Cryptocurrencies entrusted to an exchange
provider: Shielded from the provider’sbankruptcy?
KOJI TAKAHASHI*1

Abstract
Cryptocurrency exchanges, ie online platforms where customers exchange their cryptocurrencies
for other cryptocurrencies or fiat currencies, are routinely targeted by hackers, which often result ina massive drain of cryptocurrencies. The heists can be large enough to bring down the exchanges totheir knees. The customers of an exchange who have entrusted it with cryptocurrencies would havea contractual right to claim their return. If the exchange is wound up, however, personal claims(such as a contractual claim) brought in bankruptcy proceedings would not yield to them a fullrecovery. It is, therefore, practically important to examine whether the cryptocurrencies entrusted
to an exchange are shielded from the bankruptcy of the exchange provider, so that the customers
can obtain a full recovery. Under most, if not all, legal systems, the answer to this question would
be unclear because cryptocurrencies are a novel asset and because the legal relationships between
an exchange provider and its customers have not been sufficiently scrutinised. This article will seek
to improve legal clarity by presenting an analytical framework, identifying issues, and pointing topossible solutions.
It will begin by examining the law of Japan, possibly the only country in the world where the matterhas been litigated. Following a hacking attack, Mt Gox, the world’s biggest operator of a Bitcoin
exchange at that time, became insolvent. After the opening of bankruptcy proceedings, one of its
former customers filed a suit against the bankruptcy trustee in Japan, seeking a full recovery of the
Bitcoins he had entrusted to the exchange. Rather than relying on a personal claim, the plaintiff
asserted ownership over what he saw as “his Bitcoins”. His claim was, however, dismissed by the
Tokyo District Court for reasons to be examined in this article. More recently, other customers
filed a suit in Japan by trying another legal avenue to obtain a full recovery. They are arguing that
their Bitcoins had been held by the exchange on trust for them.
After presenting an analysis under Japanese law, this article will explore its relevance to other legal
systems. Since Japanese law belongs to the family of civil law systems, the analysis concerning theownership of cryptocurrencies would have direct relevance to other civil law systems in the context
of rei vindicatio (vindication of property). It would also inform the debate whether cryptocurrencies
are “property” in terms of the tort of conversion in common law systems. The analysis concerningwhether an exchange holds cryptocurrencies on trust for its customers would be useful to all thecommon law systems of which the law of trusts forms an integral part as well as any civil law
systems which, like Japanese law, have introduced the concept of trusts.

****** Professor at the Doshisha University Law School (Kyoto, Japan).

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1

Introduction

Cryptocurrency exchanges, ie online platforms where customers exchange theircryptocurrencies1 for other cryptocurrencies or fiat currencies, are routinely
targeted by hackers, which often result in a massive drain of cryptocurrencies.
The exchanges which came under biggest hacking attacks include Mt Gox(losing Bitcoins2 worth $473 million in 2014), Bitfinex (losing Bitcoins worth$72 million in 2016), Coincheck (losing Nems worth $523 million in 2018) and
BitGrail (losing Nanos worth $170 million in 2018). The heists can be large
enough to bring down the exchanges to their knees.
The customers of a cryptocurrency exchange usually entrust theircryptocurrencies to the exchange provider3 prior to placing an order, so that
their order can be swiftly executed. After the execution of transactions, thecryptocurrencies remain entrusted to the provider until such time that customers
who have a positive balance on the provider’s books request transfers. If, in themeantime, the exchange provider goes into bankruptcy, the customers would
have a contractual right to claim the return of the cryptocurrencies they haveentrusted. But a contractual claim would only allow recovery pari passu (“inequal steps”) from the bankrupt’s estate. The customers may wish to claim afull recovery as they often see such cryptocurrencies as their own. The merit of
their claim will depend on the question whether the cryptocurrencies entrusted
to an exchange provider are shielded from the latter’s bankruptcy.
Under most, if not all, legal systems, the answer to this question would
be unclear because cryptocurrencies are a novel asset and because the legal
relationships between an exchange provider and its customers have not been
sufficiently scrutinised. This article will consider this question under the law ofJapan, perhaps the only country in the world where the matter has been litigated.
Two legal weapons likely to be deployed by the customers - ownership-based
restitution and trusts – will be examined in turn. After presenting an analysis
under Japanese law, this article will explore its relevance to other legal systems.
2

Proprietary restitution under Japanese law

2.1 Proprietary restitution based on ownership
When the customers of a cryptocurrency exchange contend that thecryptocurrencies they have entrusted to the exchange provider are shieldedfrom the latter’s bankruptcy, they may seek proprietary restitution by asserting
ownership over those cryptocurrencies.

12
3

In this article the word “cryptocurrencies” refers to either different kinds of cryptocurrencies orunits of a specific cryptocurrency, depending on the context.
In this article the word “Bitcoins” is used to refer to units of the Bitcoin cryptocurrency.
This article will focus on centralised exchanges, a type of exchange to which customers can entrust
their cryptocurrencies. Towards the future, more use may be made of DEXs (decentralised
exchanges) which enable trading without cryptocurrencies being entrusted to them and hence
do not attract hacking attacks. But DEXs will not completely replace centralised exchanges
since they do not enable trading with fiat currencies.

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3

Such relief was sought in a suit against Mt Gox, which was once the world’s
biggest provider of a cryptocurrency exchange. In 2014, it became insolvent
and bankruptcy proceedings were opened in Japan. Most of the creditors wereits former customers who had entrusted it with Bitcoins and fiat currencies andhad a contractual right to recover them. Conscious that filing a contractual
claim in the bankruptcy proceedings would only yield a partial recovery, oneof the former customers filed a suit before the Tokyo District Court against
the bankruptcy administrator (hereafter “the Mt Gox case”), seeking a fullrecovery of what he saw as “his Bitcoins” by asserting ownership over them.
Filing such a suit is permissible because a right of proprietary restitution isunaffected by the commencement of bankruptcy proceedings under Article 62of the Japanese Bankruptcy Act, which provides:4“The commencement of bankruptcy proceedings shall not affect the right torecover, from the bankruptcy estate, assets that do not belong to the bankrupt.”

The Court dismissed the claim5 by denying that Bitcoins could be an objectof shoyûken, that is the concept of ownership in Japanese law. In so holding,
it relied on the provisions of the Japanese Civil Code which indicate that theobjects of shoyûken are limited to tangible assets. The relevant provisions read:“Article 85: The term ‘butsu’ (things) as used in this Code shall mean tangible
assets.
Article 206: The shoyûken holder of butsu shall have the right to freely use, profit
from and dispose of them, subject to the restrictions prescribed by law.”

