Cryptocurrency: A perspective from Singapore

Investors suffered very significant losses as a result of the wave of collapses in the crypto sector in 2022.¹ Some of those investors have now turned to regulators and the Courts for assistance.

Governments and regulators presently face the unenviable task of making and amending laws to deal with cryptocurrency's immersion into the lives of everyday people and the mainstream economy. Courts, judges and lawyers have had to, in the meantime, grapple with interpreting and applying existing law and legal principles that have been around for centuries (much like gold coins and paper money) to cryptocurrency.

Brave new world of jurisprudence

The Singapore Courts have embraced this challenge head-on, particularly in the context of restructuring and insolvency law. Three recent decisions illustrate the willingness of Singapore courts to engage flexibly and pragmatically with the legal issues presented by cryptocurrency all while upholding quintessential legal principles, solidifying Singapore's position as an international cryptocurrency (and debt restructuring) hub.

Re Babel Holding Ltd and other matters [2023] SGHC 98 (Re Babel)

In Re Babel, the High Court of Singapore was presented with applications by companies affiliated with the "Babel Finance" brand (the BF Group), which engage in a range of cryptocurrency-related business activities. The applicants included entities incorporated in the Cayman Islands, the British Virgin Islands, and Hong Kong.

In essence, the BF Group sought moratoria extensions under Section 64 of Singapore's Insolvency, Restructuring and Dissolution Act (IRDA) in order to secure "breathing space" to formulate a restructuring plan, which would be implemented via a scheme of arrangement (the Scheme).

The Scheme proposed included a plan for the substantive consolidation of the assets and liabilities of the entire BF Group, and a deed poll structure which would allow a Singapore subsidiary to become a primary co-obligor for claims against the entire BF Group. This in turn would make Singapore the centre from which the worldwide restructuring would be conducted. It was further proposed that customers' deficits would be converted into tokens issued by Babel Finance, "Babel Recovery Coins", and pegged to certain cryptocurrencies. The BF Group also concurrently sought sealing orders, in order to safeguard commercially sensitive information in its documents.

The objecting creditor, DRB Panama Inc, argued that both applications ought not be allowed. It argued that: (i) the moratoria extensions were not bona fide as amongst other things, the BF Group had omitted the identities of its creditors; (ii) several of the entities in the group were incorporated outside of Singapore and had no substantial connection to Singapore; and (iii) the Scheme was unworkable. It also argued, with regard to the sealing application, that there was a need for the Scheme creditors to be able to consult with each other on the extension of moratoria and how their interests might best be protected.

The Court ultimately allowed both the applications for the extension of moratoria and the sealing of the file. In granting the extension application, the Court's primary considerations were that: (i) the applicants incorporated outside of Singapore did in fact have a substantial connection with Singapore; (ii) the applications had been made bona fide; and (iii) there was a reasonable prospect of the Scheme's success. In granting the sealing application, the Court balanced the competing interests in play and accepted the BF Group's argument that it was necessary to safeguard the identity of the Group's creditors.

Several aspects of this judgment stand out:

1. First was the Court's suggestion that a scheme of arrangement may be proposed on the substantive consolidation of the assets and liabilities of the various entities within the BF Group (similar to what at times may occur in US chapter 11 cases). This is notable because, under Singapore law, companies within a group are usually treated as separate entities. Ordinarily, therefore, each of these companies would have to file separate applications for their respective schemes of arrangement. Restructuring and insolvency practitioners will be eagerly waiting to see if this ultimately means that a scheme of arrangement can in specific circumstances override this general rule, as this may result in the saving of substantial time and costs.
2. Second was the Court's acceptance of the BF Group's argument that it was necessary to safeguard the identity of the Group's creditors, in order to prevent these creditors from suffering a potentially negative market reaction to news of their exposure to the BF Group. The Court stated that prevention of such a potentially negative reaction would be more pressing than the need to allow creditors to consult with each other on the extension of moratoria. In our view, this was an extremely commercial and prescient decision, as the recent spate of cryptocurrency restructuring and insolvency filings in the US have led to such a contagion effect -- even despite efforts by most US Courts to similarly seal creditor identity in the cryptocurrency chapter 11 cases.

