Written by Team Farallon
Purpose – The aim of this article is to dissect the various aspects of the recent Singapore High Court Judgment in Fantom Foundation v Multichain Foundation Ltd & Anor [2024] SGHC 173. In doing so, this article seeks to set out the grounds of the Singapore High Court’s decision and to identify the key takeaways when it comes to valuing cryptocurrency as damages in lawsuits.
Design/methodology/approach – The research for the article is based on evidence from the court hearings, cause papers for the case, and various media reports and articles written about this case.
Originality/value – This article builds on the findings of the Singapore High Court and the cause papers written in relation to the case. This article also builds on the applicable case law on cryptocurrency and the valuation of damages in Singapore in recent cases.
Keywords – Singapore, Valuation Cryptocurrency, Damages, Assessment
Paper type – Article
Since the ruling by the High Court of Singapore in 2022 in the case of CLM v CLN¹, cryptocurrencies have been recognized and classified as property under Singapore law. The current legal framework allows individuals and businesses to buy, sell, and use cryptocurrencies for a range of purposes, including investments and payments.
The characteristics of cryptocurrency allow it to be recognized as property. It is capable of being allocated to an account holder on a particular network and as such, is able to be isolated from other assets whether of the same type or of other types and thereby indefinable by third parties. An owner of a cryptocurrency has the power to exclude others from using or benefiting from the asset by using their private key to transfer the cryptocurrency from one wallet to another. Additionally, cryptocurrency is the subject of active trading markets so it has a degree of permanence that is fully recognized in existence.
According to ByBit Fintech Ltd v Ho Kai Xin and others², the holder of a crypto asset has in principle an incorporeal right of property recognizable by the common law as a thing in action and so enforceable in Court. The enforceability of an individual’s or businesses’ right to cryptocurrencies is vital as it has compelled the Courts to also acknowledge the formation of ‘smart contracts’, which is essentially a digital agreement signed and stored on a blockchain network that executes automatically when the contract’s terms and conditions are met. The terms and conditions are written in blockchain-specific programming languages and lines of computer code.
While cryptocurrencies like Bitcoin and Ethereum are the most well-known applications of blockchain technology, Singapore also supports blockchain-based solutions more broadly and the country has developed laws and regulations to acknowledge the use of smart contracts to encourage the use of blockchain in various industries.
Traditional contract law establishes the legal framework that enables smart contracts to function, where legal issues and disputes arising in connection with such smart contracts involving cryptocurrency, are able to be resolved at law.
This revolutionary concept of smart contracts is gaining traction and while they offer significant benefits, they also present challenges related to legal enforcement for the breach of said smart contracts. On 8 July 2024, the Singapore High Court in Fantom Foundation Ltd v Multichain Foundation Ltd and another³ turned to this novel area of law.
This article seeks to set out the grounds of the Singapore High Court’s decision in Fantom and identify the key takeaways when it comes to valuing cryptocurrency as damages in lawsuits.
On 18 September 2023, the Claimant filed a lawsuit against the Defendants and was granted a default judgment on 30 January 2024. The Fantom case relates to the assessment of damages arising from the default judgment obtained by the Claimant against the Defendants.
The damages arose from the breach of two smart contracts between the Claimant and the Defendants. To truly understand how the Court arrived at its valuation of the cryptocurrency assets, the factual matrix of Fantom should be analyzed.
The 1st Defendant in the lawsuit operates the “Multichain Bridge” (then known as Anyswap), a cross-chain bridge and router protocol that facilitates the secure and seamless transfer of cryptocurrencies across different blockchain networks. The 2nd Defendant was set up for the purposes of being involved with and/or operating the Multichain Bridge.
The Claimant operates the “Fantom blockchain network”, a platform in which users, traders, developers and platform operators can transact with cryptocurrency and other digital assets and interact with software programs operating on the Fantom blockchain network.
A general user contract for bridge access to the Multichain Bridge in which safe passage from one blockchain was offered to the world at large in exchange for a fee. The first “user agreement” smart contract was formed between the Claimant and the Defendants when the Claimant accepted said offer by making payment of a fee for its cryptocurrency assets to pass through the Multichain Bridge. A fundamental term of the user agreement was that the Multichain Bridge would hold source assets safely as collateral custodian on a 1:1 basis in a decentralized management account for the single purpose of transfer upon redemption of wrapped assets. Additionally, any bearer presenting a validly encrypted wrapped asset should be entitled to unwrap and collect the source asset as locked on their bridge.