In fact, Japan’s first modern civil code, the Civil Code of 1890, did not limit theobjects of shoyûken to tangible assets.6 The limitation was introduced by the
Civil Code of 1896 which replaced the 1890 Code and remains in force to thisday. The 1896 Code adopted a two-tier scheme separating the law of property(contained in Part II) and the law of obligations (contained in Part III). It wasfeared that in this scheme, the notion of “ownership of personal rights” would
invite a conceptual confusion. This, among other reasons, lead to limiting theobjects of ownership to tangible assets.7
On a literal interpretation, “tangible assets” would be limited to solids, liquids
and gas, excluding such assets as electricity, heat and light. In the course of the lastcentury, various scholarly opinions were put forward to overcome this statutory
limitation. One such opinion says that the words “tangible assets” should beinterpreted broadly to cover the types of intangible assets which are amenable
to exclusive control in a legal as opposed to factual sense.8 This interpretation

4

5

6
7

8

There is no official English translation of Japanese law. All the translation of Japaneselegislation in this article is the work of the present author.
The judgement of the Tokyo District Court on 5 August 2015 (in Japanese), 2015 WLJPCA
08058001 (accessible by the subscribers of Westlaw Japan).
Article 6(1) provided: “Butsu are tangible or intangible.”
Stenographic Records of the Proceedings of the Meetings of the Chief Examiners of theInvestigative Committee of Codes (Division of Civil Code) (1893) vol 1 64 [Masaaki Tomii].
Sakae Wagatsuma Shintei Minpô Sôsoku (Revised Edition on the General Rules of the Civil
Code) (1965) 201 et seq (in Japanese).

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would allow shoyûken to be extended to such intangible assets as electricity.
Another opinion respects the literary meaning of the words “tangible assets”
but suggests that the rules applicable to shoyûken should, where warranted, be
extended by way of mutatis mutandis application to intangible assets.9
In the Mt Gox case, the plaintiff argued that Bitcoins were “tangible assets”
on the interpretation that this expression covered intangible assets amenable toexclusive control. But the Court rejected this argument in view of the two-tierscheme of the Civil Code and favoured the literal reading.
2.2 Proprietary restitution with respect to intangible assets
Proprietary restitution under Article 62 of the Bankruptcy Act (above) is
typically based on shoyûken and accordingly relate to tangible assets. It is,however, generally accepted that proprietary restitution may be granted under
the same provision with respect to such intangible assets as intellectual property
rights and receivables.10 What should matter is, as indicated in that provision,
whether the asset belongs to the claimant. The asset would have to be amenable
to exclusive control for it to belong to somebody and for it to be recovered by
way of proprietary restitution.
On this reasoning, the customers of a cryptocurrency exchange who haveentrusted their cryptocurrencies to the exchange provider should, in the eventof the provider’s bankruptcy, be able to obtain proprietary restitution of theircryptocurrencies from the bankruptcy estate on the fulfilment of two requisites,
namely: (i) that cryptocurrencies are amenable to exclusive control; and (ii) the
cryptocurrencies entrusted to an exchange provider by its customers belong to
the latter. These two requisites will be examined in turn below.
Amenability of cryptocurrencies to exclusive control
In the Mt Gox case, the Tokyo District Court did not merely rule that Bitcoins
were not “tangible assets”. It went on to consider whether Bitcoins were
amenable to exclusive control. The Court answered this question in the negative
for the reasons that (i) the transactions of Bitcoins need to be propagated to the
network and confirmed by mining, a process which necessarily involves third
parties and (ii) an address on the Bitcoin blockchain exhibits no electronic
record showing the balance of the Bitcoins therein.
Are these good reasons? The observation made in (i) is factually correct. The
miners who validate blocks of transactions could, if they so wish, decide notto process transactions from a specific Bitcoin address. But as long as there areother miners willing to process them, they will be processed sooner or later.
More importantly, Bitcoins exist invincibly unlike the digital assets of the pre-910Kazuo Shinomiya Minpô Sôsoku (General Rules of the Civil Code) (3 ed 1983) 132 (in Japanese).
eg Makoto Ito et al Jokai Hasan Hô (Commentary on the Bankruptcy Act) (2 ed 2014) 474 (inJapanese). It does not explain how its proposition is reconciled with the restriction of shoyûken
to tangible assets.

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5existing type which are recorded in a centralized registry. While the record of
pre-existing digital assets is at the mercy of the administrator of the registry,
the transactional record of Bitcoins is unassailable as it is contained in theblockchain and distributed across the network. Furthermore, the transfer of
Bitcoins is only possible at the behest of the person who has the knowledgeof the private key corresponding to the blockchain address in which they are
held. It would, therefore, seem possible to say that Bitcoins and other similarly
engineered cryptocurrencies are amenable to exclusive control.
The observation made in (ii) is also factually correct. The balance of Bitcoinsin a blockchain address merely represents UTXOs (unspent transaction outputs),
which is worked out by referring to all the previous transactions associated withthat address. An address on the Bitcoin blockchain, therefore, only conceptuallycontains Bitcoins and, unlike a bank account, exhibits no electronic record
showing their balance.11 It is, however, no good reason to deny the amenability of
Bitcoins to exclusive control because it should suffice to consider the amenability
to control of a balance of Bitcoins rather than specific units of the Bitcoin.
To whom do the entrusted cryptocurrencies belong?
In Japanese law, there are currently no specific rules for the assignment ofcryptocurrencies. There are, however, rules for the assignment of tangible assets
and certain intangible assets. With respect to tangible assets, an assignment
takes effect upon an agreement between the assignor and the assignee without
any formalities required.12 With respect to certain intangible assets which areregistrable such as carbon emissions allowances and dematerialised bookentry securities, an assignment requires the transfer of registration on therelevant registry in addition to a valid agreement between the assignor and theassignee.13 With respect to such registrable intangible assets, an account holder
is presumed to be in lawful possession of the assets recorded in the account.14

11

12

13

14

It should be noted that the Bitcoin’s UTXO architecture is not the only record-keeping model
for blockchains. The Ethereum blockchain, for example, keeps the record of each user accountshowing the most recent balance, as does a bank account.
Article 176 of the Civil Code provides: “The creation and assignment of proprietary rights shalltake effect solely by the manifestation of intent by the relevant parties.”
Article 50 of the Act to Promote Measures to Counter Global Warming provides in the relevant
part: “An assignment of carbon emissions allowances shall not take effect unless the assignee
has had an increase in carbon emissions allowances recorded in its account as a result of thetransfer of registration … .” Article 140 of the Act on Book-Entry Transfer of Corporate
Bonds and Shares provides: “An assignment of book-entry shares shall not take effect unless,upon an application for book-entry transfer, the assignee has had an entry recorded in theholdings column … of its account, showing an increase in the number of book-entry shares inaccordance with the assignment.”
Article 53 of the Act to Promote Measures to Counter Global Warming provides: “It shall be
presumed that the national government and account holders are in lawful possession of the
carbon emissions allowances recorded in their accounts.” Article 143 of the Act on Book-Entry
Transfer of Corporate Bonds and Shares provides: “It shall be presumed that participants arein lawful possession of the rights in book-entry shares recorded in their accounts … .”ABLU 2018_Part ONE.indb 5

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The presumption is rebutted where there is no valid agreement to assign theassets to the account holder.
Since the rules for registrable intangible assets promote transparency andtransactional certainty, it would be reasonable to suggest that those rules
should be applied mutatis mutandis to an assignment of cryptocurrencies. On
this proposition, an assignment of cryptocurrencies would require the transfer
of registration on the blockchain in addition to a valid agreement between theassignor and the assignee. The person who controls the blockchain address15 inwhich cryptocurrencies are held would be presumed to be in lawful possessionof them. This presumption would be rebutted where there is no valid agreement
to assign the cryptocurrencies to that person. The agreement does not have to
be expressed but can be inferred from the circumstances including any related
contractual terms between the parties.
The providers of a cryptocurrency exchange usually prepare terms of service
which the customers must accept before using their service. Under usual terms,
exchange providers do not undertake to act as a counter-party to exchangetransactions with their customers but provide a multilateral trading facility,16that is a facility that brings together multiple third-party offers of selling andbuying and facilitates their matching. Thus, for example, the terms of serviceof Mt Gox which were applicable shortly before it became insolvent stated:17“Members acknowledge and agree that, when completing Transactions, they are
trading with other Members, and Members accept that MtGox acts only as anintermediary in such Transactions and not as a counterparty to any trade.”

