Parties in Dispute Over Application for Preservation of Bitcoin

Chen v Blockchain Global Ltd; Abel v Blockchain Global Ltd [2022] VSC 92 (28 February 2022)

The plaintiff applied for preservation of property.  If the seed phrase of Mr Chen or Mr Guo is lost, forgotten or corrupted, the Bitcoins will become inaccessible.  The Court, in making its orders, assessed whether destruction of the Bitcoin will vitiate the ultimate determination of the proceeding and whether an order preserving the Bitcoin will cause prejudice to the parties. 

Facts:

Mr Chen seeks relief under r 37.01(1) of the Rules.  He is the fifth defendant in proceeding no S ECI 2021 03329 (‘the Abel proceeding’) and the plaintiff in proceeding no S ECI 2020 03554 (‘the Chen proceeding’).  By a summons filed 15 November 2021 in the Chen proceeding, Mr Chen sought a mandatory injunction and/or an order under rule 37.01(1) of the Supreme Court (General Civil Procedure) Rules 2015 (“Rules”) that the Plaintiff and Second Defendant place their seed phrase in respect of the Security Wallet (as defined in the Plaintiff’s Amended Statement of Claim of 23 March 2021) into separate sealed envelopes (“Envelopes”) (the seed phrase will be verified by a member of the Court) and the Envelopes will be held in the custody of the Court pending the hearing and determination of this dispute or further order.

Mr Chen also filed a summons on 15 November 2021 in the Abel proceeding in substantially the same terms. Mr Chen does not, at this stage, seek relief in the Abel proceeding and seeks that the summons in the Abel proceeding be adjourned.   Mr Chen provided a proposed form of order in the Chen proceeding in which he sought that the Plaintiff and Second Defendant each place (and do all things necessary to place) their seed phrase in respect of the Security Wallet (as defined in the Plaintiff’s Amended Statement of Claim of 23 March 2021) into separate sealed envelopes (“Envelopes”) (each seed phrase will be verified by a member of the Court or by an affidavit from the that party’s solicitor confirming the veracity of the seed phrase) and  the Envelopes will be held in the custody of the Court pending the hearing and determination of this dispute or until further order.

As at 10 September 2021, the value of the Bitcoins was approximately $10,344,904.30 AUD.  The price of Bitcoin is extremely volatile.   It has lost 30% of its value since November 2021.  On 13 September 2021, the Court made a freezing order, upon the application by the plaintiffs in the Abel proceeding, in respect of the Bitcoins.

On 16 September 2021, the Court extended the freezing order until trial or further order.  The plaintiffs in the Abel proceeding relied upon an article published in the Australian Financial Review (the Article) outlining the existence of 117.33 Bitcoins which are the central focus of ongoing litigation.  The Security Wallet is a ‘2 of 2’ wallet which means that 2 out of 2 signatories need to authorise a transaction to make a transfer out of it.  As a result, the Bitcoins are accessible only by Mr Chen and Mr Guo entering their respective seed phrases into certain software.

In the event that the seed phrase of Mr Chen or Mr Guo is lost, forgotten or corrupted, the Bitcoins will become inaccessible.  All the Defendants claim ownership of the 117.33 Bitcoins, and therefore there is a possibility of either removing, disposing or dealing with the 117.33 Bitcoins to avoid any payment to the Plaintiffs.   The disposal of the 117.33 Bitcoins may result in a judgement which cannot be satisfied.

Issues:

I. Whether an order preserving the Bitcoin is relevant to the cause of action.

II. Whether destruction of the Bitcoin will vitiate the ultimate determination of the proceeding.

III. Whether an order preserving the Bitcoin will cause prejudice to the parties. 

Applicable law:

Supreme Court (General Civil Procedure) Rules 2015 (Vic) s 37.01(1)  - expressly grants the Court broad power to make an order for the interim preservation of any property in specie, whether or not in the possession, custody or power of any party. 

Greenberger v State of Victoria [2008] VSC 357 - provides that rule 37.01 or its various predecessors has been considered on several occasions by judges of this court. Each of those cases demonstrate that on such an application a court would not investigate the merits of a particular claim.

Pizzey Properties Pty Ltd v Edelstein [1977] VicRp 19; [1977] VR 161 - provides that orders should not be made for the purpose of giving security for the satisfaction of a money judgment or in lieu of other orders restraining a party from behaving in a particular way which may be available in other circumstances under the rules. 

Johnson v Tobacco Leaf Marketing Board [1967] VicRp 45; [1967] VR 427 - provides that when an application is based upon the provisions of that rule, an inquiry into the merits is not required. 

Analysis:

The Court’s proposed orders do not involve Mr Guo disturbing the safe storage of the single piece of paper that presently records his seed phrase.  That seed phrase may be readily copied in situ by photographing it or recording the seed phrase.  Mr Guo’s present single piece of paper concerning his seed phrase may remain where it is presently stored.  The Court’s proposed orders do not require Mr Guo to provide a record of the seed phrase ‘forthwith’ but gives him a reasonable time to arrange this. 

In the event that Mr Guo cannot comply with the orders of the Court, he will have the opportunity to provide that explanation to the Court.  The Court’s proposed orders allow the issue of verification to be properly addressed by the parties and considered by the Court.  Mr Chen’s proposed course of verification is, at present, based upon a step-by-step guide created by Mr Chen.  The Court is not in a position, upon the present material, to evaluate that process.  Further, there is no prejudice in the issue of verification being considered once the seed phrases are obtained.

Conclusion:

The Court adjourns Mr Chen’s summons in the Abel proceeding and reserves the costs.  Relief is granted in the Chen proceeding substantially in the form of the Court’s proposed orders.  It is the court's preliminary view that the issue of costs should be adjourned together with the further hearing of Mr Chen’s summons.  The parties are directed to confer and provide a form of orders to the Court by no later than 10:00am tomorrow or provide their form of order to the Court by that time and the matter will then be listed tomorrow.  The Court will shortly circulate a draft form of order to facilitate that conferral.

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