Karis v Digital CC Management Pty Ltd

BANKS-SMITH J: 1 This proceeding is at its heart a dispute between cryptocurrency traders as to the manner in which certain companies were established and their various roles and entitlements. One of the matters in dispute in the litigation is who, or which entity, has legal or beneficial ownership of certain units of bitcoin. 2 I have previously published reasons that summarise the background. These reasons should be read having regard to what has already been said: Karis v Digital CC Management Pty Ltd [2022] FCA 685. 3 Mr Karis is the applicant in the proceedings. Digital CC Management Pty Ltd is the first respondent, and it has brought the application the subject of these reasons.

The anti-suit injunction 4 On 13 June 2022, on Mr Karis's ex parte application, I granted an anti-suit injunction, relevantly preventing Digital CC from pursuing litigation then on foot in the District Court of Massachusetts in the United States of America (US) relating to the bitcoin. The value of cryptocurrency is potentially volatile and there was no evidence before me of the value of the bitcoin in monetary terms, but I was informed by counsel that it was potentially worth many millions of dollars. So it can be said that the competing claims relate to a bundle of rights of some real value. 5 It was not in issue that the relevant bitcoin is currently held by the rehabilitation trustee of a cryptocurrency exchange called Mt Gox. A rehabilitation trustee is an office that exists under Japanese insolvency law. 6 It is apparently also not contentious that the rehabilitation trustee has accepted Mr Karis's claim to the bitcoin and rejected that of Digital CC. As yet, the rehabilitation trustee has not distributed the bitcoin or its proceeds. 7 When the anti-suit injunction application was before me, Mr Karis provided the usual undertaking as to damages to the Court. He also indicated through senior counsel that he would undertake to pay any funds received by him from the rehabilitation trustee to his Australian solicitors to be held on trust pending further orders: [44] of previous reasons. This is important because Mr Karis resides in the US and there is no suggestion that he has any assets in Australia. This willingness to facilitate the preservation of the funds on trust in Australia pending further order was an important factor in the exercise of my discretion in granting the anti-suit injunction. At that time it was anticipated that any distribution by the rehabilitation trustee would be a distribution of funds, rather than of bitcoin.

After the injunction 8 Once the orders made on the ex parte application were served, counsel for Mr Karis and Digital CC commenced discussions about how the funds might be distributed and preserved. I conducted a case management hearing which was adjourned to facilitate ongoing discussions. 9 On 14 June 2022 Digital CC (by its counsel) put forward a specific proposal that the bitcoin be held on trust by Boutique Capital Pty Ltd as trustee, with dual solicitors' authority for transactions, and with an irrevocable direction to be granted to the rehabilitation trustee. It was necessary that the rehabilitation trustee confirm whether such irrevocable direction would be accepted and acted upon. 10 On 17 June 2022 Mr Karis's Australian lawyers (Monaco Lawyers), emailed Digital CC's lawyers (Williams + Hughes) relevantly stating: We have been urgently making enquiries as to how the distribution by the Trustee is to occur, in order to understand what mechanisms it may be possible to put in place to give appropriate assurances to the Court and your client. These enquiries are ongoing, but we instructed that: a. the distribution is to occur by way of bitcoin, rather than cash, so it will not be possible for this to be held in our trust account (unless the bitcoin is to be sold); and b. it appears that the Trustee may have requirements as to who may be the account holder of the account into which the distribution is to be made … 11 As it transpires, that letter perhaps did not accurately convey the real position, which was that Monaco Lawyers understood that Mr Karis and his US lawyers were making such inquiries. 12 On 21 June 2022 Williams + Hughes emailed Monaco Lawyers inquiring as to Mr Karis's availability for a group call to discuss potential escrow arrangements. Mr Karis did not provide details of any availability. 13 On 23 June 2022 Monaco Lawyers emailed Williams + Hughes stating that they were still inquiring as to the steps that might be undertaken by the rehabilitation trustee, but that there was an agreement between the parties, formed through discussions between their lawyers in the US, to send a letter to the rehabilitation trustee instructing it to not distribute any of the bitcoin without the parties' agreement or an order from the Australian or US Court. Again, as it transpires, it appears Monaco Lawyers were not making such inquiries but understood that Mr Karis and his US lawyers were making such inquiries. It is now apparent that there were no communications of such a nature between Mr Karis, his US Lawyers and the rehabilitation trustee as at that time (or by 19 July 2022). 