In this article we look at two recent English court decisions relating to cryptocurrency fraud and examine what remedies are available to help with seeking recovery of cryptoassets lost due to fraudulent activity.
Setting the scene
According to Financial Conduct Authority (“FCA”) consumer research, the number of people who own cryptocurrencies in the UK stands at around 2.3 million. This number is only predicted to increase as more people look to diversify investment portfolios and seek to benefit for the potential returns offered by such investments. FCA data indicates that consumers are now much less likely to view such investments as a “gamble” and “are more likely to see them as an alternative or complement to mainstream investments, with half of crypto users saying they intend to invest more”
Notwithstanding increasing levels of interest in cryptocurrency, the FCA continues to regard cryptoassets as “very high risk, speculative investments.” This is not only due to the fact that cryptocurrencies remain largely unregulated in the UK, but also because the market continues to see increasing levels of fraudulent activity. According to a report recently published by US blockchain analysis firm Chainalysis, cryptocurrency related crime surged in 2021 with illicit addresses (i.e. wallets tied to criminal activity) receiving $14 billion in digital currencies. This is up from $7.8 billion in 2020. That said, the volume of illicit transactions remains very small compared to the overall volume of transactions – just 0.15% according to Chainalysis estimates.
The law relating to cryptocurrency remains relatively new and continues to see development. Two recent cases are: (a) Ion Science Limited and another v (1) Persons Unknown, (2) Binance Holdings Limited and (3) Payment Ventures Inc (unreported) 21 December 2020 (Commercial Court) and (ii) Fetch.ai Ltd and another v Persons Unknown and others  EWHC 2254 (Comm). Both cases are good examples of the types of fraudulent activity that may take place and highlight the remedies available to assist fraud victims with seeking recovery of those assets.
Ion Science Limited v Persons Unknown
This claim relates to a fraudulent initial coin offering (“ICO”). The claimants claimed they had been induced by persons unknown, claiming to be representatives of a Swiss company called Neo Capital, to transfer funds in the belief that those same funds would be used to invest in various cryptocurrency products. An initial investment in Ethereum and Dimecoin was successful and resulted in a profit of some £15,000. As a result, the claimants were persuaded to make further investments in two ICOs: Uvexo and Oileum.
The approach adopted by the fraudsters for each transaction was the same. They were granted remote access to the second claimant’s computer and money was transferred from his personal account to his Coinbase account. The funds were used to purchase Bitcoin, which were then transferred, supposedly to Uvexo and Oileum.
The claimants were told the Oileum investment had generated a profit of some $15 million, but to release those funds a commission payment would need to be paid. The second claimant allowed a further transfer to take place of £250,000 in the form of 29.013 Bitcoins that were supposedly transferred into an escrow account for commission payments.
In total, £577,000 was debited from the second claimant’s personal account and converted into 64.35 Bitcoins, which were then transferred away. The claimants received nothing in return.
The claimants relied on an expert report that stated that the Bitcoins, or assets representing those coins, had been transferred to accounts held by two cryptocurrency exchanges: Binance and Kraken. The expert gave evidence that both exchanges were likely to hold information that would identify the owners of those accounts.
Judgment of Mr Justice Butcher
The judgment is helpful in a number of respects.
First, it expresses the view that cryptocurrency is a form of property for the purposes of English law. This is consistent with the 2019 UK Jurisdiction Taskforce legal statement on cryptoassets and smart contracts, and also the decision of the English court in AA v Persons Unknown  EWHC 3556 and the New Zealand High Court in Ruscoe v Cryptopia Ltd (in Liquidation)  NZHC 728.
Secondly, the Judge expressed the view that the lex situs of a cryptocurrency is likely to be the place where the person who owns the asset is domiciled.
Thirdly, it demonstrates the willingness of the English court to grant disclosure orders against cryptocurrency exchanges operating outside of the UK.
The first issue that the court had to decide was whether it had jurisdiction over D1, especially where the fraudsters could literally be located anywhere. The Judge concluded that he did on the basis that there was a serious issue to be tried and England was the proper forum for the resolution of the claims.
In considering which law applied, the Judge’s view was that there was a good arguable case that it was English law as the damage had occurred here. This was on the grounds that the bank account used to fund the transaction was an English account or the asset was taken from the claimants’ control in England, as the computer used by the fraudsters was located here. Alternatively, it was arguable that the location of a cryptoasset for legal purposes is “the place where the person or company who owns it is domiciled.” This meant that English law would apply as the claimants were domiciled in England. The situs (or location) of the property is important as it determines the law which then applies (i.e. the lex situs). In reaching this conclusion, the Judge acknowledged that there appeared to be no decided case law on the lex situs of a cryptoasset, but he was satisfied this was the correct analysis.
