Crypto Hub of Asia Has First Legal Battle Decided
By Greg Browne, Associate Editor
Singapore’s Court of Appeals just ruled on its first legal dispute involving cryptocurrency. Four out of five judges concluded that Quoine Exchange, one of the world’s major bitcoin exchange operators, should pay damages for wrongfully reversing seven transactions on its platform in April of 2017. What is most interesting about this case is that the actors of both parties were a bunch of algorithms; there was no human error involved.
In April 2017, B2C2, an electronic market maker, successfully sold 309 ether for 3,092 bitcoins, generating a profit of $3.7 million. Quoine claimed a glitch arose as it was reconfiguring passwords for its hacker defense systems that severely disrupted its ability to retrieve actual market prices for bitcoin and ethereum. Specifically, Quoine, which operates by deriving its price from other crypto exchanges, was unable to aggregate prices for both cryptocurrencies because of the glitch. Reacting to this, B2C2’s trading software initiated an emergency fail-safe price of 10 bitcoins for 1 ether. The $3.7 resulting profit attracted the attention of Quoine, which cancelled the transactions the next day.
Citing the terms of its trading contract with the exchange, B2C2 claimed Quoine acted “fraudulently” because orders were supposed to be “irreversible” once filed. Conversely, Quoine claimed B2C2 was being “opportunistic and seeking to profit from a technical glitch.” Quoine also argued that the trades “were inadvertently” executed at the “abnormal rate of…10 bitcoins for one ethereum, which was approximately 125 times higher than the actual market price of ethereum.”
In March of 2019, the Singapore International Commercial Court found that Quoine was liable for “breach of contract and breach of trust.” Quoine subsequently filed for an appeal.
The Court of Appeal focused their analysis on how the legal doctrine of “mistake” should be applied when contracts were drawn up and executed by computer systems with limited human involvement. Under the doctrine of mistake, if one or both parties enter into a contract under a misapprehension of its basis, or of an important aspect of the transaction, the contract may be either completely void or voidable. In rejecting Quoine’s argument, four out of five judges reasoned that it is the programmer’s state of knowledge that is relevant in the context of digital agreements between a computer system and a participant on the platform. The majority opined that there was no mistake in the terms of the trading contract between B2C2 and Quoine, and even if there was a flaw, B2C2’s trading software was unaware of it when executing the orders.
In 2018, Singapore became the crypto hub of Asia when it allowed any firm using technology in an innovative way to provide financial services to apply for a three year regulatory sandbox. As Su Zhu, CEO of Three Arrows Capital and partner to Deribit Exchange, stated in a tweet, this decision “has some implications…for any other crypto exchanges who may believe they can reverse customer trades if necessary.”
Selina Lum, Cryptocurrency exchange operator ruled in breach of contract, Straits Times (Feb. 25, 2020, 5:00 AM SGT)available athttps://www.straitstimes.com/singapore/courts-crime/cryptocurrency-exchange-operator-ruled-in-breach-of-contract(last visited Feb. 25, 2020).
Nivesh Rustgi, First Cryptocurrency Court Case in Singapore rules Exchange to pay for a Glitch, CoinGape (Feb. 25, 2020) available at https://coingape.com/first-cryptocurrency-court-case-singapore/(last visited Feb. 25, 2020).
Grace Leong, Bitcoin exchange operator sued in Singapore, Strait Times (Jul. 31, 2017, 5:00 AM SGT) available at https://www.straitstimes.com/business/companies-markets/bitcoin-exchange-operator-sued-in-spore(last visited Feb. 25, 2020).
Sebastian Sinclair, Singapore’s Court of Appeals Rules Against Quoine Exchange in Landmark Crypto Case, coindesk (Feb. 25, 2020 at 08:00 UTC) available athttps://www.coindesk.com/singapores-court-of-appeals-rules-quoine-exchange-in-breach-of-contract-in-landmark-crypto-case(last visited Feb. 25, 2020).
Chapter 08 – The Law of Contract, Singapore Law Watch available at https://www.singaporelawwatch.sg/About-Singapore-Law/Commercial-Law/ch-08-the-law-of-contract(last visited Feb. 25, 2020).