14 On 23 June 2022 Williams + Hughes responded by letter to Monaco Lawyers. That letter referred to Mr Karis's unavailability for any conference call and ongoing delays in taking steps towards securing the bitcoin in a jointly-held Australian account. It appears that at that stage the proposed joint letter to the rehabilitation trustee had been prepared but had not been signed by Mr Karis. Williams + Hughes also referred to the potential need to approach the US court to obtain an order compelling Mr Karis to sign the letter, but noted it might be necessary to vary the anti-suit injunction so that they might do so. 15 On 24 June 2022 Monaco Lawyers emailed Williams + Hughes stating: We are instructed that our client will sign the joint letter to the trustee. It appears that there may have been some miscommunication, as our client was not aware that your client's position was that it was ready and awaiting his signature. Our client is not unwilling to secure the bitcoin. 16 On 24 June 2022 Mr Karis emailed the signed joint letter to his lawyers. There is some evidence that it may have been provided to the rehabilitation trustee on or around that day. There is no evidence that any response from the rehabilitation trustee has been received to date. 17 On 29 June 2022 Monaco Lawyers emailed Williams + Hughes and Digital CC Management's US lawyers relevantly saying it was now time to deal with the substantive issues related to the proceeding. Williams + Hughes responded on the same day, noting Mr Karis's continued unavailability for a conference call about securing the bitcoin in an Australian account, and requested available times. 18 On 30 June 2022 Monaco Lawyers responded by: requesting confirmation that the joint letter had been sent to the rehabilitation trustee; indicating that the bitcoin is 'not in a position to be distributed to anyone any time soon'; suggesting that further information needed to be obtained from the rehabilitation trustee as to the status of the bitcoin, when it might be repatriated, whether it could be paid to a solicitor's trust account and confirming that it would not distribute the bitcoin pending the resolution of the matter; and asking questions about Boutique Capital, including as to how it would secure the bitcoin. 19 On 6 July 2022 Williams + Hughes responded with further details about the proposal to utilise an Australian trustee company. Relevantly, they informed Monaco Lawyers that it was proposed that Mr Karis assign his claims against the rehabilitation trustee to a professional trustee company holding an Australian Financial Services Licence (AFSL), with the capacity to hold the bitcoin on trust. Upon the bitcoin being distributed by the rehabilitation trustee, that entity would securely hold the bitcoin on trust and only transfer it upon joint instructions from Williams + Hughes and Monaco Lawyers, or a Federal Court order. 20 Williams + Hughes said in the communication that their client had identified Boutique Capital as a suitable candidate, and they had conducted initial discussions with Boutique Capital to confirm their ability and willingness to participate in such an arrangement. They noted that respective counsel had also tried to arrange a joint teleconference with Monaco Lawyers, client representatives and Boutique Capital, but Mr Karis apparently had not nominated any available times to participate in that conference. 21 On 11 July 2022 Williams + Hughes emailed Monaco Lawyers drawing their attention to an update by the rehabilitation trustee on 6 July 2022 to 'all recognised rehabilitation creditors' that distributions may begin and transfers may cease from August 2022. Williams + Hughes requested a response from Monaco Lawyers to this development urgently. It appears that Mr Karis received this update on or about 6 July 2022 but did not circulate it. He contended that it is confidential but he extracted certain parts in an affidavit that was filed on 21 July 2022. 22 On 12 July 2022 Monaco Lawyers wrote to the rehabilitation trustee, informing them that they act for Mr Karis, and seeking information about where and how Mr Karis's bitcoin distribution is being held and any conditions attached to its release, and whether or not they would, if asked by Mr Karis, refrain from making a distribution pending further instructions. 23 On 14 July 2022 Digital CC filed this application, seeking orders to the effect that within seven days Mr Karis is to transfer his rehabilitation claims against the rehabilitation trustee relating to the bitcoin to Boutique Capital (or another ASFL as the parties may agree) to be held pending the resolution of this proceeding, and to be distributed only in accordance with joint instructions or an order of this court. A further order was sought that if such steps are not complied with, then the anti-suit injunction is vacated. The rationale for the vacation of the anti-suit injunction is that Digital CC would then be free to pursue relief relating to preserving access to the bitcoin in the US proceedings, where Mr Karis resides.

