the physical hardware wallet and procured that the BTC be transferred to another account without payment having been made. As Justice Michael Black KC put it in the judgment, "the BTC were thus lost to Huobi and Tabarak."

Huobi subsequently brought a claim against Tabarak, joining Tabarak's Director of Investments to the claim, for breach of contract and negligence, seeking compensation for the loss of the BTC. Huobi's claim was dismissed at first instance, and it subsequently appealed to the DIFC CoA on several grounds to overturn the judgment.

The DIFC CoA Judgment

There were a number of issues canvassed by the judgment, including some which will only be relevant to DIFC practitioners.  This article focusses on the key issues for cryptocurrencies that will be of interest broadly. 

Key issue 1 – is a digital asset legal property and, if so, what type?

One of the key issues to be determined by the Appeal Judge was whether a digital asset such as bitcoin could properly be considered as legal property.

In considering this issue, the Appeal Judge reviewed Huobi’s tortious claims that Tabarak was in breach of its duty of care as bailee of the BTC under Article 71 of the Law of Obligations3 by failing to take reasonable care of the BTC and permitting it to be misappropriated from the wallet.  The Appeal Judge also considered the wider contractual claims that Tabarak had agreed to act as custodian or escrow agent of the BTC.

A determination of these claims turned upon an evaluation of the nature of BTC as property. As such, the Appeal Judge assessed (1) whether BTC was a form of legal property; and (2) if so, what form that took.

Key to the Appeal Judge's consideration was an analysis of the common law position in the Digital Assets: Final Report published on 27 June 2023 by the Law Commission of England and Wales (the "Law Commission Report"), which the Appeal Judge acknowledged has "received much deserved judicial praise". The Law Commission Report, citing in particular the 2019 judgment of AA v Persons Unknown4, observed  that the common law had moved to a position of accepting a digital asset as a ‘thing’ which is capable of being an object of personal property rights. The Law Commission Report concludes that not only are BTC property, but they are a third class of property that is neither a ‘thing’ in possession nor a ‘thing’ in action.

Agreeing with the conclusions of the Law Commission Report, the Appeal Judge therefore found that BTC: (1) was a form of legal property; and (2) constituted a "third class of property" that is neither a thing in possession nor a thing in action.

In making this finding, the Appeal Judge found that this third category applies broadly to intangible data objects such as BTC and other digital assets, which are capable of being owned and transferred under the Personal Property Law⁵ and the Law of Obligations. To hold otherwise would be to "depart from the expectations of parties and commercial common sense."

The conclusions of the DIFC CoA on the nature of digital assets as property have recently been confirmed by legislation with the enactment of the new Digital Assets Law⁶, which came into force in the DIFC in 8 March 2024 (and so after the decision at First Instance).

Though the DIFC CoA was required in Huobi v Tabarak to interpret the common law as it stood at the time of the appealed judgment (ie. 2021), Article 9 of the Digital Assets Law confirms the Appeal Judge's approach in providing that "A Digital Asset is intangible property and is neither a thing in possession nor a thing in action." The Digital Assets Law also amends the Personal Property Law to include Digital Assets within the definition of "Property", mirroring the findings of the DIFC CoA in confirming the application of the Personal Property to cryptocurrencies and other digital assets.

Legislative reform in this area is also taking place in England and Wales, albeit at a slightly slower pace.  Earlier this year, in February 2024, the Law Commission published its draft Property (Digital Assets etc) Bill (the "Bill"), which proposes an express statutory provision to confirm this existence of a third category of personal property rights.  The drafting of the Bill leaves it open to the English courts to determine what types of digital assets will fall within this separate category and what personal property rights attach to such property. The intention of the Bill is to codify the widely accepted position that treating certain digital assets as things to which personal property rights can relate is a practical and effective means of meeting the legitimate expectations of those parties who interact with such digital assets.  The Bill has been the subject of a consultation paper in England and Wales, and we await further developments on this.

Key legal issue 2 – how does one own a digital asset? 

Determining that a digital asset can constitute property is only part of the equation; the question that then arises concerns the ownership of that property and the consequences of that ownership.

The Appeal Judge considered this question, which was necessary to determine whether: (1) Tabarak had control over Huobi's BTC; (2) if so, in what capacity they had such control; and (3) what obligations flowed from that capacity, in order to consider breach thereof.

The Appeal Judge held that the concept of exclusive control rather than physical possession was the "most apposite way" of determining title to the BTC property. Rather than extending the concept of possession to this new third category of property, he affirmed the suggestions of the Law Commission Report that control should "form an important constituent part of the legal rules and principles that apply to complex interactions with third category things", as it was more attune to the particular sensitivities of the nature of digital objects such as bitcoin and other cryptocurrencies.

The novel concept of exclusive control was therefore adopted as the core element in considering legal concepts such as transfer of title, intermediary arrangements, causes of action and associated remedies so far as they applied to digital assets.