Remedies granted against persons unknown
The first remedy sought was a proprietary injunction preventing the fraudsters from dealing with the coins, or any other assets representing them, pending the claim being resolved at trial. Having determined there was a serious issue to be tried, the Judge concluded that the balance of convenience lay in favour of the grant of an injunction as there that was a prima facie case of wrongdoing and there was no reason to believe that the fraudsters would have the means to satisfy a monetary judgment. An injunction was, therefore, appropriate.
The second remedy sought was a worldwide freezing order (“WFO”). Having concluded there was a good arguable case, the Judge had to consider if there was a real risk of dissipation. Based on the fact that false aliases and documentation had been used, and Neo Capital did not appear to be a genuine company, the Judge found that there was. The fact that no assets could be readily identified was not, in the words of the Judge, “a bar to the grant of this type of freezing order in this type of case”. A WFO was granted.
Remedies granted against the cryptocurrency exchanges
Binance Holdings Limited (“BHL”) and Payment Ventures Inc (“PVI”) were alleged to be the parent companies behind the Binance and the Kraken cryptocurrency exchanges. Both companies were based out of the UK.
No actual claim was made against either BHL or PVI. The claimants wanted information to enable them to identify the fraudsters and then seek recovery of the assets. For that purpose, the claimants sought what is called a Bankers Trust order (“BTO”). This is a specific type of disclosure order available in clear cases of fraud where the assistance of a third party is required to obtain confidential information and/or documents to support a proprietary claim.
Applying the five-stage test set out in Kyriakou v Christie Manson & Woods Ltd and others  EWHC 487 (QB), the Judge concluded it was appropriate to grant a BTO against both BHL and PVI.
FETCH.AI Ltd and another v Persons Unknown and others
The claimants alleged that fraudsters had gained unauthorised access to accounts held with the Binance cryptocurrency exchange. The fraudsters then sold certain assets at below market value, causing a loss of some $2.6 million. The relief sought was for the most part identical to the relief sought in Ion Science.
Remedies granted against Persons Unknown
The court began by considering the scope of the words “persons unknown” and came to the view that the definition used by the claimants was too wide as it would potentially catch persons who had unwittingly come into possession of the coins without knowing that they belonged to the claimants. The Judge directed that the definition of “persons unknown” be split into three categories:
- Persons directly involved in the fraud.
- Persons who had received the assets having paid below market value.
- Innocent recipients.
The Judge directed that the third category had to be narrowly defined to ensure that parties who had no knowledge of or reason to believe that they were in possession of assets belong to the claimants did not find themselves in breach of the order. This was achieved by limiting the scope of the proprietary relief granted to assets held by persons who either knew, or ought to have known, that the assets belonged to the claimants.
The Judge concluded that the English court had jurisdiction to hear the matter and that England was the proper forum for the litigation on the basis that the damage had occurred here. Mr Justice Pelling also referred to the judgment in Ion Science and agreed that the lex situs of a cryptoasset is likely to be the place where the person who owns it is domiciled.
Remedies granted against the cryptocurrency exchanges
The claimants also sought BTOs against the companies alleged to be behind the Binance exchange. Following the decision in Ion Science, the Judge stated he was satisfied that a BTO could in principle be served out of the jurisdiction. The view expressed by the Judge on this point is not binding and is one which will undoubtedly be revisited in future cases. The Judge did, however, decide that he did not have jurisdiction to make a Norwich Pharmacal Order against a foreign company based on the decision in AB Bank Limited v Abu Dhabi Commercial Bank PJSC  EWHC 2082 (Comm).
The approach of English law to cryptocurrency is far from settled and will continue to develop. However, the judgments in Ion Science and Fletch.ai give some indication as to the direction of travel and how the English court may approach similar issue in the future.
There are several general principles that can be taken from these cases:
- The court agreed with the decision in AA v Persons Unknown by concluding that cryptocurrencies are property for the purposes of English law. This is consistent with the view expressed by the UK Jurisdiction Taskforce and by the New Zealand High Court. What is less clear is the legal basis for that conclusion. This will require further clarification.
- The lex situs of a cryptocurrency is likely to be the place where the person who owns it is domiciled.
- There is demonstrable willingness of the part of the English court to make BTOs against cryptocurrency exchanges, even where they are based out of the jurisdiction. Only time will tell if the English court continues with that approach.
Both cases are a powerful reminder of the risks faced by investors. While the volume of illicit transactions remains relatively minor when compared to the overall volume of transactions, it is important investors remain live to the risks and take appropriate steps to guard against them.
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