In the 8 July 2024 case of Fantom Foundation Ltd v Multichain Foundation Ltd and Multichain Pte Ltd  [2024] SGHC 173, the Singapore High Court rendered judgement on the assessment of damages involving the valuation of cryptocurrencies.  While the Court recognised that its valuation methodology is not decisive, the case gives an overview of the principles relied on, and the challenges faced by, Singapore courts in assessing cryptocurrency-based damages.

‍Brief Facts of the Case _{[Note 1]}‍

Fantom Foundation Ltd (Fantom) is the developer and operator of the Fantom Opera Chain, a smart contract platform for cryptocurrencies and decentralised applications.  The Fantom coin (FTM) is the native cryptocurrency of the Fantom Opera Chain.

Fantom entered into several agreements with Multichain Foundation Ltd (MFL), the operator of a cross-chain bridge (Multichain Bridge) that, among others, enables trading of cryptocurrencies across different blockchain networks.  Pursuant to the agreements between Fantom and MFL, Fantom deposited various cryptocurrencies into the Multichain Bridge (Deposited Cryptocurrencies) in exchange for cryptocurrencies of equivalent value that are issued on a different blockchain (Wrapped Tokens) and provided MFL with a liquidity pool of 4.175 million FTM (FTM Pool) in exchange for FTM issued on the Ethereum blockchain.  However, due to a security breach on 7 July 2023, assets were stolen from the Multichain Bridge wallet, including assets belonging to Fantom.

Fantom sued MFL for breach of contract, claiming that contrary to the agreed terms, MFL failed to ensure that the Multichain Bridge was controlled by decentralised secure nodes that are incapable of one-person control.  Fantom successfully obtained a default judgement and MFL was ordered:

• to pay damages equivalent to difference between the value of the Deposited Cryptocurrencies as of the date before the security breach and the value of the Wrapped Tokens as of the filing date of Fantom’s court claim against MFL; and
• to deliver the FTM Pool (or its equivalent value) to Fantom.

The question then turned to how to assess the damages and the value of the FTM Pool payable to Fantom, given the inherently volatile nature of cryptocurrencies.

Key Findings of the Court

Approach to the Valuation of Damages

The Court accepted Fantom’s proposed approach of using the values of the Deposited Cryptocurrencies on the date before the security breach occurred, based on the principle that compensatory damages should return the claimant to the position it was in as if a breach had not occurred.  The Court also ruled it was fair to use the filing date of Fantom’s court claim against MFL, rather than the date immediately after the breach occurred (i.e., 8 July 2023), as the reference date for valuing the Wrapped Tokens, because the price of the Wrapped Tokens would have been very volatile on 8 July 2023 and would not have been a fair reference point to assess Fantom’s losses.

Giving weight to Fantom’s expert’s past experience in the valuation of cryptocurrency matters and in the absence of better evidence, the Court also agreed with such expert’s proposal that the reference values of the Deposited Cryptocurrencies can be taken from a leading cryptocurrency price-monitoring platform and the reference values of the Wrapped Tokens can be taken from a decentralised exchange that calculates the rate at which a token can be swapped for another.

Approach to the Valuation of the FTM Pool

The Court accepted Fantom’s expert’s proposed approach of determining how much it would cost to trade the FTM Pool in terms of USDT on the largest cryptocurrency exchange by trading volume in the world (Reference Exchange).  This is because based on information from the purported largest independent cryptocurrency data aggregator in the world, FTM is most liquidly traded against the USDT token in the Reference Exchange.

In deciding to use 14 April 2023, the date on which Fantom transferred the FTM Pool to MFL, as the reference date for valuing the FTM Pool, the Court ruled that:

• based on past dealings between Fantom and MFL, MFL would likely have returned the FTM Pool to Fantom within 1 day or 1 week after the transfer date of 14 April 2023;
• MFL could be said to have breached its contract at any time between 14 April 2023 and 20 April 2023 and Fantom could have chosen any date from that period as the reference date; and
• there is no showing that Fantom arbitrarily chose 14 April 2023 as the reference date, as it was shown that Fantom could have obtained a more favourable valuation by choosing a different reference date.

Challenges to Valuing Cryptocurrency-based Damages

The Court noted that valuing cryptocurrency-based damages in this manner set out in the judgement is not necessarily decisive or optimal, particularly as in this case, MFL did not present opposing arguments regarding Fantom’s expert’s proposed valuation methods.

The Court also noted that, due to the volatile nature of cryptocurrencies, two issues will always pose challenges when determining their value for purposes of assessing damages:

• ascertaining the market value of a cryptocurrency at any particular point in time would always be difficult, given that cryptocurrencies do not inherently have an objective value, there is no single source of truth as to what their value should be and cryptocurrencies are also typically traded against other cryptocurrencies; and
• determining the value of cryptocurrencies as at the date of the breach may not reflect the actual loss of the claimant and it may also be difficult to ascertain when the breach occurred.

‍Conclusion

Given the rising ubiquity of cryptocurrency transactions and the inherent volatility of their values, it is likely that more court cases involving cryptocurrencies will be filed.  While the case is not necessarily decisive, the Court’s methodology in quantifying cryptocurrency-based damages is a starting point which companies and individuals with cryptocurrencies and other digital assets should be aware of.

For More Information

OrionW regularly advises clients on fintech matters.  For more information about fintech, or if you have questions about this article, please contact us at fintech@orionw.com.

Disclaimer: This article is for general information only and does not constitute legal advice.
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[Note 1: As the judgement deals with the issue of how to value cryptocurrencies that were ordered to be paid by a defendant, this article does not discuss the specifics of the agreements and other arrangements between Fantom and MFL.]