Under other terms, exchange providers undertake to act as a counter-party
to exchange transactions with their customers. Thus, the terms of use of
Coincheck provide in the relevant parts:18“ARTICLE 10-2 SPOT TRANSACTIONS AT SHOP
1 … (1) Each Registered User shall be allowed to perform spot transactions atthe virtual currency shop being operated by the Company, by placing orders
to purchase or sell virtual currency through the procedure as specified by theCompany. The counterparty in such transactions will be the Company.”

15

16

17

18

by means of the private key associated with that address. This rule would require further
elaboration where the private key is intentionally or accidentally disclosed to other persons.
A terminology drawn from the MiFID II (Directive 2014/65/EU on markets in financial
instruments) of the European Union.
Terms as of 20 January 2012 (available at http://web.archive.org/web/20140122203409/https://www.mtgox.com/terms_of_service).
The terms applicable as of the time of writing (June 2018) (available on the website of
Coincheck: https://coincheck.com). The terms also offer an alternative service whereby theprovider undertakes to provide a multilateral trading facility in the following language:“ARTICLE 10-1 SPOT TRANSACTIONS AT EXCHANGE
1. … (2) The Company’s responsibility shall be to provide an exchange where virtual
currency can be bought and sold based on the orders placed ... . Therefore, the Company
shall not become a party that is directly involved in virtual currency purchase and sales
transactions, unless in exceptional cases... .”ABLU 2018_Part ONE.indb 6

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When a customer of a cryptocurrency exchange entrusts the exchange provider
with his or her cryptocurrencies, the provider will keep those cryptocurrencies inthe blockchain addresses it controls.19 It will also record those cryptocurrencies
in its off-chain books, that is a ledger outside of the blockchain. When an orderplaced by the customer is executed, the balances on the provider’s off-chain
books will be adjusted accordingly. But the transaction will not immediately
be broadcast to the blockchain network since it takes time and cost to havethe transaction inscribed in the blockchain. Where the provider has acted as
the counter-party to the transaction, the cryptocurrencies used to fulfil thetransaction will eventually be transferred to a separate blockchain address
controlled by the provider where it keeps the cryptocurrencies it owns. Where,on the other hand, the provider has merely provided a multilateral trading
facility, the cryptocurrencies may be kept in the blockchain address controlled
by the provider until such time when customers who have a positive balance on
the provider’s books request transfers to the blockchain addresses they control.
If the rules for registrable intangible assets are to be applied mutatis mutandis
to the assignment of cryptocurrencies, the exchange provider to which
cryptocurrencies are entrusted would be presumed to be in lawful possessionof them while they remain held in the blockchain address controlled by theprovider. This presumption would be rebutted if there is no valid agreement
to assign those cryptocurrencies to the provider. Is there such an agreement?
Where an exchange provider merely provides a multilateral trading facility,
it will not be acting as a counter-party to exchange transactions with its
customers. This might lead one to think that no agreement could be inferred
to assign the entrusted cryptocurrencies to the provider. If that were the case,however, the assignment of cryptocurrencies would have to take place directly
between customers. And it is hard to see how it works because it is often
impossible to identify a specific customer with whom specific cryptocurrencies
have been exchanged. As stated above, an exchange provider may not transfer
cryptocurrencies to blockchain addresses controlled by its customers until
such time that customers who have a positive balance on the provider’sbooks make a request for transfer. In these circumstances, it is not possible
to infer an agreement between specific customers directly to assign specificcryptocurrencies between themselves. It would be more reasonable to consider
that cryptocurrencies are assigned first to the exchange provider when they
are entrusted to the latter, which the latter re-assigns to its customers whenrequests for transfer are made.
Where, on the other hand, an exchange provider acts as a counter-party to
exchange transactions with its customers, it would not be difficult to infer an

19

It may be contrasted with the holding patterns of online wallet providers. Some of them, likeexchange providers, control the blockchain addresses in which the cryptocurrencies entrusted
by their customers are held while others, unlike exchange providers, merely provide software
allowing their customers to possess private keys to control the blockchain addresses in which
their cryptocurrencies are held. See Raskin, “Realm of the coin: Bitcoin and civil procedure”
2015 Fordham Journal of Corporate and Financial Law 969 996.

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agreement to assign the traded cryptocurrencies to the provider at the time
when the customer’s order is executed. But would it be more reasonable to infer
an assignment agreement at an earlier point in time when the customer entrusts
their cryptocurrencies to the exchange provider? Suppose that before thecustomer’s order is executed, the blockchain for the entrusted cryptocurrencyis hard forked and has yielded cryptocurrencies of a new breed. If it is thecustomer to whom the entrusted cryptocurrencies belong, the exchange
provider would be obliged to extract the cryptocurrencies of the new breed anddeliver them to the customer. It is a task involving risky operations which an
exchange provider would not undertake without charging a sufficient level offees. In view of the current practice of an exchange provider charging no feesfor keeping custody of entrusted cryptocurrencies, it seems reasonable to infer
an agreement for customers to assign their cryptocurrencies to the exchange
provider at the time when they entrust them to the latter.
From the foregoing analysis, it follows that regardless of whether an
exchange provider acts as a counter-party to exchange transactions with its
customers or merely provides a multilateral trading facility, the presumptionthat the cryptocurrencies entrusted to an exchange provider by its customers
belong to the provider is not rebutted. It must accordingly be concluded thatthe customers of a cryptocurrency exchange have no right to obtain proprietary
restitution with respect to the cryptocurrencies they have entrusted to theexchange provider.
3

Trusts under Japanese law

When the customers of a cryptocurrency exchange contend that thecryptocurrencies they have entrusted to the exchange provider are shieldedfrom the provider’s bankruptcy, they may base their contention on theprinciple that trust property is shielded from the trustee’s bankruptcy,20 arguingthat the provider holds the cryptocurrencies on trust for them. This argument
envisages that the provider is acting as a trustee and the customers are acting
simultaneously as settlors and beneficiaries.2120

21This principle is enshrined in article 25(1) of the Trusts Act (Shintaku Hô), which provides:“Where an order for the commencement of bankruptcy proceedings is made against a trustee,no asset forming part of trust property shall be included in the bankruptcy estate.” Procedurally,
when a trustee goes into bankruptcy, its duties come to an end (article 56(1)) and the bankruptcy
administrator steps in to preserve the trust property until a new trustee is appointed and becomes
ready to administer the trust (article 60(4)). Article 56(1) of the Trusts Act provides: “The duties
of a trustee shall be terminated on the following grounds ... However, in the case of subparagraph(iii) below, if the terms of trust otherwise provide, such terms shall prevail. … (iii) an order for thecommencement of bankruptcy proceedings has been made against the trustee … .” Article 60(4)of the Trusts Act provides: “Where the duties of a trustee have been terminated on the groundstipulated in Article 56(1)(iii), the bankruptcy administrator shall, until a new trustee is ready tocarry out the administration of the trust, preserve the assets forming part of trust property andtake the necessary steps to hand over the administration of the trust.”
In a separate move, a trust bank is planning to offer a scheme whereby an exchange provider(acting as a settlor) assigns the cryptocurrencies entrusted by its customer to the trust bank who