Applying this with an eye to Tabarak's role as intermediary in the BTC transaction and Huobi's submission that it acted as custodian, the Appeal Judge therefore held that "someone who exercises control over a crypto asset in which another has superior title, with the consent of that other, may be considered a custodian of the asset."

As with the Appeal Judge's findings on the essential nature of digital assets as property, his findings as to control are reflected in the DIFC’s Digital Assets Law, where control is the fundamental building block governing title to digital assets, transfer of their title and the exercise of rights over them in case of events such as incapacity and insolvency.

The DIFC CoA's consideration of the relationship between a crypto-asset intermediary and its clients is particularly helpful given that the vast majority of crypto-assets are kept by intermediaries and yet there is an uncertainty on the basis on which these assets are being held.  However, the intricacies of crypto ownership are yet to be fully explored; for example, the DIFC CoA left open the question of whether possession of the sole tangible object conferring exclusive direct control over the BTC (i.e. a cold wallet) and said colloquially to contain the BTC, may be argued to confer possession of the BTC.

Key legal issue 3 – can the concept of bailment apply to digital assets?

As referred to above, one element of Huobi's claim was that Tabarak had failed to exercise its duty of care as a bailee under the Law of Obligations in allowing the transaction to proceed as it did and therefore the fraudulent theft of the BTC from the wallet.

One key obstacle to this submission by Huobi was that, under common law, it is impossible to create a bailment over intangible assets. Intangible assets would, for present purposes, include crypto assets even if they were to be categorised as within the third type of property, as their key characteristics remain intangible. 

Citing relevant academic scholarship,⁷ the Appeal Judge observed that possession of the relevant asset underpins the common law concept of bailment. On this basis, given the common law does not permit possession of intangible assets, arguments based on bailment are not generally not applicable to the resolution of cryptocurrency-related disputes.

However, the judgment in Huobi v Tabarak casts doubt on this traditional interpretation of the law of bailment.

Having found that exclusive control of a digital asset is to be considered as, or is in fact equivalent to, possession of it, the Appeal Judge suggested that Huobi might not be precluded from running a bailment argument in the context of Tabarak's custody of the BTC. In particular, as a matter of statutory construction, the word "possession" in the Law of Obligations might very well include the concept of "control" whenever it relates to digital assets of the third category of property.

That being said, the recent amendments to the Law of Obligations pursuant to the Digital Assets Law does explicitly carve out digital assets from relevant bailment provisions, and it does appear that, despite the Appeal Judge's obiter comments, Huobi is nonetheless unable to pursue the bailment argument any further in respect of the BTC in Tabarak's custody.

Whether there are further developments in this area of jurisprudence remains to be seen.  However, the DIFC CoA judgment might open the door to similar arguments in the future, whether in the DIFC or other jurisdictions.

Conclusions

The legal and practical implications of the decision in Huobi v Tabarak are likely to resonate across global financial centres and common law jurisdictions. Given the cross-border nature of digital assets, it is hoped that other common law jurisdictions around the world will ultimately adopt a similar position to give commercial parties greater certainty in relation to digital assets as a property class.

The judgment not only provides some clarity on how disputes involving fraudulent seizure of control over digital assets should be handled, but is also yet another example of how the courts are adapting traditional legal doctrines to the world of digital assets. The DIFC is now the first jurisdiction globally (1) to have a statutorily defined definition of a digital asset; (2) which is simultaneously underpinned by a carefully reasoned judgment at the appellate level; (3) which itself reached the same conclusions on the nature of digital assets as property as the statute based on an application and analysis of the common law.

The judgment in Huobi v Tabarak should therefore bring welcome certainty to not only practitioners and litigators of cryptocurrency-related disputes, but to the digital asset community more broadly.  Whilst the implications of the Digital Assets Law and consequential amendments to other relevant legislation remain to be seen, these legislative reforms together with the DIFC CoA's decision in the present case cements the DIFC's position as a forward-thinking and progressive jurisdiction in the sphere of digital assets.

Authored by Randall Walker, Byron Phillips, Alex Sciannaca, Sonali Patani, Jessica Quinlan, and Luke Bellamy.

References 

1  (1) Gate Mena DMCC (Formerly Known as Huobi OTC DMCC) (2) Huobi Mena FZE v Tabarak Investment Capital Limited (2) Christian Thurner [2023] DIFC CA 002.

 2  In Re Gatecoin Limited [2023] HKCFI 91, Consistent with the DIFC, Her Ladyship found that cryptocurrency inherently has all the attributes of property and can be held on trust

3  DIFC Law No. 5 of 2005.

4  [2019] EWHC 3556 (Comm).

5  DIFC Law No. 9 of 2005.

6  DIFC Law No. 2 of 2024.

7  Professor Louise Gullifer KC, Hin Liu and Henry Chong, "Client-Intermediary Relations in the Crypto-Asset World".