First hearing of interlocutory application 24 Digital CC's application came before me for hearing on 18 July 2022. 25 Mr Karis opposed the application, filing an affidavit shortly before the commencement of the hearing in which he indicated that: (a) based on information he has received from the rehabilitation trustee, it is intended that designated cryptocurrency exchanges will be selected by the rehabilitation trustee in 'as many countries/regions as possible', and rehabilitation creditors 'who wish to receive repayment in cryptocurrency' will then be able to register in one of those exchanges, so that a distribution of the bitcoin may be made to them via that exchange; (b) it will be necessary for a rehabilitation creditor to verify their identity; (c) the deadline for a distribution has not been finalised; (d) the rehabilitation trustee had indicated there may be 'disadvantages' with respect to applications for claims transfers that are made now or before the end of August 2022; (e) it is appropriate to wait until the designated exchanges are disclosed and he will then register on one of those; (f) the exchange referred to by Boutique Capital (referred to in correspondence included below) may not be one of the designated exchanges; and (g) he does not know about the financial stability of Boutique Capital and he cannot satisfy himself about that without spending time and money, which he should not have to do pending identification of the designated exchanges. 26 During the hearing I raised a number of questions that arose on the evidence to be addressed by Mr Karis's lawyers. I also asked that Mr Karis disclose any practical alternatives to that put forward by Digital CC, apart from waiting, as his affidavit suggested. I adjourned the hearing to 21 July 2022. 27 On 19 July 2022, and presumably in response to matters that had been raised at the 18 July 2022 hearing, the following occurred: (a) Monaco Lawyers made further inquiries of the rehabilitation trustee, seeking an urgent response to their letter of 12 July 2022, although not indicating that the matter was before the Court again on 21 July 2022; (b) Mr Karis emailed the rehabilitation trustee (in an email flagged 'low importance') asking if it would be possible to make the 6 July 2022 update available to the Court, although not indicating that the matter was before the Court again on 21 July 2022; and (c) Mr Del Monaco apparently made inquiries (apparently of the Legal Practitioners Liability Committee (Vic)) as to the capacity for him to hold the bitcoin as trustee, and received a response to the effect that such a course was available (this information was conveyed by senior counsel). 28 Mr Del Monaco also affirmed an affidavit in which he said that he was willing to hold the bitcoin as trustee and he gave an undertaking to the Court that he would keep the Court informed of any developments with respect to the rehabilitation trustee.

