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Luno v Robert Ong Case Explained

Renowned litigator Faisal Moideen shares insights on his court victories for Luno.

by Edmund Yong (Celebrus Advisory)

These are interesting times for digital asset exchanges (DAX) in Malaysia. The Securities Commission has put in place a licensing framework to regulate operators. Parliament may enact specific statutes to govern this new area where necessary. Eventually a body of case law will take shape based on judgments handed down by the Courts.

As a young teething industry based on novel technology, it is only a matter of time before tough disputes emerge and are brought before the Court to decide. This came in a lawsuit initiated by Luno regarding the mistaken transfer of bitcoins. Billed as Malaysia’s first ever Court ruling on cryptocurrency, it creates an important precedent and has implications beyond DAX for other related industries.

Legal certainty is important, it is part of a healthy development process so that the industry can come to its own. The communities in Access Blockchain Association and Bitcoin Malaysia have been following this space closely and have reacted to the Court findings with excitement.

Note: We are indebted to Foong Cheng Leong for his excellent annotation of this case first published in Digital News Asia on Dec 17, 2019 and the feedback he gave us. Here are the full citations: Luno Pte Ltd & Anor v Robert Ong Thien Cheng (Sessions Court Civil Suit No. BA-B52NCVC-389-12/2017) (Unreported); and Shah Alam High Court Civil Appeal No. 12BNCVC-91-10/2018.

To gain further insights on this, we sat down with Faisal Moideen, the litigator representing Luno who won the case at the Sessions Court and on appeal at the High Court. Formerly from Shook Lin & Bok, Faisal started his private practice Messrs Moideen & Max in 2011 and is the managing partner. He is on the A-List of Malaysia’s Top 100 lawyers as compiled by the Asia Legal Business Journal.

A. FACTS OF THE CASE

(To give our readers some context, this case happened during the historic crypto rally which began around Sep 2017. Luno was one of the most popular exchanges for Malaysian traders then as it is today. Bitcoin price was cresting into record highs towards the year end. Around this time, the market was also widely anticipating a ‘hard fork’ event known as SegWit2X scheduled for mid-Nov that would have major impact on the bitcoin network.)

On Oct 30, 2017 Robert deposited RM300,000 into Luno’s bank account in Malaysia. Luno processed this and allocated it to Robert’s trading account.

The next day, Robert converted his ringgit balance into bitcoin, which came up to about 11.3 BTC. He then transferred this from Luno to his other account in Bitfinex. Luno and Bitfinex are unrelated exchanges and registered in different jurisdictions.

Luno executed the transfer successfully. However, due to a technical glitch, an additional 11.3 BTC was transferred to Robert’s Bitfinex account on the same day. In other words, there were double transfers.

Luno immediately realized this and notified Robert on Nov 2, 2017 via email. Robert acknowledged and admitted that he is required to return the 11.3 BTC. The transfer cannot be reversed by Luno and had to be returned via a separate instruction by Robert to Bitfinex.

According to the case, Robert had used up all his BTC to trade on Bitfinex including the additional ones that were mistakenly transferred to him i.e. 22.6 BTC in total. (Back in Oct 2017, Bitfinex had launched a new futures product called Chain Split Tokens (CST) for the ‘hard fork’ event mentioned above. However, the ‘hard fork’ failed and was suspended shortly after.) Robert stated that he had converted all 22.6 BTC to CST futures, which did not materialize and is now valued close to nil as a result.

Ultimately Robert did not return the 11.3 BTC. Instead he offered to pay Luno RM300,000 at the end of Nov 2017, about a month after the fact. But by then, BTC prices have changed. Luno went on to sue Robert to recover the 11.3 BTC or its equivalent fiat value of RM810,837 at the time of filing.

The plaintiff in this case is Luno and involves two of their entities in particular: (1) one which holds the master bank account to accept ringgit deposits from Luno customers in Malaysia, and (2) another which assigns the deposited funds to respective customer wallets for buying and selling crypto.

The defendant is Robert, a customer of Luno.

