Securities and Financial Services Regulation

• Published date: 01 December 2019
• Citation: (2019) 20 SAL Ann Rev 677
• Date: 01 December 2019
• Publication year: 2019
• Author: Hans TJIO LLM (Harvard), MA (Cambridge); Advocate and Solicitor (Singapore), Barrister (Middle Temple); Professor, Faculty of Law, National University of Singapore.

I. General

26.1 The over-financialisation of the world has come under serious attack since the Global Financial Crisis, perhaps justifiably so. We are increasingly reminded of Churchill's desire to make “finance less proud and industry more content”.1 Many of us in academia have attempted to do so in the only way we can, arguing for the importance of, amongst other things, small and medium-sized enterprises (“SME”) funding. But technology has perhaps intervened to increase the challenges in this respect through its role in finance services, including peer-to-peer lending, cryptocurrency, tokenisation and trading platforms. Banks and other traditional financial intermediaries like financial advisers have sometimes been side-lined. This may be of little loss to SMEs, however, given that banks have not been lending enough to them, preferring instead to lend to households and indirectly inflating property values. But even exchanges or platforms have been set up less to channel finance to SMEs but to facilitate even more financial activity, often trading in non-standard financial products rather than shares and bonds. Disputes in relation to these technology-related financial activities have increasingly been litigated in Singapore courts.2

II. Markets and exchange regulation

A. Cryptocurrency exchanges

26.2 In 2019, the Singapore International Commercial Court (“SICC”) in B2C2 Ltd v Quoine Pte Ltd3 (“B2C2”) gave the first substantive

judgment of the Singapore courts in a cryptocurrency case involving its most widely known “Bitcoin”. Bitcoin first started out as an alternative to fiat currency in 2008 as a means of exchange but appears to be traded as a commodity or store of value today with a great deal of speculation in what appears to be of little intrinsic value, which may explain its volatility and hence declining use as a means of exchange as opposed to a store of value. However, the regulators have settled on regulating it as a currency or payment system under the new Payment Services Act4 in Singapore (passed on 14 January 2019 but which came into force on 28 January 2020).5 It would be quite different with the Bitcoin futures contract now traded on the Chicago Board Options Exchange, which, if it had a presence in Singapore, would have been seen as a “derivatives contract” under the Securities and Futures Act6 (“SFA”) following the taking effect of the Securities and Futures (Amendment) Act 20 1 77 in October 2018 and prior to that, as a “futures contract”.8

26.3 In 2017, in B2C2 Ltd v Quoine Pte Ltd,9 Simon Thorley IJ10 dismissed B2C2's application for summary judgment pursuant to O 14 of the Rules of Court11 for breach of contract and breach of trust against the defendant, Quoine Pte Ltd (“Quoine”). Quoine, a Singapore-incorporated company, operated a currency exchange platform which allowed third parties like the plaintiff (an electronic market maker incorporated in England) to trade Bitcoin and Ethereum for other virtual currencies

or for fiat currencies such as the Singapore or US dollar. The trial was subsequently heard by Thorley IJ, who held in 2019 in B2C2 that Quoine was liable for the said breaches as it had unjustifiably reversed trades that were made at abnormal exchange rates.

26.4 The plaintiff, B2C2, provided liquidity on the exchange platform by buying and selling virtual currencies at the prices it quoted for virtual currency pairs. It agreed to a set of terms and conditions available on the defendant exchange platform's website. On 19 April 2017, the plaintiff placed 12,617 Bitcoin and Ethereum orders, of which only 15 were filled. Eight of the filled orders were buy or sell orders transacted at the prevailing exchange rate, which was around 0.04 Bitcoin for one Ethereum. The other seven filled orders were sell orders that were effected at an exchange rate of around ten Bitcoin for one Ethereum, which was about 250 times higher than the prevailing exchange rate, due to an outage in the platform. Thorley IJ examined the trading system in some detail and found that because of a technical glitch on the defendant exchange (which was a market maker for 98% of the trades), it was unable to perform its market-price updates. Instead, the plaintiff's price was the only one available on the defendant's platform and this was matched by the computer system with Bitcoin held by the defendant's forced sale customers. The proceeds of sale of Bitcoin were automatically credited to, and corresponding amount of Ethereum debited from, the plaintiff's account. Hence, B2C2 stood to gain a large windfall if the trades stood.