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9Such an argument was made in a fresh action against the bankruptcy
administrator of Mt Gox filed on 19 February 2018 in the Tokyo District
Court.22 Instead of asserting ownership over the Bitcoins they had entrusted to
Mt Gox, the former customers argued that Mt Gox had held them on trust forthem. As of the time of writing (June 2018), the court has yet to hand down adecision.
The following analysis will consider the merit of such an argument andexamine the duties of a trustee to see whether they are compatible with themodus operandi of exchange providers.
3.1 Creation of a trust
A trust is an arrangement pursuant to which a specific person manages ordisposes of an asset in accordance with a specific purpose.23 The asset can betangible or intangible since there is no good reason to restrict it to tangibles.24
It would, therefore, be safe to assume that cryptocurrencies can comprise trust
property.
A trust is created by a trust agreement, a will or a unilateral manifestation of
intent.25 Among those methods, the one most relevant to the present discussion
is a trust agreement. Thus, a trust is created where there is an agreement between
A and B whereby A will assign an asset to B and B will keep it in custody or

22
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is to hold them (as a trustee) for the customer (as a beneficiary) with the aim of shielding thecryptocurrencies from the bankruptcy of exchange provider. See Nihon Keizai Shimbun (Nikkei
Newspaper), the morning edition of 7 Feb 2018, 7 (in Japanese).
Nihon Keizai Shimbun (Nikkei Newspaper), the morning edition of 20 Feb 2018, 38 (in Japanese).
Article 2(1) of the Trusts Act provides: “The term ‘trust’ within the meaning of this Act refers
to an arrangement created by any of the methods set out in the following Article, pursuant towhich a specific person is to manage or dispose of an asset in accordance with a specific purpose(other than the purpose of exclusively promoting his own interests …) and take any other steps
necessary to achieve that purpose.”
The Trusts Business Act (Shintaku Gyô Hô) previously provided for an exhaustive list of assets
capable of comprising trust property. The list included tangible movables and certain intangible
assets such as receivables. By the 2004 amendment of the Act, the list was abolished, paving theway for a trust to be created with respect to other intangible assets such as intellectual property
and carbon emissions allowances.
Article 3 of the Trusts Act provides: “A trust shall be created by any of the following means: (i)by concluding an agreement with a specific person to the effect that an asset shall be assigned
to the latter or encumbered with a security right or otherwise disposed of in favour of the latterand that the latter shall manage or dispose of the asset for a specific purpose and take any othersteps necessary to achieve that purpose (hereinafter referred to as a ‘trust agreement’); (ii) bymaking a will to the effect that an asset shall be assigned to a specific person or encumberedwith a security right or otherwise disposed of in favour of a specific person and that the lattershall manage or dispose of that asset in accordance with a specific purpose and take any othersteps necessary to achieve that purpose; or (iii) by a manifestation of intent by a specific person
to manage or dispose of a specific asset he holds in accordance with a certain purpose and takeany other steps necessary to achieve that purpose, with the manifestation being evidenced by anotarial deed or any other document or electronic or magnetic record … stating or recordingthat purpose, the particulars necessary to specify the asset, and other particulars specified by
the ordinances of the Ministry of Justice.”

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dispose of it for a specific purpose.26 The agreement need not be expressed or
use the word “trust.” It can be inferred from the circumstances.
It follows that a trust is created between an exchange provider and its
customer in favour of the latter (i) when the customer entrusts cryptocurrencies
to the provider if there are circumstances which make it possible to infer anagreement between them that the customer will assign the cryptocurrencies tothe provider and that the latter will keep them in custody and dispose of themfor the purpose of executing the customer’s order for exchanging them for othercryptocurrencies or fiat currencies and delivering the latter to the customer;or (ii) when the customer entrusts the provider with fiat currencies if there
are circumstances which make it possible to infer an agreement between themthat the customer will assign the fiat currencies to the provider and that thelatter will keep them in custody and dispose of them for the specific purpose of
executing the customer’s order for exchanging them for cryptocurrencies anddelivering the latter to the customer. If a trust as described above is created,the cryptocurrencies or fiat currencies obtained in the course of the transaction
will form part of the trust property until they are delivered to the customers.
There is, however, uncertainty as to what circumstances make it possible toinfer a trust agreement. In a leading case, a construction company held in its
bank account a sum of money paid by a local municipality as an advance for thebuilding work for which the municipality had engaged the company. The Supreme
Court ruled27 that the money was shielded from the bankruptcy of the company,
reasoning that the company held it on trust for the municipality. To reach thatruling, the Court found that there was a trust agreement between the company
and the municipality whereby the company was to use the money for the purposeof defraying the cost of the building work. The Court so found notwithstandingthat the parties had not used the word “trust” in the construction contract. The
Court observed that the construction contract only stipulated that the company
could not use the advance for purposes other than to defray the cost of thebuilding work. But it noted that the contract additionally laid down, by way
of incorporation of the terms of another contract, (i) that the advance must be
deposited in a dedicated bank account, (ii) that the company could only makea withdrawal from the account after submitting documents showing the properuse of the fund to the bank and receiving its verification, (iii) that the proper useof the fund must be inspected by an external auditor, and (iv) that the auditor
could demand the bank to suspend withdrawals should it find that the advancewas not properly used. It is not clear from the Court’s reasoning whether any ofsuch additional elements are indispensable to infer a trust agreement.
In this regard, it is interesting that under the Japanese regulatory rules
in force as from 1 April 2017,28 the providers of a cryptocurrency exchange

26
27
28

ibid article 3(i) of the Trusts Act.
The judgment of the Supreme Court on 17 Jan 2002 (56-1 Minshû 20).
These rules are contained in the Payment Services Act (Shikin Kessai Nikansuru Hôritsu) which
devotes one chapter to “virtual currencies”. The words “virtual currencies” are defined inarticle 2(5) in the following terms. It is a technologically neutral definition but the chapter is

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11

soliciting business in Japan must be registered with the Prime Minister.29 To beregistered, the providers must comply with certain requirements.30 Among thoserequirements are (a) to establish a system necessary to ensure the segregation of
the fiat currency and cryptocurrencies received from its customers from its own
fiat or virtual currencies and (b) to have the status of segregation periodicallyinspected by an external auditor.31 Furthermore, (c) the Prime Minister may
through his or her officials inspect the business operation of the provider,32
and, (d) where necessary, order improvement.33 Among the additional elements
mentioned by the Supreme Court, (i) corresponds to (a), (iii) to (b) and (c), and(iv) to (d). To that extent, it would be easier to infer a trust agreement with theexchange providers who have been registered in Japan by complying with therelevant regulations.

