From peaks to troughs: the complexities of valuing cryptocurrencies for damages

In the early hours of 26 December 2004, a massive undersea earthquake struck off the western coast of Sumatra, triggering high velocity waves of an initial height of 30 to 60 centimetres which grew to nine metres in height as they approached land. Within seven hours, the massive waves reached 14 countries, decimating communities and leaving around 230,000 unsuspecting people dead in its wake – the deadliest natural disaster in the 21^st century.

In some ways, the rise and fall in cryptocurrency prices resembles wave behaviour during a tsunami. Market speculation and hype often drive rapid price increases. When excitement wanes or market confidence is lost, a massive sell-off ensues, and the cryptocurrency loses much of its value.  This price volatility is exacerbated by the fact that many cryptocurrencies lack intrinsic value. 

In the last five years alone, the total market capitalisation of cryptocurrencies grew 30-fold to a staggering peak of around 3 trillion USD before suffering two market corrections, with the 2022 correction resulting in a one-third drop in market capitalisation.

The volatility of the cryptocurrency market poses special challenges to courts in the assessment of damages when the assets in question are cryptocurrencies. At which point in time should damages be assessed? How does one ascertain the market value of cryptocurrency? The Singapore High Court had the opportunity to comment on these issues in the case of Fantom Foundation Ltd v Multichain Foundation Ltd and another [2024] SGHC 173 (Fantom Foundation).

Background 

In Fantom Foundation, the Claimant, Fantom Foundation Ltd, obtained default judgment against Defendants Multichain Foundation Limited and Multichain Pte Ltd for breach of several agreements allowing the Claimant to integrate its blockchain with the Defendants’ multichain bridge (Multichain Bridge) facilitating trade across blockchains (the Integration Agreements), and return of the Claimant’s native token (or its equivalent value), Fantom (FTM), under a liquidity facility (Liquidity Facility).

Under the Integration Agreements, investors would be able to trade cryptocurrency on other blockchains by locking cryptocurrency on the Multichain Bridge in exchange for ‘wrapped tokens’ created, or ‘minted,’ by the Multichain Bridge and backed by the locked cryptocurrency. Pursuant to the Integration Agreements, the Claimant deposited various source cryptocurrency assets (the source assets) on the Claimant’s side of the Multichain Bridge to mint the value-equivalent of wrapped tokens on the other side (the wrapped assets). 

Under the Liquidity Facility, the Claimant also deposited around 4.175m of FTM on the Multichain Bridge in exchange for the equivalent amount of wrapped FTM tradeable on the Etherum blockchain (FTM (ERC-20)), to be repaid by the Defendants within a day or two up to a week later, to improve liquidity for transactions involving FTM and FTM(ERC-20) on the Multichain Bridge.

On 7 July 2023, a massive security breach occurred on the Multichain Bridge, resulting in unauthorised withdrawals of source assets of over USD 127 million, leaving the Claimant with around USD 3,209.12m worth of wrapped assets on 18 September 2023, the date of the claim. The Defendants also failed to return the 4.175m FTM deposited on the Multichain Bridge. This matter came before the Court for assessment of damages on 8 June 2024. 

When should damages be assessed? 

In Fantom Foundation, the Claimant invited the Court to assess damages with reference to the date of the breach (breach-date rule), that is, on 7 July 2023, when the source assets were dissipated and 14 April 2023, the date when the Claimant deposited 4.175m FTM with the Defendants without any repayment in return. This approach is uncontroversial and reflects the default position under Singapore law. While the Court rightly accepted the Claimant’s position, the Court noted that this approach would not necessarily be fair or accurately represent the situation in certain cases.

For one, applying the breach-date rule may not accurately reflect a claimant’s loss when there is a drastic change in the crypto asset’s price following the date of the breach. Using the example of one Bitcoin misappropriated by a defendant at the end of 2018, the Court highlighted that the value of the misappropriated Bitcoin would be worth USD 4,000 at the date of the breach, USD 7,000 if the claim were filed one year later, USD 27,000 at the time of trial one year later, and USD 60,000 by the time judgment is rendered at the end of June 2024.

With regards to the 4.175m FTM owed by the Defendants, the Claimant gave evidence that the FTM had more than doubled in value from the date of breach to the date of valuation some nine months later from around USD 2.13m to over USD 4.5m. While this line of argument was not pursued by the Claimant, it is not difficult to see how valuing a crypto asset at the date of the breach might cause injustice to a claimant in some instances. 

To mitigate possible injustice, the Court observed that US courts have developed the “New York rule” in the context of securities jurisprudence which values an asset at the highest market price of the asset within two to three months following a claimant’s discovery of the breach, on the basis that two to three months would be a reasonable time for a claimant to replace an asset on the market. This rule was applied in the context of cryptocurrency valuation in the Delaware Superior Court case of Diamond Fortress Technologies Inc v EverID Inc 274 A.3d 287. Even so, this approach may still be inadequate to account for highly volatile assets like cryptocurrency. 

How does one ascertain the market value of cryptocurrency? 

According to the Court, assessing the market value of cryptocurrency “necessitates the use of educated guesses,” since cryptocurrencies are priced somewhat differently on different exchanges due to a myriad of factors such as liquidity, transaction costs, and order book differences. This, coupled with the lack of intrinsic value and high volatility discussed above can lead to price uncertainty. 

That said, the Court accepted the Claimant’s valuation of the source assets, wrapped assets and 4.175m FTM with reference to prices stated on reputable crypto price monitoring platforms and crypto exchanges, with the caveat that the use of the Claimant-owned Spookyswap exchange as a valuation tool for the wrapped assets may pose conflict of interest issues (which were eventually found to be absent in the present case).

Observations and concluding comments 

At the end of the day, it bears mentioning that the end-goal of an assessment of damages exercise is to restore a claimant to the position they would have been in had the breach had never occurred. Often, this means valuing the assets at the date of the breach. 

If a later valuation date is sought for, potential claimants would do well to justify the later date by presenting evidence that they would have held the assets in question for longer instead of disposing them on the market had the breach not occurred. 

A court examining the matter might find a claimant more convincing if they are able to point to reliable evidence of a rising market and strong fundamentals or use cases indicating intrinsic value. Conversely, claimants should also be prepared for the possibility of having their assets valued at a lower value compared to the market value at the time of the breach to take into account sudden and dramatic price collapses. 

Ultimately, a careful and well-supported approach to assessing damages can significantly impact the outcome of a claim, ensuring that justice is served while reflecting the true economic realities of the situation.