Re Zipmex Pte Ltd and other matters [2023] SGHC 88 (Re Zipmex)

One of the purposes of a "pre-packaged" scheme of arrangement under Section 71 of Singapore's IRDA is to expedite the implementation of the scheme by circumventing the need to convene a creditors' meeting to secure votes for the passing of the scheme. The applicant must nonetheless satisfy the Court that the requisite threshold of 75 percent in value and a majority in number of each class of creditors would be satisfied if a creditors' meeting had been held, in order to obtain the Court's sanction.

This presented a challenge in Re Zipmex, which concerned such an application by a group of companies operating a cryptocurrency trading platform through the "Zipmex App" (the Zipmex Group). Of the 70,000 creditors of the Zipmex Group, approximately 67,130 creditors (approximately 96 percent) had "withheld assets" which were below US$5,000 in value. These sums were but a fraction of the Zipmex Group's debts, which were in the tens of millions of dollars. The remainder of the Zipmex Group's debts were held by only approximately 2,870 vendor creditors (i.e. 4.1 percent of the total number of creditors), who were placed in a separate voting class.

The practical effect of the above arrangement was that in order to have its pre-packaged schemes sanctioned, the Zipmex Group would have to obtain the requisite approval by the class comprised of these 67,130 creditors even though the vendor creditors, who held the majority of the debt, had expressed overwhelming support for the scheme. This would be unduly burdensome on the restructuring entities, from an administrative standpoint.

The Zipmex Group's solution to obviate this requirement was to propose the creation of an "administrative convenience class", under which the 67,130 creditors would be excluded from the voting exercise, unless they indicated their desire to participate in it. The rationale for this was to lessen the administrative burden on the Zipmex Group in conducting the voting exercise. They relied on amongst other things, jurisprudence under Section 1122(b) of the US Bankruptcy Code, which permits the proponent of a plan to designate a separate class as "reasonable and necessary for administrative convenience", for all unsecured claims less than a specified dollar amount."

The Singapore High Court allowed the Zipmex Group's application for approval of the pre-packaged schemes, including the use of the administrative class. In particular, it agreed that "some compromise of strict rights and equitableness is sometimes required for the sake of efficacy and feasibility", and that "a poll of all 70,000 or so here would not be workable for the applicants, at least in a reasonable amount of time and at reasonable cost". In terms of the statutory mechanism which would allow the Court to create a new administrative convenience class, the Court relied on Section 210(3AB) of the Singapore Companies Act, which provides that "unless the Court orders otherwise", a majority in number of creditors must approve a scheme in order for that scheme to be binding. It considered that the aforementioned phrase "allows leeway to the Court to redefine the majority required for approval".

A key factor taken into consideration by the Court however, was that there would be no undue prejudice to the creditors within the administrative class. In this case, it accepted that there was no undue prejudice as there would be some quid pro quo (in the form of full payment) for the deemed consent to be taken from the creditors within this class, and that these creditors would still be able to vote, if they opted in.

This decision, in our view, was yet another extremely commercial decision which demonstrates the flexibility and pragmatism of the Singapore Courts. The Singapore High Court was willing to examine and adopt the practices of the Courts in other jurisdictions to deal with the unique problem presented by the facts of the Re Zipmex case (and undoubtedly other cryptocurrency restructuring filings) to reach a fair and practical solution, within the existing legal framework under Singapore law.

Algorand Foundation Ltd v Three Arrows Capital (HC/CWU 246/2022)

The downfall of the Singapore-based cryptocurrency hedge fund, Three Arrows Capital (3AC) is widely recognised as one of the reasons for the larger cryptocurrency crash of 2022. Key players in the industry had lent 3AC substantial sums of money: Genesis Global Trading, headquartered in New York City, had lent 3AC US$2.3 billion; Voyager Digital, a cryptocurrency broker, has claims against 3AC for US$650 million; Blockchain.com, another US$US270 million.