So, the Multichain Bridge connects several distinct blockchains and facilitates the conversion of one native cryptocurrency coin from one blockchain to its equivalent token on another blockchain. The Multichain Bridge then locks a source asset on one side of the bridge while creating a digital equivalent of that asset, also known as a wrapped asset, on the other side of the bridge when can be freely transferred while the bridged asset remains verifiably locked, also known as a locked asset. The terms and conditions of the smart contract were encapsulated in the Defendants’ documentation as published on its website.4
The Claimant had deposited cryptocurrency assets with the Multichain Bridge in reliance on the user agreement smart contract. Owing to a series of unauthorized transfers in which millions of locked assets were abnormally moved out of the Multichain Bridge, there was a loss of value of the Claimant’s wrapped assets through the dissipation of its collateral locked assets (where only a nominal residual value of the stablecoins was recoverable) and the Claimant could no longer redeem its tokens for the deposited cryptocurrency assets.
The Claimant and the Defendant had also agreed for the former to provide liquidity in tranches upon the 1st Defendant’s request. The Claimant would make payments to the Multichain Bridge on the chain lacking liquidity which would be repaid shortly thereafter from the chain with excess liquidity by the 1st Defendant. This was done in consideration for a mutual increase in user traffic and the liquidity facility arrangement was the second contract formed.
Pursuant to the liquidity facility agreement, the Claimant had transferred its native coin, FTM as issued on the Fantom blockchain network. However, the transaction was never repaid by the Defendants.
The damages sought by the Claimant arose from the loss of cryptocurrency assets pursuant to the user agreement and liquidity facility agreement and this loss had to be quantified by the High Court.
At a glance, the existence of such smart contracts goes against the conventional notion of contractual arrangements between parties. We will explore how the High Court arrived at its decision in Fantom and how the law in Singapore has provided the infrastructure needed for such smart contracts to flourish.
This article will take a closer look at the challenges faced in Fantom owing to the nature of cryptocurrency since any future cases involving crypto assets will likely encounter similar issues as well.
More than $125 million in cryptocurrency was stolen from the Multichain platform globally5 so it was first necessary to establish whether there were sufficient assets within the jurisdiction to satisfy any prospective judgment. There were voluminous unauthorised transfers to unidentified wallets globally which made it laborious to trace the assets.
As part of the legal strategy in Fantom, despite the losses faced by all the potential creditors of the Defendants, it was better to opt out of combining all the potential creditors’ claims.
Instead, the lawsuit was pivoted to the Claimant’s losses to secure a default judgment against the Defendants by focusing on the low hanging fruit and lowering the complexity of the assessment of damages.
“The essence of strategy is choosing what not to do.”
– Michael E. Porter, American economist and founder of strategic management
Before commencing any lawsuit, it is crucial to establish the proper legal heads of claim to proceed with and the quantity of damages to claim for as it helps to clearly define the basis and parameters of the lawsuit. Without doing so, a case may lack focus and direction leading to confusion and potential dismissal. A key legal strategy is knowing how to craft the lawsuit papers to shape the litigation strategy that best highlights the strength of a Claimant’s claim.
Since the case involved smart contracts as opposed to the traditional contracts documented in the form of a written agreement, it can take longer to identify and interpret the provisions of the agreement and to determine whether there were any breaches of the smart contracts.
An incorrect determination of the appropriate legal action to sue under could provide an adverse party with the ammunition needed to defend against the claims. Additionally, pleading multiple legal claims could also unnecessarily divert the Court’s attention and bring focus to weaker claims that may take away from the strengths of the main causes of action against a Defendant.
A challenge in calculating the damages in cryptocurrency cases is ascertaining the appropriate dates of valuation of the assets. As a general rule, damages for breach of contract are assessed as at the date of the breach as held in the case of Tay Joo Sing v Ku Sang.6 This general rule was applied for the liquidity facility agreement in Fantom, where the date of valuation was the date of transfer of the FTM by the Claimant to the Multichain Bridge. This is because at the date of transfer, the obligation to make payment of the deposited FTM would have already materialized since a fundamental term of the agreement was for the almost immediate repayment of the FTM.
The High Court of Singapore in Justlogin Pte Ltd and another v Oversea-Chinese Banking Corp Ltd and another7 has also recognised that the general rule that damages are to be assessed as at the date of the breach is not an absolute one. The Court held that where it is necessary to compensate the Claimant adequately for the damage suffered, or if it would otherwise lead to injustice, a different date of assessment can be selected.
In Fantom, given that the unauthorised transfers from the Multichain Bridge resulted in drop in value of the Claimant’s assets, two dates were utilised for the assessment of damages under the user agreement. The first date was the day before the breach of the user agreement (namely the date of the unauthorised transfers) and the second point of valuation taken was the commencement of the lawsuit. The two points of time were used to emphasize the difference in the valuation of the cryptocurrency assets after the breach which caused the assets to the siphoned out of the Multichain Bridge. The difference in value also reflected the fact that the Claimant was prevented from redeeming the wrapped asset at a 1:1 value for the original locked assets.
