Cryptocurrency: the Next Chapter in the Valuation Conundrum

Jul 2024

Earlier this week, the Singapore High Court handed down a decision concerning cryptocurrency valuation in the context of assessing damages for breach of contract and made some important observations in the process. The Court explored two key valuation challenges arising from the uniquely volatile nature of cryptocurrency: (i) how to ascertain market value; and (ii) determining the correct point in time to conduct the valuation. The judgment provides insight on looming issues likely to confront the courts in many common law jurisdictions in the near future, including the Cayman Islands.

A link to the Fantom Foundation decision is here.

Conyers is one of the founding firms behind the Crypto Fraud and Asset Recovery (“CFAAR”) chapter in the Cayman Islands. The Conyers Litigation and Restructuring group has played leading roles on the most high-profile and complex offshore cases involving cryptocurrency exchanges and digital tech service providers (including Aubit International, Atom Holdings and Three Arrows). Therefore, we are closely monitoring developments in this space and valuation issues are no exception.

Factual Background

In Fantom Foundation Ltd v Multichain Foundation Ltd and another [2024] SGHC 173 (“Fantom Foundation”), the Singapore High Court considered the appropriate quantum of damages payable to Fantom following its loss of several crypto assets in a security breach.

Pursuant to various agreements, Fantom Foundation Ltd (“Fantom”) allegedly:

1. deposited a range of crypto source assets into a Multichain Bridge* operated by Multichain Foundation Ltd (“Multichain”); and
2. provided liquidity to Multichain in the form of 4.175m FTM on its side of the Multichain Bridge, in exchange for the equivalent value in FTM (ERC-20) on the Ethereum blockchain side.

Fantom’s assets were subsequently siphoned out of the Multichain Bridge following a security breach. Fantom alleged that this security breach was possible because the First Defendant breached a key term of one of the relevant agreements by not implementing certain security safeguards.

Fantom obtained default judgment against the Multichain Defendants, including damages for breach of contract to be assessed and the delivery up of certain crypto assets.

Assessment of Damages

The Damages Claim

The Court accepted Fantom’s submission that damages should be calculated based on the difference in value of the source assets immediately prior to the security breach, and the value of the wrapped assets in its possession on the date the proceeding was filed. This was based on the general principle that a plaintiff should be returned to the position it was in as if the breach had not occurred.

The Court did explore whether the more appropriate date to assess the post-breach value was the date immediately after the breach was reported, however ultimately accepted the evidence of Fantom’s General Counsel that the price of the assets would have been so volatile on that date that their value would not be of utility.

The FTM Claim

Based on data from a valuation expert, it was said that FTM is most liquidly traded against stablecoin USDT in Binance. On that basis, the expert testified that the appropriate approach to valuing the FTM Claim was to assess the price of 4.175m FTM by reference to what it would cost to trade in terms of USDT in Binance on the date it was transferred to the Multichain Bridge. The court considered this to be an appropriate valuation date as the notional date on which Multichain breached its obligations.

We can see from the judgment that “on the date of the hearing… , even as the hearing was ongoing, the value of 1 FTM shifted by about 2.5% within the space of about a half hour.”

This, of course, leads to issues as to whether a spot value (i.e. the value at a specific point in time on that date) should be used or whether a volume-weighted average price on a particular date should be used ( i.e. an analysis of the over 120 million FTM transferred on Binance that day). On this occasion, the court adopted the lower amount advanced by Fantom on a spot value basis, in part because Fantom did not press the higher amount asserted by the valuation expert.

Importantly, leaving valuation questions open for future cases, the Judge qualified this decision by recognising the following (at [31]):

“On the facts, I found that no injustice would result from adopting the date of the breach as the reference point for assessing damages, although, as I note later in this judgment, assessing damages with reference to the date of breach in this manner may not always be just or even reflective of reality in some cases. I had also no reason, on the evidence before me, to dispute the valuation approach adopted by the Claimant and the Claimant’s experts. Nonetheless, as I did not have the benefit of opposing arguments regarding the method of valuation, I should not be taken to suggest that the approach by the Claimant’s expert and the Claimant as being the optimal or definitive method of valuation in all cases.”

Similar to recent Cayman Islands examples, Fantom has confirmed in subsequent press releases that this litigation was part of a wider recovery effort, which involves appointing a third-party liquidator to help recover and distribute missing or frozen assets for all parties affected by the Multichain fallout.

The Next Chapter

Although these questions did not ultimately require judicial determination on this occasion, the Fantom Foundation decision helpfully canvasses some of the emerging issues in crypto valuation that are likely to confront the Cayman courts (and other courts around the world) in the near future.

Key areas of future controversy flagged in the judgment include:

1. the appropriate methodology to determine the market value of crypto in circumstances where: (a) it has no inherently objective value or single source of truth; and (b) there is massive price volatility fuelled by a disconnect between economic value and perceived value;
2. whether taking a spot value or calculating the volume-weighted average of a cryptocurrency is the more appropriate valuation method, noting that there may be significant price shifts over the course of a day;
3. whether the breach date rule represents the best assessment methodology to value crypto, given its volatility;
4. whether (in exceptional circumstances) it might be possible for a court to measure the quantum of compensatory damages in a crypto context by reference to the defendant’s gains rather than the claimant’s loss, given the difficulty of tracing the movement of assets on the blockchain; and
5. whether the ‘New York rule’ that has developed in the context of securities jurisprudence in some jurisdictions in the US (i.e. the highest market price of the security within a reasonable time of the plaintiff’s discovery of the breach) should be the appropriate approach to crypto valuation.

Further, the Cayman courts have not yet ruled on whether crypto (and, if so, which form(s) thereof) is to be recognised as property under the common law, or for the purposes of the restructuring and winding up regime under Part V of the Cayman Companies Act (2023 Revision).

Given that the Cayman Islands is a leading jurisdiction of choice for companies, funds and foundations focused on crypto investment, it is only a matter of time before many of these questions confront the Cayman courts.

The Conyers team will continue to provide updates on developments in this area. Please reach out to the authors or your usual Conyers contact to receive these updates.