29

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primarily aimed at cryptocurrencies. “The ‘virtual currencies’ within the meaning of this Act
are anything described in either of the following subparagraphs. (i) anything having financial
value (but only those recorded electronically in electronic devices or other items, excluding
the Japanese or foreign currencies and assets denominated in such currencies), which can beused to pay to unspecified persons for goods bought or rented or for services received, which
can be sold to or bought from unspecified persons, and which can be transferred by means ofelectronic data processing systems. (ii) anything having financial value which can be exchanged
with unspecified persons for anything described in the preceding subparagraph, and which canbe transferred by means of electronic data processing systems.”
Article 63-2 of the Payment Services Act provides: “Unless registered with the Prime Minister, no
person may engage in the business of exchanging virtual currencies.” Article 63-22 of the same Act
provides: “Unless registered pursuant to Article 63-2, no foreign provider of a virtual currencies
exchange may solicit from persons in Japan the business activities listed in Article 2(7)” [note by thepresent author: this refers to the business activities related to the exchange of virtual currencies].
Article 63-5 of the Payment Services Act provides: “(1) The Prime Minister shall refuse to grantregistration where the applicant is any of the following persons … (v) A corporation which has
not established a system necessary to ensure compliance with the provisions of this Chapter”.
Article 63-17 of the same Act provides: “(1) In any of the following circumstances, the Prime
Minister may rescind the registration granted under Article 63-2 … (i) where the provider has
become any of the persons described by the subparagraphs of Article 63-5(1)”.
Article 63-11 of the Payment Services Act provides: “(1) The provider of a virtual currencies
exchange shall, in connection with its business, segregate the fiat or virtual currencies entrusted
by its customers from its own fiat or virtual currencies pursuant to the Ordinance of the Cabinet
Office. (2) The provider of a virtual currencies exchange shall, pursuant to the Ordinance of
the Cabinet Office, periodically undergo an audit by a certified public accountant … or by anauditing firm as regards the status of the segregation laid down in the preceding provision.”
Article 63-15 of the Payment Services Act provides: “When the Prime Minister finds it necessary
for the proper and secure business operations of a virtual currencies exchange, he or she mayorder the exchange provider to submit reports or materials concerning its business operations
or financial conditions and may have his or her officials enter its place of business or otherpremises, ask questions about its business operation or financial conditions and inspect its
books and other items.”
The Payment Services Act provides in article 63-16: “When the Prime Minister finds it
necessary for the proper and secure business operation of a virtual currencies exchange, he or
she may, to the extent necessary, order the provider to take measures necessary to improve its
business operation or financial conditions or any other measures necessary for the purposes ofsupervision.”

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3.2 Compatibility with trustee’s duties
Once a trust is created, the trustee is subject to a range of duties including theduty to avoid conflicts of interest and the duty of segregating trust property
from his own property. If an exchange provider holds the fiat currencies andcryptocurrencies entrusted to it by its customers on trust for the latter, it would
be subject to such duties. The following analysis will examine whether suchduties are compatible with the exchange providers’ modus operandi.
Acting as a counter-party to exchange transactions
It has been seen earlier that an exchange provider may, depending on the termsof service, undertake to act as a counter-party to exchange transactions with
its customers. If the exchange provider is acting as a trustee for its customers,
it raises doubt whether such conduct involves the type of conflict of interest
which the provider is obliged to avoid. Japanese law indeed prohibits a trusteefrom acting as a counter-party to the sale or purchase of the trust property.34
As an exception, however, the trustee can so conduct itself if the beneficiaryhas given an informed consent.35
When a customer of a cryptocurrency exchange places an order in responseto the price quoted by the exchange provider, the customer may be deemed tohave consented on an informed basis to the provider acting as the counter-party
to the exchange transaction. It would, therefore, be safe to conclude that an
exchange provider can act as a counter-party to exchange transactions with its
customers without failing in its duty as a trustee to avoid conflicts of interest.
Commingling cryptocurrencies in a blockchain address
There are two models for the way in which the providers of a cryptocurrency
exchange hold the cryptocurrencies entrusted to them by their customers on
the blockchain.
In one model, the cryptocurrencies of each customer are held in a blockchain
address which is associated with that specific customer. To avoid delay in
executing the customers’ orders, the private keys would need to be kept in an
online wallet (“hot storage”), though it makes the cryptocurrencies vulnerable

34

35

The Trusts Act provides in article 31(1): “A Trustee shall not carry out the following conducts: (i)causing assets forming part of trust property … to be included in the trustee’s own property or
causing assets forming part of the trustee’s own property … to be included in trust property;”.
The Trusts Act provides in article 31(2): “Notwithstanding the contrary provisions in thepreceding paragraph, a trustee may carry out the conducts listed therein in any of the following
circumstances. However, sup-paragraph (ii) shall not apply where the terms of the trust providethat the conduct in question shall not be carried out even in the circumstances set forth in that
sub-paragraph … (ii) The trustee has disclosed facts material to the conduct in question andobtained the beneficiary’s consent ...”.

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to hacking attacks. This was the model apparently adopted by Bitfinex,36 prior
to receiving a major hacking attack in August 2016.37
In another model, the exchange provider commingles the cryptocurrencies
entrusted to it by its customers in blockchain addresses which are not associatedwith any specific customers. The holdings of each customer are only recorded in
the provider’s off-chain books. This model allows the provider to leave the private
keys in an online wallet (“hot storage”) for only so much of the cryptocurrencies
as would be sufficient to cover the volume of transactions instructed in normal
circumstances. For a bulk of the entrusted cryptocurrencies, the provider can keep
the private keys in an off-line wallet (“cold storage”). This arrangement enhances
security, which presumably is the reason behind the prevailing adoption of thismodel. Thus, Mt Gox indiscriminately distributed the Bitcoins entrusted to it by
its customers in a number of blockchain addresses and randomly moved themaround different addresses to avoid hacking attacks.38 This model is permissible
under the Japanese regulations applicable to the providers of a virtual currencies
exchange,39 which require the providers to segregate the cryptocurrencies
entrusted to them by their customers as a whole from their own cryptocurrencies
but do not go to the extent of requiring them to segregate the cryptocurrencies
of each customer on the blockchain. This model is also permissible under the
regulations of other jurisdictions such as New York.40
The second model, however, begs the question whether commingling thecryptocurrencies entrusted by different customers in the same blockchain
addresses is compatible with the duty of the exchange provider as a trustee.
Under Japanese law, a trustee has the duty to segregate trust property fromhis own property and any other trust property he administers. The requiredmanner of segregation depends on the categories of assets.41 Thus, to segregate

36

37

38

39

40

41

See an announcement by Bitfinex on 4 June 2015 (https://www.bitfinex.com/posts), whichstated, “[s]tarting today we … will separate each user’s funds on the public blockchain”.
Bitfinex adopted multi-signatures as a measure to limit vulnerability to hacking attacks (In the
Matter of BFXNA Inc. d/b/a BITFINEX, CFTC No 16-19, 2016 WL 3137612 (June 2 2016) 3).
But it failed to ward off the attack.
This is based on a finding made by the Tokyo District Court in its judgement in the Mt Gox
case.
article 63-11 of the Payment Services Act (see note 31 supra for the text) and article 20 of the
Cabinet Office Ordinance on the Providers of a Virtual Currencies Exchange, read in conjunction
with II-2-2-2 of the Operational Guidelines (May 2017) of the Financial Services Agency.
23 CRR-NY 200.9, which provides for the rules on the custody and protection of customers’
assets, does not require the segregation of the cryptocurrencies of each customer on theblockchain. It reads in the relevant part: “(b) To the extent a licensee stores, holds, or maintains
custody or control of virtual currency on behalf of another person, such licensee shall holdvirtual currency of the same type and amount as that which is owed or obligated to suchother person. (c) Each licensee is prohibited from selling, transferring, assigning, lending,hypothecating, pledging, or otherwise using or encumbering assets, including virtual currency,
stored, held, or maintained by, or under the custody or control of, such licensee on behalf ofanother person except for the sale, transfer, or assignment of such assets at the direction of suchother person.”article 34(1) of the Trusts Act provides: “A Trustee shall segregate assets forming part oftrust property from assets forming part of his own property or any other trust property he