The action was filed in the Sessions Court in Malaysia which ruled in the plaintiff’s favor. This was upheld by the High Court. The matter is currently pending appeal in the Court of Appeal.

B. KEY ISSUES RAISED

Several arguments were put forth by the defence during trial. We picked out the most consequential ones in our opinion for the purpose of this article:

  1. Bitcoin is intangible and not a “thing” that is capable of being returned. Contract law doctrine allows for mistakes. In particular, section 73 of Contracts Act 1950 Malaysia provides that “a person to whom money has been paid, or anything delivered, by mistake or under coercion, must repay or return it.” But if the Court is persuaded that bitcoin does not constitute a “thing”, then this statutory provision does not apply and Luno’s claim cannot be granted.
  2. The trading of cryptocurrencies is an illegal activity in Malaysia. If this argument is accepted, then plaintiff’s exchange platform and operations would be considered illegal. The Court will not enforce any obligation that will further the continuance of an illegal activity. This is based on an established legal rule “ex turpi causa non oritur actio” which states that the plaintiffwill be unable to pursue legal remedy if it arises in connection with its own illegal act.
  3. There is no right of action as the bitcoins did not belong to the plaintiff. This is an interesting point because the plaintiff must have “locus standi” or the right to bring a legal action of recovery to Court. In order to do so, the argument is that the plaintiff must show it has legal and beneficial ownership of the 11.3 BTC mistakenly transferred: The plaintiff cannot ask for recovery of something it did not own as the bitcoins were stored in the defendant’s wallet.

C. THE COURT RULINGS

In summary, the Sessions Court held that:

  1. Cryptocurrency falls within the ambit of “anything” under s. 73 of Contracts Act 1950. Even though it is not money in the legal sense, it is a form of commodity (albeit in intangible form) as real money is used to purchase the cryptocurrency. There is value attached to bitcoin in the same way as shares do. As such, the defendant is under a duty to return the mistakenly transferred 11.3 BTC.
  2. Cryptocurrency trading is not illegal as Bank Negara Malaysia has issued guidelines to register DAX operators as reporting institutions, which the plaintiff complied with (before Securities Commission took over as the main regulating body). If the plaintiff had been deemed illegal by BNM, then it would not have reasonably been registered. Just because cryptocurrency is not legal tender does not mean that it is deemed illegal.
  3. Plaintiff has the locus to commence action for recovery, akin to a banking relationship. The Court was not persuaded by the argument that the plaintiff was merely “holding” the cryptocurrency and applied the fact situation to banking. When customers deposit their money with the bank, it is settled law that the bank has the right to recover the monies in the event of a mistaken transfer.

This judgment was upheld by the High Court.

It pointed out that the new Capital Markets and Services (Prescription of Securities) (Digital Currency and Digital Token) Order 2019 has classified cryptocurrency as a form of “security”. Thus, the comparison of a bitcoin to a share security is valid. While the Contracts Act was drafted in 1950, it should be construed to reflect changes in modern tech advances. In plain reading, the term ‘anything’ in s. 73 is wide enough to cover bitcoins. This was the crux of the appeal.

It also dismissed the illegality defense as there was no evidence shown that the plaintiff’s operations were illegal and contravened public policy.

As for the third point, the learned High Court Judge held that up until the point the bitcoins are assigned to a specified user, it was a commingled pool of bitcoins that Luno had full custody and control of. Luno was the legal owner of the bank account which the defendant had deposited into, before his funds were converted into bitcoins and recorded in his trading account.

D. INTERVIEW WITH FAISAL

I walked into the chambers of Messrs Moideen & Max at Gateway Kiaramas on a Monday morning. The reception lounge came with brocade wallpaper, ambient lighting and a soft cream-colored rug. I was shown to the conference room where a team-autographed Liverpool FC jersey in a large silver frame hung proudly on the wall: this is the pièce de résistance, not the law books.

Ed:       Thanks for your time. When you decided to take this on, did you have a sense that it will be a precedent-setting or landmark case?

