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Can Cryptocurrency Be Held on Trust?

18-07-2021

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For what is believed to be the first time ever, a UK court has considered whether cryptocurrency can be held on trust. Here, Rayshum Khan, paralegal in the Criminal Litigation department, outlines the case in question and ponders its implications.

Date: 23 February 2022

For what is believed to be the first time ever, a UK court has considered whether cryptocurrency can be held on trust. Here, Rayshum Khan, paralegal in the Criminal Litigation department, outlines the case in question and ponders its implications.

On 17 November 2021, the case of Zi Wang v Graham Darby [2021] EWHC 3054 (Comm), came before Stephen Houseman QC, sitting as a Deputy Judge of the High Court, to consider whether cryptocurrency can be held on trust.

The court ultimately gave the judgement that cryptocurrencies can be held on trust – but in this contested case they were not.

The facts of the case involve the following: Mr Wang, a knowledgeable crypto trader, sought Mr Darby’s ‘baking’ services. ‘Baking’ in relation to crypto, refers to the process where individual tokens are used to generate rewards in the form of additional tokens.

During this process, cryptocurrency traders will often entrust their crypto to another individual’s account. In turn, this aids a higher volume of ‘baking’ to occur and therefore yields higher rewards.

Mr Wang and Mr Darby created an agreement in December 2018, in which Mr Wang would ‘sell’ 400,000 Tezos tokens to Mr Darby who was required to keep the Tezos in a specific crypto wallet for at least two years to carry out the ‘baking’ process.

In exchange, Mr Darby would transfer 30 Bitcoin to Mr Wang. At this point in time, 30 Bitcoin were worth half the current value of the 400,000 Tezos.

As part of the agreement, Mr Darby was entitled to 50% of the accrued additional tokens accumulated by the baking process. Meanwhile, Mr Wang would be free to use and trade the Bitcoin as he pleased.

Once two years of ‘baking’ were complete, Mr Darby was required to return the Tezos to Mr Wang in exchange for the 30 Bitcoins, or alternatively, for the payment of 110,000 US dollars.

However, by March 2019, in response to the value of Tezos rising, Mr Darby informed Mr Wang that he would be putting an end to the ‘baking’ service, and alternatively, he wished to trade the Tezos to generate a higher return on trading (as opposed to ‘baking’ them).

Mr Darby stopped holding the Tezos in the specified wallet – contrary to the agreement – and presumably began trading with them.

Mr Wang alleged that the Tezos were held on trust for him by Mr Darby as one of (i) an Express Trust, (ii) a Quistclose-Resulting Trust or (iii) a Constructive Trust.

Therefore, Mr Wang brought proceedings against Mr Darby for breach of their agreement, and for a breach of trust/or fiduciary duties in failing to hold the Tezos in the specified wallet to ‘bake’ them.

In considering whether the agreement constituted a trust, the court had to deliberate the recent decision of the High Court in AA v Persons Unknown. In this case, it was accepted by both parties that Tezos tokens could constitute property, which theoretically can be the subject of a trust.

There was no question of whether the cryptocurrency could be held on trust – as both parties agreed it could – however, it was considered whether on these facts, a trust was created.

Essentially, the court treated cryptocurrency in the same way as any other property for the purpose of the proprietary claim.

However, in contrast, in the case of Wang v Darby, the Court found that Mr Darby did not hold the Tezos on trust for Mr Wang, for the following reasons:

Mr Wang was only entitled to the return of the Tezos in exchange for the Bitcoin (or the equivalent US dollar sum). This important financial interchange omitted the existence of any trust.

If Mr Wang had failed to pay his own restoration obligation at the related time, Mr Darby would have been entitled to keep the 400,000 Tezos. That concept itself would be inconsistent with a trust.

Both parties considered the arrangement to be a sale and purchase back agreement. This presumes an original sale/purchase in the other direction. Each sale/purchase transferred ownership of the asset – this was terminal to any trust examination.

A trust over the Tezos was not essential to give effect to the parties’ legitimate expectations or commercial interests.

Therefore the court struck out this aspect of Mr Wang’s claim and concluded that no trust had been created between the parties.

In conclusion, the decision of AA v Persons Unknown was innovative in establishing proprietary interests in cryptocurrency. Importantly, it highlights the legal protections to those working in the crypto asset space.

Additionally, it has clarified that parties to crypto asset arrangements can, as a matter of law, hold crypto assets on trust for another. Whether or not a trust is created remains subject to strict rules.

It is imperative that when entering into such arrangements, parties should ensure there is a greater level of clarity specified to any written terms put in place to evidence their agreement.

For further information contact Rayshum on 020 7613 1402 or email

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