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fiat currencies, it is sufficient to account for their quantity by keeping books.42
On the other hand, the assets which can be registered as forming part of trust
property, such as carbon emissions allowances and dematerialised bookentry securities, must be segregated by means of effecting such registration.43
It has been suggested earlier in this article that the rules for registrable
intangible assets should be applied mutatis mutandis to determine the ownerof cryptocurrencies. However, the registration of cryptocurrencies as forming
part of trust property is not possible unless and until the blockchain is so
configured as to make it technically possible and the law recognises it as avalid registration. Consequently, cryptocurrencies would fall within the same
category as fiat currencies for the purpose of segregation44 and accordingly, it
will be sufficient to account for their quantity by keeping books. It follows thatan exchange provider would not be failing in its duty of segregation if it uses
off-chain books to account for the quantity of each customer’s holdings.
It should be noted that to tolerate commingling cryptocurrencies entrusted
by different customers in the same blockchain addresses would not harm theinterests of the customers. The law will treat the bulk of cryptocurrencies as
being subject to shared interests and deem those interests to belong to eachtrust property which the exchange provider administers for each customer.45
Each customer may divide the bulk in consultation with other customers or,
failing all other statutorily prescribed manners of division, submit a petition
for division to the court.46

42
43
44
45

46

administers in the manners specified by the following subparagraphs for each category of assets.
If, however, the terms of the trust provide for other manners of segregation, such terms shallprevail. (i) the assets which may be registered as forming part of trust property … (excluding
the assets mentioned in subparagraph (iii)): by the said registration; (ii) the assets which
may not be registered as forming part of trust property … (excluding the assets mentioned
in subparagraph (iii)): the manners specified in (a) or (b) below for each category of assets:(a) tangible movables (excluding fiat currencies): by holding the assets in custody in a condition
that allows them to be distinguished by appearance from his own property and any other trust
properties he administers; or (b) fiat currencies and any assets other than those mentioned in (a):by accounting for their quantity; or (iii) the assets specified by the Ordinance of the Ministry ofJustice: in the manners specified by the Ordinance as the appropriate manners of segregation.”article 34(1)(ii)(b) of the Trusts Act (see n 41 supra).
article 34(1)(i) of the Trusts Act (see n 41 supra).
article 34(1)(ii)(b) of the Trusts Act (see n 41 supra).
This is derived from article 18 of the Trusts Act, which provides: “(1) Where an asset forming
part of trust property becomes indistinguishable from an asset forming part of the trustee’s own
property …, it shall be deemed that shared interests in those assets belong to the trust property
and the trustee’s own property. In this case, the shares of the interests shall be proportionate
to the values of the respective assets as of the time when they became indistinguishable fromeach other. (2) … (3) The two preceding paragraphs shall apply mutatis mutandis to the cases
where the same person acts as a trustee for two or more trusts and an asset forming part of thetrust property of one trust becomes indistinguishable from an asset forming part of the trust
property of another trust …. In such a case, the words ‘the trust property and the trustee’s own
property’ shall be read as referring to ‘the trust property of each trust’.”This follows from article 19 of the Trusts Act, which provides: “(3) Where shared interests
in an asset in the possession of a trustee belong to the trust properties of two or more trusts
administered by the same trustee, the asset may be divided in the following manners: (i) in

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15

The relevance of the analysis under Japanese law to other legal systems

Different legal systems will apply different legal principles to address whether
cryptocurrencies entrusted to an exchange provider are shielded from theprovider’s bankruptcy. This article will focus on the principles related to rei
vindicatio, tort of conversion and trusts, to see what relevance the foregoinganalysis under Japanese law has for these principles.
4.1 Rei vindicatio
The legal systems which have inherited the Roman law concept of ownership,
dominium, would allow a suit to be filed for rei vindicatio (vindication of property:
an owner’s claim against the possessor for the return of the property). Those are
typically the legal systems of the civil law tradition.47 But legal systems of mixed
traditions may also recognise this form of relief.48 The modern Japanese law isrooted in the civil law tradition and the ownership-based restitutionary claim
made in the Mt Gox case was the Japanese-law version of rei vindicatio. The
foregoing analysis under Japanese law concerning proprietary restitution would,
therefore, have direct relevance to other legal systems in which this principle may
be invoked. Thus, the same issues as examined under Japanese law will confront
such legal systems when addressing whether the cryptocurrencies entrusted to an
exchange provider by its customers are shielded from the provider’s bankruptcy.
The first issue which will be confronted is whether cryptocurrencies can be
an object of ownership. The concepts of ownership are different from one legal
system to another reflecting the precedents and doctrines behind them. Somelegal systems limit the objects of ownership to tangible assets while others
extend it to intangible assets.49 The legal systems of the former type would
encounter the same difficulties as experienced under Japanese law. The foregoing

47

48

49

accordance with the terms of the trusts; (ii) in consultation among the beneficiaries of the trusts… ; and (iii) by a decision of the trustee where it is reasonable to consider that the division isnecessary in order to achieve the purpose of each trust and it is clear that the division will notharm the interest of the beneficiaries or where there are justifiable grounds for the division in
the light of, inter alia, the impact it may have on the trust properties, the purpose and mannerof the division, and the actual relationships of the trustee with the beneficiaries. (4) In the casefalling within the preceding paragraph, if no agreement is reached through consultation undersubparagraph (ii) and in no other manners provided by the other subparagraphs is the division
possible, the beneficiary of each trust … may submit a petition to the court for the division of
the asset subject to the shared interests.”eg an action en revendication in French law, Herausgabeanspruch in German law (par 985 of
the German BGB (Civil Code)) and Eigenthumsklage in Austrian law (par 366 of the Austrian
ABGB (General Civil Code)).
eg the law of South Africa. See Van der Merwe & Du Plessis (eds) Introduction to the Law ofSouth Africa (2004) 218 [CG der Merwe].
Akkermans classifies German and Dutch law into the former category, and French law into thelatter (“Property law” in Hage & Akkermans (eds) Introduction to Law (2014) 71 78). Von Bar
and Drobnig add Greek law to the former camp and the law of Portugal, Italy, Austria, Belgium,
Spain, and Sweden to the latter (The Interaction of Contract Law and Tort and Property Law inEurope A Comparative Study (2004) 317).