In choosing the specific dates for valuation, the Claimant utilised the general principle in assessing compensatory damages in that the Claimant should be returned to the position it was in as if the breach had not occurred.8 The Claimant’s position before entering the user agreement was that it had possession, access and control over its cryptocurrency assets before placing them on the Multichain Bridge.
It was a deliberate choice to pursue a valuation of the Claimant’s claim on a conversative basis by following the general legal principles of contract law to increase the chances of obtaining a judgment in favour of the Claimant’s claims.
The Court in Fantom had agreed with the Claimant’s position on the law.9
In relation to property, Fantom adopted the principle in Toh Tiong Huat v P M Gunasaykaran (personal representative of the estate of Mayandi s/o Sinnathevar, deceased) and another10 where the measure of damages for a breach of contract on the sale and purchase of property was the market value of the property at the contractual time of completion.
In Fantom, the cryptocurrency assets lost by the Claimant was established with the market price and the available evidence based on the financial data listing extracted from CoinMarketCap, a leading cryptocurrency price-monitoring platform and SpookySwap, a decentralized exchange built on the Fantom blockchain network that dynamically calculates the rate at which a token can be swapped for another based on the amount of each token available in its liquidity pool. Both third-party platforms display the market summary of each cryptocurrency coin.
The Court in Fantom was satisfied with the evidence provided in that there would be no feasible way for the Claimant to influence the price of the compromised assets and there was no reason to believe that the valuation was in any way manipulated or inaccurate. Additionally, the judgment held that the Claimant’s method was the “closest possible proxy to the meaningful valuation of the wrapped assets” and the “methodology proposed by the Claimant was the fairest way to apprise the damages”.
However, the approach adopted in Fantom is not necessarily the definitive method of valuation in all cryptocurrency cases. The Court of Appeal in the recent case of CEF and another v CEH11 cited the case of Robertson Quay Investment Pte Ltd v Steen Consultants Pte Ltd and another,12 and held that the Court must adopt a flexible approach where it is clear that some substantial loss has been incurred and that “[d]ifferent occasions may call for different evidence with regard to certainty of proof, depending on the circumstances of the case and the nature of the damages claims.”
As cryptocurrency valuation can be complex and subject to volatility, unique market factors and regulatory nuances, expert involvement may be necessary to analyse market trends and apply relevant valuation methods to assist the Court in arriving at its decision.
Unlike traditional assets such as stocks or bonds, cryptocurrencies do not have standardized valuation models that can be universally applied. As part of the evidence used in Court for valuation, an expert’s experience and judgment may be essential to ensure accuracy and credibility for the Claimant’s claims.
Cryptocurrencies are inherently volatile by nature and difficult to trace. This presents problems to the assessment of cryptocurrency assets as damages in Court.
It is tricky to find out the true market value of cryptocurrency at any given point of time and to decide the date of valuation of the damages to calculate the losses. There is no objective value of cryptocurrency as recognized by the Court in Fantom which will prove problematic when attempting to set a standardized methodology for calculating such assets.
These complexities did not have to be addressed in Fantom and have yet to be answered in any Singapore case precedent.
The Court in Fantom realized that the default judgment obtained by the Claimant on 30 November 2023 had garnered a bit of attention in the cryptocurrency world and there was potential for market movements upon the issuance of its decision. As such, the Court held that “[i]n the face of such volatility, it is important that the relevant market players gain a holistic understanding of the decision of this court in the assessment of damages.”
Although Singapore has proactively adapted its legal and regulatory landscape to accommodate the rise of cryptocurrencies, providing clarity and fostering innovation while ensuring compliance with global financial standards, Fantom may just be another small step when it comes to valuing cryptocurrency as damages.
As the Court in Fantom held, “the final chapter on the law on the valuation of cryptocurrencies has yet to be written” and with the way the ownership of cryptocurrencies is becoming widespread, it is inevitable that the Singapore Courts will eventually have to tackle the complex issues that come with the valuation of cryptocurrency assets.
It will be fascinating to observe how the law evolves to handle the issues outlined above.
For expert assistance with any cryptocurrency disputes, contact our lawyers to learn more.
References
¹[2022] SGHC 46.
²[2023] SGHC 199 at [35]-[36].
³[2024] SGHC 173.
4https://docs.multichain.org.
5https://therecord.media/millions-stolen-from-multichain-crypto.
6[1994] 1 SLR(R) 765 at [36] and [37].
7[2007] 1 SLR(R) 42515 at [66].
8iVenture Card Ltd and others v Big Bus Singapore City Sightseeing Pte Ltd and other [2022] 1 SLR 302.
9[2024] SGHC 173 at [22].
10[1995] 3 SLR(R) 627 at [30].
11[2022] 2 SLR 918 at [115].
12[2008] 2 SLR(R) 623 at [30].
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