Faisal:   Yes, we did. But our main concern was finding a solution for our client’s legal issue.

Ed:       How did you prepare for this? I mean, what kind of research or jurisdiction did you rely on? This was two years ago when the case law was even less developed back then, and the digital asset trading industry is hardly established.

Faisal:   We prepared for it by relying on existing local jurisprudence, predominantly on contractual principles as there was not much support we could have drawn from foreign legislation then considering cryptocurrency is still an evolving and developing concept. The challenge was to fit cryptocurrency dispute within the existing legal framework.

Ed:       The annotator Foong Cheng Leong for Digital News Asia observed that “digital asset disputes are slowly creeping into Courts and the Courts have been applying existing traditional laws into modern technology.” Do you agree?

Faisal:Yes. The Courts have no choice given that there is currently no specific legislation applicable. However, laws are not static and this case is evidence that laws are flexible enough to adapt to new circumstances and facts if there is willingness to interpret the law and expand its application to new set of circumstances.

Ed:       Given the absence of legislation, it does seem fair and reasonable to expect some judicial activism in a case like this. You think it should have gone further?

I mean, the Courts gave a wide reading for the word “anything” in the Contracts Act which is great. But what will help the industry is to have the legal status of bitcoins ascertained and whether it can actually be considered personal property.

Faisal:   We are of the view that the Court had appropriately considered the current set of legislation and precedents in the context of the case at hand and had given effect to such legislation and precedents as far as it could have in deciding on the matter which is of a novel nature in Malaysia.

Ed:       Sorry to drill this further, want to get your thoughts on this. The literature on property law seems to be divided whether possession is required, especially when physical possession is impossible?

It gets more complicated as CMS Order 2019 now classifies bitcoin as a security, which the learned High Court cited as well in this case. How do you show legal title or possession for security when bitcoins are generally anonymized with no ownership information?

Faisal:   Technology is evolving more rapidly than ever. I think that it is high time that the legislature and regulatory bodies keep up with time and attempts to regulate the ownership of cryptocurrency to avoid being restrained by the concept of physical possession. The Courts have dealt with the issue thus far, but a proper legislation on the matter would be of great assistance.

The issue of legal title or possession of such security also ought to be ironed out between the financial and securities regulating bodies and the blockchain platforms. However, it might be pertinent to note that the proof of ownership may not be the most pressing issue at hand compared to the manner that such cryptocurrency transactions should be dealt with.

E. POINTS OF INTEREST

Ed:       What surprised us is that the Court even applied principles of equity in this case – at one point, it found that a “constructive trust” is imposed on the defendant when he became aware of his receipt of the additional bitcoins.

Was this your strategy all along? The line of argument clearly worked as the judgment had explored concepts like unjust enrichment and natural justice.

Faisal:   Yes. We maintain the position that cryptocurrency has value attached to it even if it is not formally recognised as legal tender in Malaysia. It is undeniable that money is used to purchase the cryptocurrency, on that basis, no one ought to be able to retain something purchased for value without having provided valuable consideration for it.

[Note to our readers: “Constructive trust” is a concept under the laws of equity, which is different from the laws of contract which many of the points had so far centered on. For instance: equity recognizes that whilst the legal ownership of the money may have passed to the person you mistakenly transferred to, the beneficial ownership of the money remains with you. Beneficial ownership is like the right to benefit from that thing you own, which was not transferred because you did not intend for the mistaken person to get your money. This case seems to open the door for equitable claims in the future.]

Ed:       One remarkable ruling was on whether the plaintiff had locus standi in recovering the bitcoins. It seems to take a cue from banking law – that bitcoins held in exchanges are similar to money held in banks. Customers have ‘in personam’ claims against the bank like debtor and creditor i.e. the exchange is the legal owner of the funds. Is our understanding correct?

If so, this gives clarity on the fundamental nature of a digital asset account, with implications on adjacencies like crypto walleting and custody solutions; and will be cited in ages to come.