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analysis under Japanese law would accordingly be of particular relevance tosuch legal systems. Even in the legal systems which do not limit the objectsof ownership to tangible assets,50 not all intangible assets will qualify as an
object. So it will be necessary to consider whether cryptocurrencies can be an
object of ownership. Under Austrian law, for example, the General Civil Codedefines Sachen (things) broadly51 but it is understood that assets must have theattribute of controllability (Beherrschbarkeit) to qualify as Sachen. It has been
observed that the controllability of cryptocurrencies is evident because thetransfer of cryptocurrencies to another address would be impossible without
the knowledge of the private key. On that reasoning, it has been suggested thatcryptocurrencies can be classified as Sachen.52 This reasoning has a familiar ringto it as a similar question, whether cryptocurrencies are amenable to exclusive
control, has been considered in the foregoing analysis under Japanese law.
Whatever the technicality involved in each legal system, cryptocurrencies
would be a latest addition to the list of new assets which challenge theconventional boundary of assets deemed to qualify as the objects of ownership.
Other such assets include domain names, wireless networks, carbon emissions
allowances and data. Such assets have been compelling the law makers of eachState to consider de lege ferenda (with a view to the future law) whether andhow their legal systems should embrace them. Broadening the qualifying assets
would cause friction with numerus clausus, a principle which says that there
shall be no property rights other than those prescribed by legislation.53 Where
necessary, however, the law will evolve to accommodate new assets. The law of
Luxembourg, for example, has been amended to allow proprietary restitutionof data stored in a cloud computing service in the event that the service provider
goes into bankruptcy.54
The second issue which will be confronted is whether the cryptocurrencies
entrusted to an exchange provider by its customers belong to the latter. Under
many legal systems, the rules for the assignment of cryptocurrencies would be

50

51

52

53

54

The English word “ownership” is fitting in this context as it covers both tangible and intangible
assets. Thus, it is not uncommon to speak of the “ownership” of an intellectual property right.
Par 285 of the Allgemeines bürgerliches Gesetzbuch (General Civil Code) provides: “Alles, wasvon der Person unterschieden ist, und zum Gebrauche der Menschen dient, wird im rechtlichen
Sinne eine Sache genannt (Everything which is distinct from a human and serves the use of men
is called a thing in the legal sense).”Völkel “Privatrechtliche Einordnung virtueller Währungen” (2017) 6 Österreichische
Bankwissenschaftliche Gesellschaft 385 387.
In Japanese law, it is enshrined in article 175 of the Civil Code, which provides: “No property
rights may be created other than those prescribed by this Code or other legislation.”
This result would be derived from article 567(2) of the Luxembourg Commercial Code, which
provides: “Les biens meubles incorporels non fongibles en possession du failli ou détenus par lui
peuvent être revendiqués par celui qui les a confiés au failli ou par leur propriétaire, à condition qu’ilssoient séparables de tous autres biens meubles incorporels non fongibles au moment de l’ouverturede la procedure … (Non-fungible intangible movable assets in the bankrupt’s possession or detention
may be recovered by the person who has entrusted them to the bankrupt or by their owner, provided
that they are separable from all other non-fungible intangible movable asset at the time of openingof the proceedings …).” See also Avis du Conseil d’Etat, No 49.937 (12 March 2013).

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unclear. As noted in the foregoing analysis under Japanese law, it will often be
reasonable to draw an analogy with the rules for the assignment of tangible
assets or other intangible assets. Thus, under Austrian law, it has been suggested,by drawing an analogy with the rules for tangible assets, that an assignment ofcryptocurrencies would not take effect unless they have been transferred to a
new blockchain address under the sole control of the assignee.55
The third issue which will be confronted is how the rules for assigning
cryptocurrencies are to be applied to the cryptocurrencies entrusted to an
exchange provider by its customers. Here, it will be essential to analyse the legal
relationships between the exchange provider and its customers. This analysis
must be no different from that conducted under Japanese law.
4.2 Tort of conversion
For a number of legal systems, notably those of the common law tradition, rei
vindicatio is an alien concept.56 In such legal systems, the gap of the missing
vindicatio may be filled by the tort of conversion.57 It protects the claimant’s
right to possession of property.58 The courts have discretion to order theconverted property to be returned to the claimant.59 This discretion may be
exercised, in the event of the defendant’s bankruptcy, to allow recovery fromthe bankruptcy estate.60
It has been long debated what intangible assets can be classified as“property” subject to conversion.61 A line of cases has dealt with assets like
contractual rights,62 information comprising a database,63 domain names64 andcarbon emissions allowances.65 In English law, an asset must “be definable,
identifiable by third parties, capable in its nature of assumption by third parties
and have some degree of permanence or stability”66 before it can be admitted
into the category of “property.” In the United States, according to the Courtof Appeals for the Ninth Circuit, “property” must be an interest capable ofprecise definition and of exclusive possession or control.67

55
56

57
58
59
60
61

62
63
64
65
66
67

Völkel (n 52) 388.
In the English common law, for example, a demand in court which consists in the direct
assertion of ownership is not available: See Burrows (ed) English Private Law (3 ed 2013) par
17.304 [Donal Nolan & John Davies].
ibid par 17.309.
See Calnan Proprietary Rights and Insolvency (2 ed 2016) par 2.132.
subsections (2)(a) and (3)(b) of s 3 of the Torts (Interference with Goods) Act 1977.
See Calnan (n 58) par 2.108.
eg Palmer & Kohler “Information as property” in Palmer & McKendrick (eds) Interests in
Goods (2 ed 1998) 3; Green “The subject matter of conversion” [2010] JBL 218 225.
OBG v Allan [2007] UKHL 21 (English House of Lords).
Your Response Limited [2014] EWCA Civ 281 (English Court of Appeal).
Kremen v Cohen 337 F 3d 1024 (2003) (US Court of Appeals for the Ninth Circuit).
Armstrong DLW GmbH v Winnington Networks Ltd [2013] Ch 156 (English High Court).
National Provincial Bank v Ainsworth [1965] 1 AC 1175, 1247 (English House of Lords).
Kremen v Cohen (n 64). The Court also required that the putative owner had established alegitimate claim to exclusivity. But this requirement seems more related to the question of who
is the owner than to the question of what are the essential attributes of “property.”

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Whether cryptocurrencies are “property” has already been a subjectof academic discourse for several years.68 In applying the relevant tests
for “property,” the foregoing analysis under Japanese law on whether
cryptocurrencies are amenable to exclusive control will be informative to theextent similar elements exist in the tests.
4.3 Trusts
Historically, the trust is an institution which has been developed in the legal
systems of the common law tradition. But a similar institution has been
embraced by Japanese law69 and some other legal systems of the civil law
tradition70 as well as some legal systems of mixed traditions.71
The bottom line seems to be shared by all such legal systems: Assets
belonging to trust property are shielded from the trustee’s bankruptcy.72 The
foregoing analysis of trusts under Japanese law may, therefore, shed somelight where trusts are invoked in other legal systems to address the question
whether cryptocurrencies entrusted to an exchange provider by its customers
are shielded from the provider’s bankruptcy.
Care should, however, be taken not to underestimate the differences in
the underlying theories of trusts law between the common law and civil law
traditions. In the common law systems, where the claimant can show that hehas an equitable proprietary interest in an asset that is in the possession of the
defendant, the court may declare that the asset is held on trust for the claimantand order the defendant to transfer the asset in specie to the claimant.73 Equitable
proprietary interests are created by the maxim “equitable treats as done what
ought to be done”, whereas legal proprietary interests can only be derived fromthe owner. The distinction between equitable and legal proprietary interests isalien to Japanese law and other legal systems of the civil law tradition. These
legal systems adopt a unitary concept of ownership, that is an ownership whichcannot be divided between equitable and legal proprietary interests.

