B2C2 Ltd v Quoine Pte Ltd

• Jurisdiction: Singapore
• Court: International Commercial Court (Singapore)
• Judge: Simon Thorley IJ
• Judgment Date: 14 March 2019
• Neutral Citation: [2019] SGHC(I) 3
• Citation: [2019] SGHC(I) 3
• Published date: 28 May 2020
• Plaintiff Counsel: Danny Ong, Sheila Ng and Jason Teo (Rajah & Tann Singapore LLP)
• Defendant Counsel: Paul Ong, Ivan Lim and Marrissa Karuna (Allen & Gledhill LLP)
• Date: 14 March 2019
• Hearing Date: 21 November 2018,28 December 2018,22 November 2018,23 November 2018,26 November 2018,29 November 2018
• Docket Number: Suit No 7 of 2017
• Subject Matter: Mistake,Contract,Breach of trust,Breach,Mistake of fact,Trusts

Simon Thorley IJ: Introduction

This is an action for breach of contract and breach of trust. The Defendant (“Quoine”) is a Singapore-registered company which operates a currency exchange platform (the “Platform”) enabling third parties to trade virtual currencies for other virtual currencies or for fiat currencies such as Singapore or US dollars. The two virtual currencies (sometimes referred to as cryptocurrencies) involved in this action are Bitcoin (“BTC”) and Ethereum (“ETH”).

The Plaintiff (“B2C2”) is company registered in England and Wales trading inter alia as an electronic market maker. As an electronic market maker, B2C2 provides liquidity on exchange platforms by actively buying or selling at the prices it quotes for virtual currency pairs, thereby generating trading revenue.

In recent years, there has been a significant growth in virtual currencies of which Bitcoin is perhaps the best known. They are not linked to any particular country nor regulated by any central monetary authority. They are traded for other virtual currencies or traditional currencies on computer networks such as the Platform.

B2C2’s claim arises out of an incident that occurred on the Platform on 19 April 2017 when, as a result of a series of events which I shall consider in more detail below, seven trades for the sale by the Plaintiff of ETH for BTC at an exchange rate of either 9.99999 or 10 BTC for 1 ETH were effected by the Platform. This was at a rate approximately 250 times the rate of about 0.04 BTC for 1 ETH which had been the previous going rate. The proceeds of the sale (3092.517116 BTC) were automatically credited to B2C2’s account by the platform and the corresponding amount of 309.2518 ETH was automatically debited from that account.¹

When Mr Mario Antonio Gomez Lozada (“Mr Lozada”), the Chief Technology Officer (“CTO”) of Quoine, became aware of the trades the following morning, he considered the exchange rate to be such a highly abnormal deviation from the previously going rate that the trades should be reversed. Accordingly, the seven trades were cancelled by Quoine and the debit and credit transactions were reversed.

B2C2 contends that Quoine had no contractual right unilaterally to cancel the trades once the orders had been effected and that its action in so doing was in breach of the version of the Terms and Conditions which regulated the trading relationship between Quoine and B2C2 at the material time. Additionally, B2C2 contends that Quoine holds the proceeds of B2C2’s account on trust for B2C2 and that the unilateral withdrawal of the BTC which had been credited to the account as a result of the trades was in breach of trust.

The writ was issued in the Singapore High Court on 18 May 2017, the Statement of Claim was served on that day and the Defence on 16 June 2017. With the agreement of the parties, the action was transferred to the Singapore International Commercial Court on 24 August 2017 and came on for trial before me on 21 November 2018.

There was an application for Summary Judgment under Order 14 of the Rules of Court (Cap 322, R 5, 2014 Rev Ed). I dismissed this application in a judgment delivered on 27 December 2017: see B2C2 v Quoine Pte Ltd [2018] 4 SLR 1. Since then there has been further disclosure coupled with affidavit evidence and expert reports. As such, the actual facts of the case as detailed below are somewhat different from the facts as they appeared to be as at the time of that summary judgment application.

Currency trading

There are a large number of trading platforms around the world and some of these provide for trading in virtual currencies. At a high level of generality, they operate in the same way. There are two types of traders, market makers and investor-traders. An investor-trader, as its name suggests, is a person who purchases a given commodity with a view to holding it for a period of time in the hope that its value increases so that it can be sold at a profit.