Faisal:Yes. The ultimate owner may be the traders; however, the exchanges hold the role of the custodian of the cryptocurrency it has under its platform. For example, if a bank mistakenly transfers funds to a wrong account holder, you cannot possibly say that the bank does not have the necessary locus standi to recover the wrongfully transferred funds.

[Note to our readers: This is an important position that will be referenced in future cases. The customer relationship for a centralized DAX like Luno is framed like a banking relationship – any money paid to the credit of a customer’s account is the bank’s money. The bank is the debtor and the customer the creditor. Nonetheless, how this applies in the context of other innovative DAX models that are decentralized (peer-to-peer) or escrow-based like Paxful or Remitano is not considered here.]

[Generally under banking law, “the banker is entitled to rectify any incorrect entry before the customer relies (in good faith) and acts upon such entry.” This is because “the Court will not permit a customer to knowingly take advantage of an erroneous credit entry”. That said, the bank has the duty to its customers keep accurate accounts (Weerasooria).]

Ed:       It seems that the ruling that bitcoin is a form of commodity in intangible form can potentially open up to other possibilities. For example, bitcoin is scripted code which could be arguably treated as a “documentary intangible” just like cheques.

Purely for imagination sake, do you think there is a chance for bitcoins to be recoverable in tort by a claim of conversion?

Faisal:   It may be possible in an instance where the bitcoins allocated in a particular trader’s account were utilized and/or dealt with in a manner without the prior consent or authorization of the trader.

[Note to our readers: Where bitcoins are stored with a centralized exchange, the normal avenue for claims for lost bitcoin is breach of contract, which is fairly straightforward. If this is not within the centralized exchange, and bitcoins are stolen by someone or lost due to hacking, logically the claim will be conversion under tort law. However, this is an uncertain area as it depends on how local laws classify or define the proprietary nature of bitcoin.]

[The Singapore International Commercial Court applied the laws of contract in what has since become the country’s landmark case on cryptocurrency: B2C2 Ltd v Quoine Pte Ltd [2017] SGHC(I) 03. Unlike the Luno case, the exchange Quoine managed to reverse the trades (after a technical glitch in quotes) and directly deducted the amount from the customer’s account. The customer claimed that the reversal was wrongful. The long and short of it, Quoine has a contractual clause in its risk disclosure statement that enabled it to cancel any transaction that “took effect based on an aberrant value’; and the question was whether there was breach of contract and breach of trust in reversing the trades.]

F. CONCLUDING REMARKS

Ed:       How satisfied is your client with the outcome? It’s interesting how the price volatility of bitcoin plays a role this case. When we look at the Mt Gox bankruptcy case and the lengthy recovery process that ensued. The Tokyo District Court ultimately let the bitcoins owed be reimbursed at current prices.

Faisal:   Yes, they are satisfied with the outcome of the case so far. On a more serious note, without express legislation, there are currently no right or wrong answers to such legal issues. What is essential is that no party is put to unnecessary and unjust expense when the price of cryptocurrency is still extremely volatile. In this case, I am of the view that my client was rightfully awarded what it had lost.

Ed:       We won’t ask for comments on the appeal process as it is still ongoing. The legal certainty that this ruling brings is conducive to industry growth and attracts foreign investors. In your opinion, what areas should our legislature focus on to grow this further?

Faisal:   Primarily, our legislature should take an active step in defining the parameters of legal accountability of the exchange platforms and the governing the enforceability and validity of cryptocurrency transactions. Traditional contract laws can be applicable as can be seen in this case but of course having specific legislation to deal with such transactions removes any doubt. The legislature should also deal with unregulated exchange platforms where a large volumes of cryptocurrency transactions are still facilitated.

Ed:       Nowadays, exchanges carry comprehensive clauses on error trades and reversals in their Terms of Use (see Part 3 of this article). Would you say the industry has learnt its lesson?

Faisal:   Yes. However, with that being said, it is essential for the industry to step up in upholding its standard operating procedures and taking a higher level of accountability in their respective blockchain technology to minimize errors.