Boutique Capital 29 At this point it is appropriate to say something about Boutique Capital. 30 Expressed generally, an AFSL authorises a licensee to provide financial product advice, deal in a financial product and provide traditional trustee company services, amongst other things. Licences are issued by the Australian Securities and Investments Commission (ASIC). Licences will not be issued unless at the time ASIC is satisfied that the applicant can meet its various obligations. The Corporations Act 2001 (Cth) provides the compliance, conduct and other regulatory framework for AFSL licensees, including provisions relevant to compensation and ASIC's supervisory powers: see generally Part 7.6 of the Corporations Act. 31 Digital CC has provided information to Mr Karis about Boutique Capital and has also placed into evidence certain correspondence which I extract for completeness (with some formatting editing to assist in clarity). The capability statement and the ASIC record of the AFSL licence were also in evidence. 32 The first Boutique Capital letter (on or about 11 July 2022) states: To whom it may concern Boutique Capital Pty Ltd are an Australian company who are licensed by the Australian Securities and Investments Commission to undertake the services of a Licensed Trustee. As part of those services Boutique currently act on behalf of eight different funds who trade digital assets and currently use the Bitgo platform as the outsourced custodian for bitcoin holdings. Digital CC Management has asked Boutique whether it is willing and able to accept an assignment of a MtGox civil rehabilitation distribution claim, and to hold that claim on trust pending the resolution of Court proceedings to determine its rightful owner. To assist it to understand the proposed process, Digital CC Management provided Boutique with two information sheets from the rehabilitation trustee regarding filing for a change of holder of a rehabilitation claim via online and offline methods (attached). Boutique understands that by accepting the assignment it may be required to: 1. Receive a distribution of bitcoin into an account under Boutique's control, and to do all things required by the MtGox civil rehabilitation trustee to direct the distribution into that account. 2. Hold any such distribution on trust for the nominated parties, and not to release the bitcoin except with the joint authorisation of both nominated parties' solicitors. We confirm we are prepared to accept the assignment on this basis. The costs of such a service would be as follows: … Attached are a copy of the Boutique Capital AFSL and a Capability Statement. Kind regards Tim Baker Managing Director 33 The second Boutique Capital letter (20 July 2022) states To whom it may concern … Digital CC Management has asked Boutique Capital Pty Ltd for further information regarding Boutique's capacity to take an assignment of a MtGox distribution claim and to hold it on trust pending the outcome of court proceedings. This letter should be read together with Boutique's earlier open letter regarding the same matter (enclosed). Digital CC asked Boutique to explain how the Bitgo platform operates and how the bitcoin distribution would be secured on that platform. Boutique's response: Bitgo (https://www.bitgo.com/) is an institutional digital asset custodian. Custody services are offered to eligible participants through BitGo Trust Company, Inc., a trust company chartered in South Dakota and BitGo New York Trust Company LLC, a limited purpose trust company in New York. The platform maintains a Lloyds of London insurance policy in relation to the assets held in custody and maintains institutional grade processes for the protection of assets on the platform. This includes both multi signature protocol and real time video conference personal identification prior to assets being moved off the platform. The platform requires an individual or organisation to open an account on the platform, similar to opening a bank account. The owner of the account must complete standard AML/KYC processes to identify themselves. Digital CC also asked whether Boutique could open an account on a new cryptocurrency exchange (that is, an exchange that Boutique has not previously used) if required to receive the distribution. Boutique's response: Boutique Capital as a licensed trustee has opened numerous accounts on digital asset exchanges over the past 5 years and has extensive experience in doing so. Boutique Capital will open a wallet on Bitgo which is segregated for the holding of the assets in question in much the same way that a trustee might open a bank account to hold cash in a bank. Finally, if the answer to the above question is 'yes', Digital CC also asked how long it typically takes to open a new account with a cryptocurrency exchange, and what is typically required in such a process. Boutique's response: It is very quick (usually within hours) to open personal accounts on digital asset exchanges, usually only requiring the account opener to identify themselves with a photo of their driver's license. But the process to open a trust account on exchanges usually takes a couple of weeks due to the enhanced due diligence associated with trust or company accounts. Kind regards Tim Baker Managing Director

Second hearing 34 At the second hearing Digital CC continued to press for the relief set out in its interlocutory application. Mr Karis through senior counsel made relevant submissions with respect to the application, but also requested an adjournment until 3 August 2022 so that Mr Karis could 'come back to the Court with something concrete', and submitted that there was no fear of a distribution by the rehabilitation trustee in that period. Senior counsel also emphasised that Mr Del Monaco was willing to be a trustee and that inquiries had indicated that such a course was possible.

