On 29 October 2024, the Hong Kong District Court issued the judgment of the first legal action (Chan Wing Yan and Another v. JP-EX Crypto Asset Platform Ltd and Others [2024] HKDC 1628) against JPEX, which the Hong Kong Securities and Futures Commission has identified as an unlicensed virtual asset trading platform (VATP).

The case involves two plaintiffs who had deposited USDT (Tether, a type of stablecoin) into their JPEX accounts. Among the seven defendants, WEB3.0 Technical Support Limited (referred to as “D2”) was the operator of JPEX. The key fact in this case is that D2 transferred the plaintiffs’ USDT deposits to unknown wallets without authorization.

Notably, D2 did not appear in court during the proceedings. The plaintiffs filed a motion for a default judgment against D2, arguing that D2 breached a trust by making these unauthorized transfers.

The central issue was whether there exists an express trust relationship between D2 and the plaintiffs. In this context, the judge reaffirmed the established principle that cryptocurrency is recognized as “property” and can indeed serve as the subject matter of a trust relationship, as noted in Re Gatecoin Ltd [2023] HKCFI 914.

The judge concluded that the “three certainties” necessary to establish an express trust, as outlined in Re Gatecoin, were present in this case. The key reasons for this determination were as follows:

1. Certainty of Subject Matter (i.e., property being subject to the trust):
   • Property: USDT qualifies as “property” that can be the subject of a trust.
   • Segregation: The USDT deposits were kept separate in wallets designated for the plaintiffs.
   • Trust Without Specific Appropriation: A trust can still be valid even if it pertains to a portion of a fungible mass, provided that the proportionate share of the subject matter is clearly defined.
2. Certainty of Object (i.e. class of beneficiaries of the trust)
   • The beneficiaries of the trust are certain.
3. Certainty of Intention (i.e., there is mutual intention, determined through an objective assessment, to create a trust relationship):
   • Retaining Private Keys: Not allocating private keys to users demonstrated JPEX’s intent to hold the cryptocurrencies deposited by users in trust, as it retained control over these keys.
   • Public Representations: Terms like “client funds” and “all users’ assets” in JPEX’s public announcements recognized the users’ beneficial ownership of the cryptocurrencies.
   • Role as a Cryptocurrency Exchange: JPEX presented itself as a cryptocurrency exchange, and the plaintiffs intended to entrust their assets to JPEX specifically for the purpose of depositing, trading, and investing in cryptocurrencies.

The court determined that D2 held the USDT deposits in an express trust for the plaintiffs and had breached its duties as a trustee. As a result, a default judgment was granted against D2.

This ruling is anticipated to set an important precedent for future claims against JPEX, as claimants may reference this judgment to support their own allegations of breach of trust. Additionally, other VATPs with similar structures to JPEX may also be seen as holding client assets in trust.