There has been a significant increase in interest in, and the use of, cryptocurrencies in recent times. Cryptocurrencies are essentially de-centralised virtual currencies, which are not linked to any particular country, nor regulated by any central bank or monetary authority.
In late December 2017, the Singapore International Commercial Court (SICC) decided that the nation’s first dispute involving cryptocurrency merits a full trial. While this case does not involve questions of the legality of cryptocurrency itself, it involves issues relating to the manner in which such cryptocurrencies are traded.
The plaintiff is B2C2 Ltd, a company registered in England and Wales, which trades as an electronic market maker (Plaintiff). Its main business involves providing liquidity on exchange platforms by actively buying or selling at the prices it quotes for virtual currency pairs, thereby generating trading revenue.
The defendant, Quoine Pte. Ltd. (“Defendant“), is a Singapore incorporated company which operates a currency exchange platform (“Platform“) that enables third parties to trade virtual currencies (eg. Bitcoin, Ethereum, etc) for other virtual currencies or for “fiat” currencies (eg. legal tender such as the Singapore dollar or US dollar).
The Platform operated by the Defendant allows traders to trade in variety of ways, including:
- a market order – here, the trader simply indicates what he wishes to trade. Upon receipt of a market order, the Platform automatically identifies the best available trade and executes the order immediately at the best available market price; and
- a limit order – the trader sets either the maximum price at which the trader is willing to buy or the minimum price at which he is willing to sell. If and when such price is reached, the trader’s order will be fulfilled.
The orders of the buyers and sellers are displayed electronically on a “trading dashboard”. The dashboard also contains a price chart displaying the current fair market price based on real time pricing. This is achieved through a software program used by the Platform (Quoter Program). In order to trade on the Platform, a trader is required to open an account, which can be done online.
On 28 June 2015, the Plaintiff opened an account on the Platform, agreeing to a set of Terms and Conditions available on the Defendant’s website (Agreement). The Defendant also uploaded a Risk Disclosure Statement (Risk Disclosure Statement) onto the website on 22 March 2017.
The dispute centres around 15 orders (out of a total of 12,617 Ethereum (ETH) to Bitcoin (BTC) orders) made on 19 April 2017 by the Plaintiff on the Platform and fulfilled. Of these 15 orders, eight were transacted at a price of approximately 0.04 BTC for 1 ETH (specifically, the Plaintiff sold 46.8384 ETH for BTC at an exchange rate of 0.03969596 BTC for 1 ETH).
According to the Defendant, a “technical glitch” arose on the Platform sometime after 23:30 that day, which led to changes being made to the passwords and cryptographic keys for some of the Platform’s critical systems. Due to an oversight, the Defendant’s operations team did not implement these changes to the login credentials for the ETH/BTC Quoter Program. This caused the ETH/BTC Quoter Program to cease working, as it was unable to connect to a database to perform the market price updates.
It was during this time (approximately 1.5 minutes between 23:52:52 and 23:54:33) that the Plaintiff placed the other seven orders, at an exchange rate of approximately 9.99999 and 10 BTC for 1 ETH, which is approximately 250 times the rate of 0.04 BTC for 1 ETH previously transacted. It was therefore highly unlikely that the limit orders would have been fulfilled in the usual course of events.
At the material time, some other traders involved in the ETH/BTC market were using ETH borrowed from the Defendant (Force-closed Customers). As the ETH/BTC Quoter Program could not access the necessary data to establish a true market price, it referred to the only data available to it at the time, being the data arising out of the Plaintiff’s seven orders. This caused the Platform to detect that the Force-closed Customers’ collateral had fallen below the maintenance margins. The Platform thus automatically placed stop loss orders to sell the Force-closed Customers’ assets at the best available prices, in order to repay the ETH loans.
Given that the only available price on the Platform was the price offered by the Plaintiff, the computer matched the Plaintiff’s seven orders with the BTC held by these traders. As a result, 3092.517116 BTC was credited to the Plaintiff’s account and 309.2518 ETH debited from that account, with corresponding amounts being debited from and credited to the Force-closed Customers’ accounts.
The Defendant became aware of the technical glitch subsequently and unilaterally reversed the trades, returning the BTC to the traders’ accounts and the ETH to the Plaintiff’s account.
The Plaintiff takes the position that the Defendant’s unilateral reversal was in breach of the Agreement and in breach of trust.
Proceedings before the Singapore International Commercial Court
On 18 May 2017, the Plaintiff commenced proceedings at the Singapore High Court. The proceedings was then transferred to the Singapore International Commercial Court on 24 August 2017, to be before International Judge, Simon Thorley QC .
On 8 September 2017, the Plaintiff made an application for summary judgment under Order 14 of the Rules of Court.
It is trite law that an applicant for summary judgment must establish a prima facie case for summary judgment. It is then for the respondent to establish that there is a fair or reasonable probability that he has a real or bona fide defence.
The Plaintiff’s Arguments
The Plaintiff presented a straightforward case, premised on two causes of actions.
First, it relied on the Agreement, which provides that “once an order is filled, you are notified by the Platform and such an action is irreversible“. On this basis, the Plaintiff contended that the reversal of the orders on the following day represented a breach of the Agreement.
As an alternative, the Plaintiff contended that the Defendant’s act of unilaterally deducting the proceeds from the Plaintiff’s account constituted a breach of trust, on the basis that all assets belonging to the Plaintiff and held by the Defendant were held by the Defendant as a trustee.