Consideration 35 It must be borne in mind that the anti-suit injunction proceeded on an ex parte basis. On this application both Mr Karis and Digital CC have been represented. At this stage of the proceeding, where the case has been presented on affidavit and the pleadings have not progressed beyond a statement of claim, it is not possible to predict with certainty what will be the outcome of the case. However, I am satisfied on what I have seen to date that the parties both have respectable arguments underlying their claims to the bitcoin in question. Neither claim at present can be described as vexatious or frivolous. 36 Whilst I was prepared to grant the ex parte anti-suit injunction on the basis of the undertaking provided by Mr Karis through senior counsel at that time (and noting that the court may receive the undertaking of an overseas applicant - Caravelle Investments Ltd v Martaban Ltd (1999) 95 FCR 85 at [24]-[25]), Digital CC has now had the opportunity to be heard relevantly as to whether the undertaking can be supported and the risks with respect to access to the bitcoin. 37 Digital CC points to the difficulty that none of Mr Karis, the bitcoin or the rehabilitation trustee are within the jurisdiction of the Court and that at present, it has nothing but Mr Karis's word that the bitcoin or proceeds that he receives will be placed by him into his solicitors' trust account or otherwise placed in the hands of a trustee. 38 This is in a scenario where Mr Karis has indicated some good intent with respect to directing the bitcoin or its proceeds into trust: so much is apparent from his execution of the letter of 24 June 2022, and also from the statement in his solicitors' email of 24 June 2022 to the effect that he is not unwilling to secure the bitcoin. I add that senior counsel for Mr Karis rightly acknowledged before me in effect that the undertaking that he gave to the Court on behalf of his client on 13 June 2022 was given with the understanding that it was necessary and had a purpose. 39 For the reasons that follow I will make orders largely in accordance with Digital CC's proposal, but in doing so I note that the evidence does not establish that Mr Karis in fact intends to breach his undertaking to the Court. However, as a matter of fairness and common sense, having regard to all of the matters before me, I consider it appropriate that there be relief that preserves the bitcoin or its distribution proceeds until this proceeding is resolved by judgment or further order, unless by consent. The bitcoin is one of the subjects of and is central to the dispute, the rights to it are contested and it is apparently of potentially significant value. In those circumstances I consider that I have power under s 23 of the Federal Court of Australia Act 1976 (Cth) to grant the relief sought, and that it is appropriate to do so. 40 First, Mr Karis had already indicated by his undertaking that he would pay any funds received from the rehabilitation trustee into trust. The orders proposed by-pass receipt by Mr Karis personally, in that they have the result that the bitcoin or any payment are distributed by the rehabilitation trustee directly into trust or into the hands of a trustee, but the net effect of that course is the same as if there were compliance with his undertaking: Mr Karis will not be in a position to control the further distribution of the bitcoin or its proceeds, but his interests in them will be protected. As that end result is consistent with that anticipated by his undertaking, it is difficult to see that there is any real prejudice to Mr Karis. Mr Karis had also suggested (by the time of the second hearing) that the bitcoin be held by his solicitors on trust. 41 Second, and as noted, the bitcoin is central to the litigation and if it is lost, or its proceeds are lost, then any judgment in favour of the respondents may be defeated. 42 Third, the proposal does not purport to secure the bitcoin in favour of the respondents. It preserves the asset so that it remains available to be delivered appropriately after judgment, and does not purport to do more than is necessary in that regard. 43 Fourth, I have given careful thought to the identity of the proposed trustee and the contest inherent in the proposal that Mr Del Monaco might hold the bitcoin on trust in lieu of Boutique Capital. I make no criticism of Mr Del Monaco. However, it seems to me that the sensible course is for an AFSL licensee with experience in dealing with cryptocurrency to assume that role. Cryptocurrency is not simply money, as senior counsel for Mr Karis acknowledged. Whilst its use as currency is becoming widespread, there was no evidence before me that suggested Mr Del Monaco or his firm had any particular expertise in dealing with cryptocurrency units, exchange platforms, wallets, keys or the like. It might be said that if the bitcoin are simply held on trust, any such expertise is not particularly relevant. However, it may be that particular issues arise which may be dealt with in the interests of all parties more efficiently by a specialised trustee. I also have concerns as to the generality of Mr Del Monaco's evidence about his willingness and capacity to act as trustee, dealt with in three lines in his affidavit. I acknowledge his undertaking to keep the Court informed of relevant developments, but the fact that the Court is updated may not necessarily assist with the issues at hand. I would expect in any event that Mr Del Monaco would keep the solicitors for Mr Karis and the Court informed of relevant developments. 