Most recently, Algorand Foundation (Algorand), a Singapore-incorporated company, applied to wind up 3AC, for failing to make payment of 53.5 million USD Coin (USDC), a stablecoin, claimed under a statutory demand. This winding up application raised the (crypto) age-old question: is cryptocurrency money?

Algorand, of course, argued that cryptocurrency is money, pursuant to which 3AC could be wound up for failure to pay the USDC 53.5 million USDC claimed under its statutory demand. It drew a comparison to the Singapore court's recognition of foreign currencies as money despite not being legal tender or widely accepted or used as a medium of exchange in Singapore, and argued that that cryptocurrency could be similarly recognised.

The Singapore High Court was not, however, persuaded. It asked "if a country uses seashells as its international medium of exchange, would the Singapore courts have to recognise that as money?". Its answer was a resounding "no"—cryptocurrency is not money for the purposes of the court's jurisdiction to grant a winding-up order, or to give rise to the presumption of insolvency under section 125(2)(a) of the IRDA. The application for winding-up was thus dismissed.

The following reasons in particular were cited for the Court's decision:

1. First, determining whether or not a particular intangible asset such as cryptocurrency was money would require a detailed examination of evidence, which was not appropriate in the context of an insolvency/winding up application.
2. In an application under section 125(2)(a) of the IRDA, the creditor is relying on the benefit of a presumption that the debtor is unable to pay its debts, without any positive evidence to this effect. Thus, the creditor would have to pay the price of establishing the requirements for a money debt, even if these requirements were applied in a technical manner. The court should not adopt and apply the societal view of money in the context of winding up applications and the presumption of insolvency. The word "indebtedness" must require a debt which is in fiat currency.

Critics may argue that this decision was not particularly cryptocurrency-friendly and may undermine Singapore's ambitions to market itself as a cryptocurrency hub. After all, stablecoins are fungible and can function as a unit of account. Arguably however, this decision (which was carefully circumscribed so as only to apply to the definition of "money" in the context of winding up proceedings and the presumption of insolvency) is a legally and technically sound one. It evinces the Singapore Court's commitment to applying and upholding established law instead of bending to societal pressures (particularly in light of the public sentiment with regard to 3AC and its founders).

The arguably draconian effects of insolvency merit a stricter approach than for example, an application for a freezing injunction (the Singapore Courts have previously held that NFTs are a form of property in the context of such an application: Janesh s/o Rajkumar v Unknown Person ("CHEFPIERRE") [2002] SGHC 264).

It will be interesting to see how the law develops. There is little doubt that the Singapore Courts will be called upon to make a determination of this very same question in a future case, ideally outside of the insolvency context and with the benefit of a full trial and with the assistance of expert evidence.

Conclusion

In our view, the three decisions above are encouraging as they illustrate clearly that the Singapore Courts are determined to strike a balance in the application of Singapore's insolvency laws against the backdrop of the increasing prominence of cryptocurrency in financial markets. As the existing insolvency framework in Singapore contains well-established principles which provides certainty, it is undoubtedly beneficial for Singapore Courts to ensure such principles are upheld even in the face of a rapidly-changing financial climate. Singapore has also shown flexibility in its application of insolvency laws where necessary, such as granting confidentiality orders or recognising a separate class of creditors where this would lead to benefits such as greater protection for investors, greater efficiency and lower costs in schemes of arrangement.

This well-balanced approach paints a clear picture of why Singapore is increasingly viewed as an insolvency hub, attracting companies around the world, due to its adaptability, pragmatism and efficiency. As a jurisdiction that stays current with the dynamic financial climate while staying true to quintessential legal principles, Singapore is definitely a jurisdiction to watch in the realm of insolvency law and cryptocurrency disputes.