Preserving Bitcoin – Chen v Blockchain Global Ltd [2022] VSC92

In the recent case of Chen v Blockchain Global Ltd [2022] VSC92, the Supreme Court of Victoria made preservation orders in relation to personal property in the form of 117.33 Bitcoin (the Bitcoin).  The Bitcoin were stored in a security wallet that was protected by password protected by two distinct codes called “seed phrases”.

The Court was asked to make orders under Rule 37.01(1) of the Supreme Court (General Civil Procedure) Rules 2015.  The purpose of that rule was to preserve property that the plaintiff considered was at risk.  The principal concern was that without both of the seed phrases there was no access to the Bitcoin.  In effect if either seed phrase was lost the Bitcoin would effectively be destroyed because it would be inaccessible forever.  That issue is relevant to the Court because the Bitcoin was the subject of a freezing order dated 13 September 2021 which would have been vitiated if the Bitcoin was destroyed.

The plaintiff wanted the Court to order that both seed phrases be immediately placed into an envelope to be verified by a member of the Court.  That way if either seed phrase was lost the Bitcoin would still be accessible.

In argument between the parties it became apparent that the defendant had his seed phrase stored on a single piece of paper that was kept in a “safe location” within China.  Recent travel restrictions had prevented him from checking on the safety of that seed phrase but he believed there was no reason for concern.

Application

In order to apply Rule 37.01 the plaintiff had to show:

(a) The Bitcoin comprised the subject matter of Court proceedings; and
(b) If the Bitcoin was destroyed, because either or both of the seed phrases was lost, a judgment of the Court in relation to the Bitcoin would be vitiated.

The Court was satisfied that the orders sought should be made, essentially because:
The Bitcoin comprised the subject matter of Court proceedings; and

If the Bitcoin was destroyed, because either or both of the seed phrases was lost, a judgment of the Court in relation to the Bitcoin would be vitiated.

The Court was concerned that the Bitcoin might be destroyed because:

1. The defendant could not reach his seed phrase;
2. The defendant’s seed phrase was recorded on a single piece of paper;
3. There was no evidence about where in China the seed phrase was stored or why the defendant considered it to be “safe”.
4. The defendant could not actually be certain that the piece of paper containing the seed phrase was either safe or available.
5. Counsel for the defendant conceded that there was “some risk” that the seed phrase could be lost.
6. Losing the seed phrase would effectively destroy the Bitcoin which had no value if it could not be accessed.

The Court considered that the proposed orders were no more than was reasonably necessary to preserve the Bitcoin and there was no prejudice to the defendant in circumstances where:

1. The seed phrase could easily be copied or photographed.
2. A reasonable time would be allowed for compliance.
3. If the defendant could not comply with the orders, it would get the opportunity to explain the reasons.
4. The orders will allow verification of the Bitcoin.
5. The orders did not involve an actual Bitcoin transaction.
6. The orders would result in both seed phrases being stored in safe places – thereby preserving access to the Bitcoin.
7. It would not disrupt the arrangement between the plaintiff and the defendant because at any time both were presently able to make copies of their respective seed phrases.

Conclusion

As technological advances create new types of property, such as Bitcoin, it is heartening to see that the concept of property and preservation of that property so that Court orders are not vitiated, not only remains a priority of the Court but something it is readily able to deal with under the current law.  One of the potential difficulties with this case was the fact that Bitcoin is an unregulated currency and therefore the plaintiff had been concerned that if the defendant’s seed phrase had been lost, there would have been no way to access the Bitcoin because it was unregulated.  The approach taken by the Court in this case was a practical and sensible measure to guard against the potential issue created by the unregulated nature of Bitcoin.  It is probable that this or a similar issue will come up again because technology continues to develop new types of property and ways to create wealth.

Liability limited by a scheme approved under Professional Standards Legislation