44 I prefer the Digital CC proposal that Boutique Capital assume the role of trustee. I am satisfied on the basis of the information that has been included above, and having regard to the regulatory processes in place under the Corporations Act, that Boutique Capital is well placed to communicate with the rehabilitation trustee about any intricacies of the proposed distribution of the bitcoin, respond to any question of the rehabilitation trustee, and address any issues that might arise in the course of facilitating a distribution to Boutique Capital. 45 Fifth, I am not persuaded that it is appropriate to delay further the making of orders in this matter. It is unclear when the rehabilitation trustee might proceed to make any distribution. I accept that step may not be imminent - but then again, it may be. The absence of a timely response from the rehabilitation trustee to the Monaco Lawyers' letter of 12 July 2022 causes some concern. This is not a criticism of the rehabilitation trustee, as it is by no means clear that the urgency of the request for information was impressed upon them. However, Mr Karis has not been able to point to any evidence that indicates that his particular circumstances or claim have been given attention by the rehabilitation trustee to date, nor when that might occur. Against that, there is some evidence of potential detriment if steps are not taken quickly with respect to any direction or assignment of Mr Karis's claims in the rehabilitation, and there is evidence that distributions will occur from the end of August 2022. If the orders as sought are not made, then it might be that Digital CC would have little option in order to protect access to the bitcoin but to attempt to pursue further court action in the US or in Japan. Whether that could be achieved prior to the end of August is unknown and logically the prospect of that being so reduces as time goes by. Therefore, I am not satisfied that it is appropriate to adjourn the matter further until 3 August 2022, particularly where it is not known whether any suitable alternative plan will be forthcoming at that time. 46 Sixth and related to the fifth point, Mr Karis has not rushed to deal with the rehabilitation trustee since the 13 June 2022 orders. The evidence indicates an absence of engagement or urgency, whether by Mr Karis or his solicitors, with ascertaining steps that might be undertaken to understand and address the pending distributions by the rehabilitation trustee. I am not convinced that anything will be achieved in the short term, based on the conduct to date. 47 Seventh, I do not accept that Mr Karis has not had an opportunity to investigate Boutique Capital. It was identified and suggested as early as 14 June 2022. No legitimate concern as to its potential involvement has been raised. 48 Eighth, the appointment of Boutique Capital need not be final. If in the fullness of time the parties agree that another trustee might be appointed, presumably that could be achieved. Further, if Mr Karis has a legitimate concern as to the conduct on the part of Boutique Capital, he may utilise the liberty to apply that I will expressly grant, and that I will extend to Boutique Capital as an interested party. There are also steps available to Mr Karis under the Corporations Act.

Orders 49 There will be orders accordingly, in terms similar to but not identical to those sought by Digital CC. 50 I note that I have some concerns as to the seven day time frame proposed by Digital CC for compliance by Mr Karis with the steps that are apparently required by the rehabilitation trustee to implement the course anticipated by these reasons. Whilst Mr Karis is expected to comply with that time frame, there are some unknowns in play that flow from the absence of any response to date from the rehabilitation trustee. 51 For that reason, I do not agree that the anti-suit injunction should automatically be vacated if Mr Karis does not comply with what is proposed by the orders. The parties should proceed on the basis that I will vacate the anti-suit injunction if I am not satisfied that Mr Karis has done all that he can to comply with the orders. However, if such a scenario arises, I will require the parties to come back before me and address me before I make any order vacating the anti-suit injunction. I will allocate time for any such hearing on short notice following any communications between the parties' solicitors and my chambers. I certify that the preceding fifty-one (51) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Banks-Smith.