The Judge held that the Plaintiff had presented a prima facie case on these bases, and it was for the Defendant to identify issues meriting a trial.
The Defendant’s Arguments
The Defendant raised six potential defences:
- that a term should be implied into the Agreement to permit reversal or correction where there has been (i) a technical and/or system failure and/or error; (ii) an error with respect to price, quantity or other parameters; or (iii) an order, contract or trade executed at any abnormal rate, all of which are alleged to have occurred in this case;
- that certain terms of the Risk Disclosure Statement had been incorporated into the Agreement, which gave the Defendant the right to reverse the trades;
- that the trades were void because of a unilateral mistake at common law;
- that the trades were void for common mistake;
- that, had the trades not been reversed, relief would have been available under the doctrine of unjust enrichment; and
- that certain exemption clauses in the Agreement prevent the Plaintiff from recovering the proceeds of the trades.
The SICC’s Decision
The Judge held that, in an application for summary judgment, the Court must assess each of the contentions to determine whether, taken individually or in combination, they constitute an arguable defence. If they do, the Court should not continue to analyse the relative strength of the arguments,but leave that to be considered at trial.
Having analysed the defences put forward, the Judge agreed that two out of these (numbered as (b) and (c) above) constituted appropriately arguable defences. Accordingly, the matter would proceed for trial.
In respect of the first defence (paragraph (b) above), the Defendant relied on Clause (h) of the representations and warranties in the Agreement, which provides that the Defendant can change “any of the terms, rights, obligations, privileges … with or without providing notice of such change” and the user accepts responsibility for “reviewing information and terms of usage as may be posted from time to time“. A Risk Disclosure Statement was uploaded by the Defendant on its website on 22 March 2017, which specified certain risks including that “The system may produce and aberrant value for the buy or sell price of the virtual currency calculated by the system. Please be aware that if the Company finds that a transaction took effect based on an aberrant value, the company may cancel the transaction“. The effect of Clause (h) (as argued by the Defendant) was that once the Risk Disclosure Statement was uploaded, it automatically came into effect without notice to the users and regardless whether that had seen it or not.
Notwithstanding several counterarguments raised by the Plaintiff (including that any change in terms could not be effective without notice to the Plaintiffs), and having considered summary responses by the Defendant, the Judge accepted that the Defendant’s contentions raised an arguable defence. In particular, the issue on incorporation of terms into contracts was one that merits full argument at trial.
In respect of the second defence, the Judge referred to the seminal decision of the Court of Appeal in Chwee Kin Keong and others v Digilandmall.com Pte. Ltd.  1 SLR(R) 502, dealing with the common law doctrine of unilateral mistake. Digilandmall involved similar facts to the present case, save that it was an employee, rather than a computer, that committed the error in question (by keying in the wrong price of laser printers for sale). It was held in Digilandmall that to succeed in rendering a contract void on the basis of unilateral mistake, the Defendant must show that there was a sufficiently fundamental mistake as to a term of the contract, of which the Plaintiff seeking to enforce the contract was aware.
The Defendant argued that, whilst the acts were those of a computer (i.e. the computer hosting the Platform), the mistake arose from human error (the failure to update the login credentials to the Quoter Program), which ultimately caused the computer to process the Stop Loss orders at an abnormal price. The mistake caused the Force-closed Customers’ holdings to be sold when they need not have been, at a price lower than the true market value. In terms of knowledge, the Defendant submitted that the Plaintiff must have known that the price was wholly out of line with all the other prices it had been seeking to trade at during the day, all of which were 250 times lower.
The Judge held that the circumstances justified an investigation at trial, particularly in relation to the facts behind setting the abnormally high offer price (which the Plaintiff argued was simply “placed automatically by the Plaintiff’s proprietary system which seeks to quote prices which are at or near the best available prices of the Platform“), and the state of the Plaintff’s knowledge. The Judge also acknowledged that the law on unilateral mistake is less well developed where computers are concerned, and that a more thorough examination would only be possible after the full facts were established.
The use of cryptocurrency has increased exponentially over the past few years. Notwithstanding increased global discussion around greater governmental regulation and oversight, it is undeniable that cryptocurrency has gained significant acceptance, and may well gain an even greater foothold in the near future.
This decision serves as a useful reminder that, while representing new opportunities and convenience, cryptocurrency also gives rise to new and challenging legal issues to be grappled with. Amongst other issues, the SICC will have to grapple with issues of attribution (when can the workings of a computer or computer program constitute actual knowledge on the part of the programmer or operator?), and whether (and if so how) the traditional understanding of the doctrine of unilateral mistake ought to be expanded.
The matter also further showcases and underscores the diverse capabilities of the SICC and its international panel of judges. Established in 2015 as the ‘international’ division of the Singapore High Court, the SICC has gone on to hear nearly 20 cases on matters ranging from construction, investment, banking and finance, and shipbuilding, all of which are high value cases involving international parties and counsel. We understand that the trial is presently scheduled to be heard in July 2018, which is further testament to the speed and efficiency which have become important hallmarks of the SICC.
For further information, please contact Alastair Henderson, Managing Partner – SE Asia, Emmanuel Chua, Senior Associate, Nicholas Hoh, Associate, or your usual Herbert Smith Freehills contact.