26.5 The defendant exchange felt that the exchange trades were highly abnormal and cancelled the seven trades. The plaintiffs then sued on the basis that the defendant had no right to unilaterally reverse the transaction and this breached the terms and conditions of the trading relationship. There was also a breach of trust if the Bitcoin first credited to and subsequently removed from the plaintiff's account did belong to the plaintiff. Thorley IJ found that the plaintiff's founder had designed its own programme in this manner not to take advantage of a situation like this but to minimise the risk of unwarranted exposure.12 Given that, the judge held that the terms of the contract did not entitle Quoine to reverse the transactions as they were “irreversible”13. None of the defences raised succeeded. A term could not be implied allowing for the trades to be reversed as this would contradict an express term in the agreement. Although there was a risk disclosure document which contained a term that could have allowed that, Thorley IJ thought that there was no reason

why the risk disclosure statement and the agreement had to be read together in a way which permitted the agreement to be amended.14

26.6 The unilateral mistake defence is perhaps of greatest interest to technology lawyers. In Chwee Kin Keong v Digilandmall.com Pte Ltd15 (“Digilandmall”), it was held that at common law, there needed to be a sufficiently important or fundamental mistake as to a term of the contract and the party seeking to enforce the contract must have had actual knowledge of the mistake. Identifying the person with the requisite knowledge posed a challenge in an algorithmic environment where the orders were placed by the plaintiff's programme and without human intervention. Thorley IJ thought that:16

… the relevant mistake must be a mistake by a person on whose behalf the computer placed the order as to the terms on which the computer was programmed to form a Trading contract in relation to that order.

26.7 The plaintiff's chief executive officer (“CEO”) was the programmer but did not have the knowledge required.17 As for unilateral mistake in equity, which jurisdiction still exists in Singapore given dicta in the Singapore Court of Appeal's decision of Digilandmall,18 Thorley IJ examined whether a reasonable person in the plaintiff's CEO's position would have known that no other trader would have contemplated trades being executed at those prices. Also, there would have had to be some wrongdoing on the plaintiff's part, but Thorley IJ thought its behaviour was perhaps opportunistic but not wrong.19

26.8 Unfortunately for artificial intelligence (“AI”) lawyers, the court, however, did not think that it was necessary to examine the situation “where the computer … is creating artificial intelligence and could therefore be said to have a mind of its own”.20 The law on mistake with respect to self-learning systems and programmes is still yet to be settled in Singapore.21 It is possible, however, that any liability could reside with

the platform hosting the programme.22 In the end, however, some human may need to bear liability for imposing it on a computer or the programme would create a black hole, in that the computer or programme could then serve as a liability-shielding device without substantial means itself to shoulder any real liability or responsibility.

26.9 Importantly, for trust and property lawyers, Thorley IJ held that the Bitcoin in B2C2's account was held on trust by Quoine and by removing the B2C2 funds, Quoine was in breach of trust. The judge held that cryptocurrency could form the subject matter of a trust even if “there may be some academic debate as to the precise nature of the property right”.23 It satisfied the traditional test of being “definable, identifiable by third parties, capable in its nature of assumption by third parties, and have some degree of permanence or stability”.24 B2C225 has been referred to with approval by the UK Jurisdictional Taskforce, which sees cryptoassets as property.26 Kulms, has, however, asked if:27

… [i]n applying existing case law to the carbon allowances case, the court accepted that there has to be a statutory framework establishing an entitlement which has some market value. The Quoine decision of the Singapore court goes one step further. It applies Lord Wilberforce's test, but does not enquire about the statutory basis of a possible entitlement to virtual currencies or digital assets. The Singapore court appears to combine the liberal approach of U.S. courts with the contract-informed interpretation of the UK FCA. Digitally stored virtual

currencies are capable of commodification with status of intangible property, depending on their identifiability, marketability, and the underlying network of contracts. Civil law jurisdictions will have to choose a different regulatory path to recognise such commodification developments.

26.10 The Singapore Court of Appeal reserved judgment on the appeal from B2C2 at the end of October 2019 and its decision will be discussed in next year's Ann Rev. It may be that part of the work needed to allow technological interests to become a form of “new property” would involve coming up with the necessary rules for “an intangible asset only exists because the law says it does”.28 This...