Ed:       Finally, two questions: Did you have any prior experience in trading cryptocurrencies before this case?

Faisal:   Frankly speaking, I have no personal experience of trading cryptocurrencies. It is not part of my personal investment strategy at present although given more certainty this could change.

Ed:       There are many aspiring lawyers who are trying to make a mark for themselves in this nascent space. Even large law firms are trying to draw in crypto files. Any advice?

Faisal:   I don’t normally offer advice to my competitors. That’s is just bad business strategy.

Ed:       Touche! Just wasted my last question.

Faisal:   Try again.

Ed:       Okay I’ve got one. Is the Liverpool jersey your lucky charm for this case? They are having a winning streak.

Faisal:   (smiles)

Do you know your Terms of Use and what to do when you have a dispute in your hands?

by Edmund Yong

G. KNOW YOUR TERMS

How an exchange responds to error trades is stated in their Terms of Use (TOU). Here is a comparison of Luno with other global platforms Coinbase (outside USA) and Binance.

Note: Only Luno is fully operational in Malaysia and authorized by the Securities Commission to accept new customers at time of writing. The terms (italics added) are extracted from the respective websites on Jan 3, 2020.

H. IS SIDREC AN OPTION?

What other option is there for customers who are dissatisfied with the DAX’s complaint handling process, and do not want to litigate i.e. spend time and money to go trial? There is an alternative dispute resolution channel under the auspices of regulators. But does it cover DAX?

The Securities Commission has an approved body called the Securities Industry Dispute Resolution Center (SIDREC) to facilitate capital market–related disputes involving monetary claims by investors against its members. It is similar to the Financial Mediation Bureau, renamed as Ombudsman for Financial Services, set up by Bank Negara Malaysia to mediate banking and insurance-related complaints between financial institutions and the consumer public.

SIDREC’s service is free for retail investors for claims not exceeding RM250,000 and enables them to have access to redress through a fair and independent expert platform. The claimant can choose to accept the decision of the SIDREC adjudicator or pursue other legal recourse. Accordingly, once the claimant accepts the decision, he or she will be bound to enter into the settlement agreement and award prescribed.

For claims above the amount of RM250,000, it is subject to a reasonable fee and requires the agreement of both parties to use SIDREC’s dispute resolution service under its Voluntary Scheme. This scheme also permits legal counsels of both parties to participate in the process. There are instances where the Courts refer cases to SIDREC for mediation.

SIDREC members comprise of capital market intermediaries and those who are authorized by SC to deal in securities and undertake fund management. Generally, they include commercial banks, stockbrokers, fund managers, distributors, financial advisers, among others, who are licensed under the Capital Market and Services Act (CMSA) to conduct regulated activities in Malaysia.

Furthermore, SIDREC members must participate in SIDREC’s dispute resolution process should an investor lodge a dispute against any of them. Nonetheless, one is advised to lodge a formal complaint to the SIDREC member concerned first before escalating to SIDREC.

According to its annual report, SIDREC received 440 claims and enquiries in 2018. More than 90% of the eligible claims going through SIDREC’s dispute resolution were resolved through case management and mediation. The turnaround time for resolution is within 90 days from receipt of claim and documentation from both parties, though this may be extended at SIDREC’s discretion depending on the nature of the case.

Having said that, it appears that there are no DAX operators listed as SIDREC members. We are informed by the SIDREC office when we enquired that it handles matters regarding shares, bonds, warrants, unit trusts and private retirement schemes, but not cryptocurrencies at this stage. Given the success of SIDREC, this could be something for policy makers to consider in the future should the need justifies.

Important Disclaimer: Please do not rely on this article in any form as legal advice. It has been prepared for general information purpose only and is not a substitute for legal advice. You must consult a qualified lawyer for your own situation.

Acknowledgments: Faisal Moideen for taking time out to do this interview. He can be reached at +603-6205 9288. Also to my late professor Wickrema Weerasooria of Monash University who practically wrote the textbook on banking law in Australia. 

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