68

69

70

71
72

73

eg Bayern, “Dynamic common law and technological change: The classification of Bitcoin”
71 Wash & Lee L Rev Online (2014) 22; Fairfield, “BitProperty” 2015 S Cal L Rev 805; Lavy
& Khoo, “Who owns blockchains? An English legal analysis” (http://sclbc.zehuti.co.uk/site.
aspx?i=ed47875) (2016); Hurich “The virtual is real: An argument for characterizing bitcoins as
private property” 2016 BFLR 573; Perkins & Enwezor, “The legal aspect of virtual currencies”
2016 JIBFL 569.
The history goes back over a century to the enactment in 1905 of the Secured Corporate Bond
Trusts Act (Tanpo-tsuki Shasai Shintaku Hô).
eg France introduced in 2007 the concept of fiducie (Titre XIV of the Civil Code), which is
structurally a trust.
eg the law of South Africa. See Van der Merwe & Du Plessis (n 48) 187 [MJ de Waal].
See, eg, s 283(3)(a) of the United Kingdom Insolvency Act 1986; article 2024 of the French
Civil Code; article 25(1) of the Japanese Trusts Act (for the text, see n 20 supra).
See, eg, Boscawen v Bajwa [1996] 1 WLR 328 335 (English Court of Appeal); Giumelli v Giumelli(1999) 196 CLR 101 par 3 (High Court of Australia).

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In English law, equitable proprietary interests can be created over intangible
assets74 and, therefore, it is probable that cryptocurrencies can be held on
trust.75 Despite the difference in the underlying theories of trusts law, it has
been seen in the foregoing analysis that cryptocurrencies can also constitutetrust property under Japanese law.
In some legal systems of the common law tradition, an equitable proprietaryinterest may be imposed by law to create a constructive trust. It will be a difficult
question whether the provider of a cryptocurrency exchange is deemed to holdthe cryptocurrencies entrusted to it by its customers on trust for the customers.
In Japanese law, there is no statutory basis for constructive trusts. That is why
the foregoing analysis under Japanese law has focused on the creation of a trust
by a trust agreement inferred from the circumstances. That analysis may be
useful to other legal systems which allow a trust to be created by an agreement
inferred from the circumstances. But its relevance to constructive trusts would
be limited since imposing an equitable interest is not the same as inferring anagreement to create a trust.
5

Conclusion

Where the provider of a cryptocurrency exchange goes into bankruptcy,
whether the cryptocurrencies entrusted to it by its customers should be shieldedfrom the bankruptcy might be seen first and foremost as a policy question.
But the policy hangs in the balance as it is a contest between the interestsof two innocent groups of parties, namely the customers who have entrusted
their cryptocurrencies and the general creditors of the exchange provider. On
the one hand, the customers have a greater stake in the cryptocurrencies they
have entrusted than do the general creditors. On the other hand, the customers
may be deemed to have taken the risk of the exchange provider’s bankruptcy
since the custody of cryptocurrencies is a risky operation which attracts manyhacking attacks.
Since the policy consideration is indecisive, this article has focused on thelegal principles. It has first examined the law of Japan, a country in which
the matter has been actually litigated. Where an exchange provider goes into
bankruptcy, the most obvious remedy the customers would seek is proprietary
restitution. The foregoing analysis has, however, revealed that this remedy
is fraught with difficulties. Firstly, while proprietary restitution is typically
based on ownership, there is a ruling of the Tokyo District Court holdingthat cryptocurrencies, being intangible, cannot be an object of shoyûken, theJapanese-law concept of ownership. In the foregoing analysis, it has been argued
that proprietary restitution should still be possible with respect to the type ofintangible assets which are amenable to exclusive control. The second hurdle isput up again by the same court which expressed the view that cryptocurrencies
were not amenable to exclusive control. The foregoing analysis has sought to74
75

Calnan (n 58) par 2.69 and 5.42.
For the same view, see Lavy & Khoo (n 68).

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demonstrate that this view is not well founded. The third hurdle lies in arguingthat the cryptocurrencies entrusted to an exchange provider by its customers
belong to the customer rather than the provider. But the foregoing analysis
has shown that this argument cannot be supported. It has accordingly beenconcluded, in the final analysis, that the customers would not be entitled toproprietary restitution.
A more promising avenue for the customers would be to rely on the principleof trusts, according to which trust property is shielded from the trustee’sbankruptcy. If it can be argued that the provider of a cryptocurrency exchange
holds the cryptocurrencies entrusted by its customers on trust for the latter, those
cryptocurrencies will be shielded from the provider’s bankruptcy. The fact thatcryptocurrencies are intangible does not disqualify them as assets comprising
trust property. It will, however, be difficult to figure out whether a trust agreement
can be inferred from the relationships between an exchange provider and its
customers. The foregoing analysis has suggested that where the exchange provider
is registered in Japan, the regulatory requirements which must be complied withare conducive to inferring a trust agreement. Once a trust is created, the exchange
provider would be subject to a range of duties as a trustee, such as the duty to
avoid conflicts of interest and the duty to segregate trust property from his own
property and any other trust property he administers. It has been observed abovethat those duties are not incompatible with the modus operandi of exchange
providers even if they act as a counter-party to exchange transactions with theircustomers and even if, as is usually the case, they commingle cryptocurrencies
entrusted by different customers in the same blockchain address.
After conducting an analysis under Japanese law, this article has proceeded
to examine its relevance to other legal systems. It has focused on rei vindicatio,
tort of conversion and trusts as these are likely to be invoked by the customers
of a cryptocurrency exchange when they argue that the cryptocurrencies
they have entrusted to the exchange provider are shielded from the provider’sbankruptcy. Despite significant differences which exist among different legal
systems, many similar issues will be encountered, on which the analysis underJapanese law will shed useful light. Thus, the tort of conversion may exist inlegal systems to which rei vindicatio is not known. But they both give rise tosimilar issues, namely the issue whether cryptocurrencies can be classified as“property” subject to conversion and the issue whether cryptocurrencies canbe an object of ownership. On these issues, the analysis under Japanese law
on whether cryptocurrencies can be an object of shoyûken and whether they
are amenable to exclusive control may be informative. Again, the analysis oftrusts under Japanese law may be useful to other legal systems which have theinstitution of trusts. Under each such legal system, similar issues will arise
such as whether cryptocurrencies can comprise trust property and in whatcircumstances an exchange provider holds the cryptocurrencies entrusted to it
by its customers on trust for the latter. Care should, however, be taken not totranspose the conclusions under Japanese law unquestioningly to legal systemsof the common law tradition because the underlying theories of trusts law aredifferent.

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Given the high frequency of hacking attacks to cryptocurrency exchanges
and the large size of heists, the question whether the cryptocurrencies
entrusted to an exchange provider by its customers are shielded from theprovider’s bankruptcy is a question of practical significance. Notwithstanding
that, the answer seems unclear in most legal systems. This article has sought toimprove legal clarity by presenting an analytical framework, identifying issues,and pointing to possible solutions. It has also highlighted the similarities anddifferences between different legal systems. It should, however, be noted thateven if analysis and solution in each legal system have been clarified, as longas they differ from one legal system to another, the question of conflict of laws
cannot be avoided. It is a question which is not addressed in this article but
calls for discussions because here, too, there is much uncertainty.76

76

For a discussion in a somewhat broader context, see Takahashi “Implications of the blockchain
technology for the UNCITRAL works” in United Nations Commission on International
Trade Law (ed) Modernizing International Trade Law to Support Innovation and Sustainable
Development (United Nations 2017) 81 91.

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