An unsecured creditor claim valued at ~$500m (depending on the date of valuation), liability for losses suffered during a hack, whether a claims portal established for beneficiaries is sufficient to meet the requirements for submission of a creditor claim, and what to do when a company in liquidation holds a significant value of cryptocurrency on trust but can't distribute it… a judgment in the Cryptopia liquidation is expected soon.
Cryptopia was incorporated in 2014. It operated as a cryptocurrency exchange that permitted users to deposit and trade pairs of cryptocurrencies between themselves. Cryptopia generated income by charging transaction fees on trades, deposits and withdrawals. In January 2019, Cryptopia was hacked and a significant amount of cryptocurrency was stolen. Trading was suspended and when the exchange reopened, reduced. Cryptopia was unable to generate sufficient income and on 14 May 2019, David Ruscoe and Malcolm Moore of Grant Thornton were appointed as liquidators by shareholder resolution. In 2020, Gendall J determined that Cryptopia held the cryptocurrencies on bare trust for the benefit of account holders. In 2024, Palmer J made directions as to the liquidators' claims process for beneficiary account holders, distribution of the cryptocurrencies to account holders, and cost allocation methodology for trust administration costs.
This third round of directions (sought under s 284 of the Companies Act 1993 and Trusts Act 2019) involves a great many issues that need to be resolved before Cryptopia's liquidation can be completed. The issues are numerous – to highlight only a few:
Assets available to Cryptopia's creditors: Cryptopia itself had cryptocurrency holdings in every cryptocurrency supported on the platform by virtue of the fact that it collected fees from every transaction. Is Cryptopia a beneficiary of the trusts? If it is, is Cryptopia liable to any of the trusts for losses (including hack losses and unexplained shortfalls), and does that mean that it is disentitled from receiving that cryptocurrency for distribution to creditors, even if there remains unclaimed cryptocurrency in those trusts?
Contingent creditor claim – whether to admit the claim, and how to value it: A contingent creditor (Company X) submitted a creditor claim form for losses amounting to ~$500m (depending on the date of valuation) arising from the hack. Company X generated an ERC-20 token in November 2018 and listed it on Cryptopia's platform. The token traded on the exchange until the hack in early January. All of the token on the platform was stolen – around 8% of the total circulating supply. Company X claimed that it was entitled to damages for the value of the token, based on the value it traded for on the platform, and for lost market capitalisation for the remaining 92% of tokens. It valued its claim by converting the alleged value of the token to BTC at the date of the hack (although many trades on the exchange at this stage were Company X trading with itself) and then converting that BTC value to NZD at the date of its creditor claim in July 2019.
Many issues arose from this claim:
did Cryptopia's terms and conditions exclude liability?
how should the token, as a recently generated token with limited trading (only 0.03% of the volume on Cryptopia was held by users other than Company X, the total amount on the platform was only 8% of circulating supply; and much of the trading on Cryptopia trading involved Company X's founders and trading between the founders, rather than arms-length buyers or sellers) be valued?
what is the appropriate valuation date and methodology when Company X claims ongoing loss – the date of loss was 14 January 2019, and the date of liquidation 14 May 2019?
did Company X have a claim against Cryptopia when it was its founders who had accounts on the platform?
was Cryptopia liable for hack losses perpetrated by a third party?
could Cryptopia have prevented the hack at all?
At the hearing, fact witnesses and experts were cross-examined extensively on these issues.
If Company X's creditor claim was admitted, then is Cryptopia liable to other account holders for losses arising from the hack? Do Cryptopia's terms and conditions exclude liability? If Cryptopia is liable, are account holders required to submit creditor claims independently of the claims portal process, or can the liquidators use the information from their claims portal as a creditor claim form?
What to do with unclaimed trust property? The Court has previously approved a cut-off date for trust claimants. Even if the cut-off date is extended, Cryptopia is likely to hold a significant amount of unclaimed cryptocurrency. The cryptocurrency will be held on trust, but the liquidation cannot be completed if Cryptopia remains trustee. As time goes on, the likelihood that any account holder will claim and will be able to recall sufficient information to prove account ownership reduces. But any new trustee is unlikely to have the capability of dealing with cryptocurrency. Can Cryptopia convert the cryptocurrency to cash and transfer it to the Treasury as undistributable trust property (s 149, Trusts Act 2019)? Company X and counsel for creditors asked whether the trusts should be extinguished, resettled, varied or deemed expired so that the assets are available to creditors in the liquidation.
Stay tuned – the judgment will be complex and may require further submissions on some of the more challenging trust law issues. An appeal is likely, especially given the quantum of Company X's claim. But it is clear that the judgment will provide invaluable commentary on trust law in New Zealand and on the requirements for creditor claims in liquidations.
Buddle Findlay acts for the liquidators of Cryptopia Limited.