Bitcoin trial: Firm found in breach of contract, trust

Exchange operator ordered to pay damages over reversal of orders

A cryptocurrency exchange operator has been found in breach of contract and trust over a reversal of orders on its platform, the Singapore International Commercial Court (SICC) ruled yesterday.

Singapore-registered platform Quoine has been ordered to pay electronic market maker B2C2 damages, with the sum to be agreed on at a later date. The judgment comes after Singapore's first trial involving the cryptocurrency bitcoin, in which B2C2 sued Quoine over a unilateral reversal of seven orders on its platform.

According to data provider Coinmarketcap, the disputed amount of bitcoin translates to about US$12 million (S$16.28 million).

B2C2 had placed the orders in April 2017 to sell the cryptocurrency ethereum for bitcoin at a rate of 10 bitcoins for one ethereum. The trades were reversed the next day. B2C2 said the reversals were wrongful and led to proceeds being deducted without authorisation, and sought to recover around 3,085 bitcoins.

Although SICC International Judge Simon Thorley ruled in B2C2's favour, he did not order Quoine to transfer the bitcoins in question.

Instead, in his judgment yesterday, he said the compelling factor against such an order is that the bitcoin transfer would take place at today's price, "substantially higher than the price in April 2017 when the trades were executed".

He added: "When the bitcoins were originally credited to its account, the B2C2 software immediately began to hedge the proceeds by selling bitcoin. Before the trades were reversed, B2C2's systems had sold slightly under one third of proceeds on nine different exchanges."

He was referring to B2C2's market maker role, meaning it buys and sells financial instruments, hoping to profit on the bid-offer spreads.

In these circumstances, the judge said, ordering the bitcoins to be repaid to B2C2 "would cause substantial hardship to Quoine".

B2C2, represented by lawyers led by Mr Danny Ong of Rajah & Tann, earlier argued also that damages would not be adequate given the volatility of cryptocurrencies, meaning their value is hard to ascertain and damages, tough to assess. The judge disagreed, saying the courts are accustomed to such assessments.

The judge ruled that Quoine was in breach of contract and trust. Noting members' assets are held separately from Quoine's, and they can demand withdrawal at any time, this shows Quoine intended to hold the assets on trust for members. If Quoine was not entitled to reverse the trades, the unilateral removal of bitcoins from B2C2's account was a breach of trust.

Quoine, represented by a team led by Mr Paul Ong of Allen and Gledhill, had earlier said a glitch in its quoter program, leading up to the disputed trades, made it unable to access external market price data for the two cryptocurrencies. Due to the glitch, the program stopped creating or placing new orders involving these currencies, causing liquidity issues and, therefore, problems with B2C2's orders. These were priced about 250 times higher than the average price these currencies traded at on the platform.

Noting the contract between both parties is valid as well, the judgment said: "B2C2 was enriched because Quoine failed to take any of the steps necessary to protect itself (or others)... this is not a case of B2C2 getting an unjustified windfall."

In a statement, Quoine chief executive Mike Kayamori said: "We are reviewing the judgment and considering our options, including the possibility of an appeal."

A version of this article appeared in the print edition of The Straits Times on March 15, 2019, with the headline 'Bitcoin trial: Firm found in breach of contract, trust'. Subscribe