DIFC Court of Appeal clarifies law on crypto assets

A recent judgment issued by Justice Michael Black KC in the case of Gate Mena DMCC & Huobi Mena FZE v Tabarak Investment Capital Limited & Christian Thurner has provided much-needed clarity on the legal status of crypto assets, recognising them as a distinct third category of property.

The judgment is significant for its analysis of the proprietary nature of crypto assets, its examination of the duties and potential liability of intermediaries in crypto transactions, and its implications for the evolving legal landscape in the Dubai International Financial Centre (DIFC) following the recent enactment of the Digital Assets Law in 2024.

Dispute summary

This case centred around an attempt by Gate Mena DMCC (formerly Huobi OTC DMCC) and Huobi Mena FZE to sell 300 Bitcoin (BTC) to a Slovakian company, Navarcon s.r.o., in February 2020. The transaction, which was intended to be a straightforward sale of crypto assets in exchange for fiat currency, quickly turned into a cautionary saga about the risks and challenges of operating in the still largely uncharted territory of the digital assets space.

To facilitate the deal and provide an additional layer of security, the parties engaged the services of Tabarak Investment Capital Limited, a DIFC-based investment firm, and its employee Christian Thurner, to act as intermediaries. Under the initial agreement, Tabarak was to receive the 300 BTC from the sellers into its own wallet and only release them to the buyer, Navarcon, upon confirmation of receipt of the purchase price into Tabarak’s account. This arrangement was intended to provide a measure of protection for both sides, ensuring that the BTC would not be transferred prematurely and that the sellers would receive the agreed-upon consideration.

However, the plans quickly unraveled during the crucial transaction meeting on 3 February 2020. In an unexpected twist, Navarcon’ representatives, Evgeniy Morozov and Aleksij Socin, insisted on using a new Trezor hardware wallet that they had brought to the meeting, rather than proceeding with the transfer to Tabarak’s wallet as initially agreed. This last-minute change in the transaction modalities would prove to be the fatal flaw that ultimately led to the loss of the 300 BTC.

Despite the concerns raised by Gate Mena and Huobi’s representatives about the sudden departure from the agreed-upon protocol, the parties proceeded with the transaction using the new Trezor wallet provided by Navarcon. It was only later discovered that Morozov and Socin had likely exploited a vulnerability in the wallet set-up process, which allowed them to gain control of the BTC without having to provide the payment that had been promised. By the time the deception came to light, the 300 BTC had already been transferred out of the Trezor wallet, leaving Gate Mena and Huobi empty-handed and without recourse against the now-vanished buyers.

Faced with the loss of their crypto assets and the apparent betrayal by their counterparties, Gate Mena and Huobi turned to the DIFC Courts for relief, bringing a range of claims against Tabarak and Thurner. These claims included breach of contract, breach of confidence, bailment, negligence, and breach of fiduciary duty, with the claimants arguing that the intermediaries had failed in their obligations to safeguard the BTC and ensure that the transaction was carried out as agreed.

At first instance, the DIFC Court dismissed all the claims brought by Gate Mena and Huobi, finding that Tabarak and Thurner had not breached any legal duties or obligations owed to the claimants. However, the claimants were not prepared to accept this outcome and pursued an appeal to the DIFC Court of Appeal, which upheld the dismissal of most of the grounds of appeal. It did, however, allow one ground in part, ordering a retrial on the narrow issue of whether a binding agreement arose after the change in transaction modalities on 3 February 2020.

Key aspects of the judgment

There are a number of significant aspects of the judgment worth noting, which are as follows:

1. Crypto assets as a new category of property

The Court of Appeal endorsed the English High Court’s analysis in AA v Persons Unknown, holding that crypto assets constitute a distinct third category of property, different from things in possession and things in action. The Judge emphasised that the critical feature is the ability to exercise control over the asset, stating:

“I accept that the concept of control (both in its negative and positive senses) is the most apposite way of expressing ‘possession’ of a crypto asset.”

This is a significant development in the legal recognition of crypto assets as a form of property capable of being owned and transferred. It provides greater certainty for investors and market participants in the DIFC and aligns with the position in other leading common law jurisdictions. The focus on control as the defining attribute of possession is practical and reflective of the unique characteristics of crypto assets.

2. Contractual liability and retrial

The Court upheld the finding that no binding contract arose initially due to the non-fulfillment of a condition precedent. However, it ordered a retrial on the alternative case that a contract may have been formed through the parties’ subsequent conduct after the change in transaction modalities.

This ruling highlights the importance of clear and comprehensive contractual terms in crypto asset transactions, particularly if the modalities evolve during the deal. Intermediaries should be cautious about potential liability arising from their conduct and representations, even in the absence of a formally concluded agreement.

3. Duties of intermediaries

The Court dismissed the claims for breach of confidence, negligence, and breach of fiduciary duty against the intermediaries. It found no misuse of confidential information, no assumption of responsibility or reliance required for a duty of care, and no fiduciary relationship on the facts.

While the Court did not find liability on the specific facts, the judgment underscores the need for intermediaries in crypto transactions to be clear about the scope of their duties and potential liability exposure. Careful drafting of terms and conditions, including limitations of liability where appropriate, can help manage these risks.

A cautionary tale for crypto transactions

As Justice Michael Black KC aptly noted in the judgment:

“The cruel fact is that both Huobi and Tabarak acted under the innocent misapprehension that the modalities that the Judge found had been agreed between Huobi and the Buyers were sufficient to protect the BTC until payment. In the event they were not.”

This case serves as a cautionary tale for parties engaging in crypto asset transactions, highlighting the importance of robust contractual frameworks, clear delineation of duties, and due diligence in potential vulnerabilities in transaction modalities. As the legal infrastructure around crypto assets continues to develop, market participants will need to navigate this evolving landscape with care and attention to the emerging legal principles and regulatory frameworks.

If you or your organisation are facing issues related to the recovery of digital assets, or are involved in disputes similar to those highlighted in the Gate Mena DMCC & Huobi Mena FZE v Tabarak Investment Capital Limited & Christian Thurner case, please do not hesitate to contact us.

Our team of experienced lawyers, with expertise spanning the DIFC, UAE, and international jurisdictions, is at the forefront of the rapidly evolving legal landscape surrounding crypto assets and digital finance. We have a proven track record of successfully representing clients in complex, high-value disputes and can provide the strategic advice and robust advocacy needed to protect your interests and navigate the challenges of operating in this dynamic space.

Whether you need assistance with the recovery of misappropriated crypto assets, guidance on the structuring of digital asset transactions, or representation in litigation or arbitration proceedings, Gateley has the knowledge, experience, and global reach to deliver the results you need.