Market makers are more regular traders who provide liquidity to a given platform by quoting orders (both buy and sell orders) and seek to generate income by capturing what is known as the bid-ask spread. B2C2 is a market maker. Market makers will trade over a number of platforms (in B2C2’s case at the relevant time it was trading on 15) and do so by using sophisticated algorithmic trading software. At any one time a market maker may be seeking to sell a given currency on one exchange and buy it on another or, indeed, on the same exchange. The software monitors the trader’s position over all the platforms to regulate the exposure to any given currency and there will therefore be times when no buy quotes for a given currency are being placed on any of the platforms because the software has determined that the trader is over-exposed in that currency and is therefore, for the time being, only going to be a seller. The reverse can obviously also be the case.

Market makers can on occasions also be investor-traders but this action is concerned with B2C2’s activity as a market maker. Of more relevance is the fact that operators of currency exchange platforms can also trade as market makers on their own platform as Quoine did in the present case.

Whilst there are a number of ways in which an order can be placed on a platform, there are two types of orders that are material in this dispute: A market order: This is an order which is to be executed immediately at the best available current market place. The buyer or seller (as the case may be) indicates what they wish to trade and the platform automatically identifies the best available trade in the opposite direction. At the time of order placement, the trader will not know precisely what the exchange rate will be, only that it will be the best available price offered on the Platform at the time by a trader seeking to trade in the opposite direction. A limit order: This gives the trader greater control over the prices of a given trade but does not enable him to know when it will be executed. A limit order sets either the maximum price at which he is willing to buy or the minimum price at which he is willing to sell. If and when that price is reached, his order will be fulfilled. Market makers trade exclusively in limit orders.

As Mr Maxime Boonen (“Mr Boonen”), a director of B2C2, explained in his affidavit of evidence-in-chief (“AEIC”), B2C2 acted as a market maker on the Platform in the following manner:² 12 As with other exchange platforms on which B2C2 conducts market making, the entire trading process is automated 24/7 through its algorithmic trading software (“Trading Software”), which I helped to develop as B2C2’s co-founder. Human traders are almost never involved in the trading process. Human involvement is in almost all cases limited to tasks like monitoring, IT maintenance and adjusting the parameters of the Trading Software from time to time. In April 2017, the only human traders at the time were the two founders of B2C2, including myself, and we would only monitor the trades during business hours i.e. 8 am to 6 pm Greenwich Mean Time (“GMT”)). 13 As a market maker, B2C2 endeavours to quote limit orders in both directions, continuously if possible, and generate income by capturing a bid-ask spread. The process of placing a limit order on the Platform can be briefly summarised as follows: 13.1 The Trading Software requests market data from Quoine’s API. In particular, the Trading Software requests, in respect of a given product, the Platform’s current order book, B2C2’s account balances with the Platform, and any current live orders B2C2 may have on the Platform. 13.2 The Trading Software determines what orders ought to be placed (and the price, size, and side), if any, based on the aforementioned data as well as other factors. The price is determined based on price formulation strategy that seeks to improve on the available prices at the top of the order book by a small amount, subject to a minimum bid-ask spread. 13.3 The Trading Software submits the orders via authenticated API messages, through which instructions to cancel or amend orders, and to retrieve the status of orders or trades and balances for each asset, can be sent to the Platform. 14 Unless a specific market making contract exists between the market maker and the Platform (which was not the case between B2C2 and Quoine), a market maker is considered like any other user of the Platform and its orders are therefore not treated any differently than other users’ orders. After an order is submitted by the Trading Software, on condition that it is not first rejected by the Platform (for example, if the user’s balance is too low), it is inserted into the Platform’s order book at the relevant price level and either (i) immediately matched with the best asks (i.e. orders to sell) (in the case of a buy order) or the best bids (i.e. orders to buy) (in the case of a sell order) up to the price quoted in the order, or (ii) left standing in the order book if it does not immediately match against an opposite order, until it is cancelled or matched with another order at a later time. When an order is filled, a completed trade arises and the relevant virtual currency ‘bought’ will be deposited by Quoine into the Account, whilst the relevant currency ‘sold’ will be deducted from the Account. The prevailing balance maintained under the Account is reflected on the user interface of the Platform, and immediately updated upon completion of a trade.

[emphasis in bold in original]

The Platform

Quoine was cofounded by Mr Lozada together with Mr Mike Kayamori in 2014. It operates platforms in Japan and in Singapore. The Platform functions in the following way:³

The Platform uses order books to record orders from buyers and sellers for each pair of currencies being traded on the Platform. An order book is essentially an electronic ledger containing...