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14 December 2022

Claims for Crypto-Fraud – Courts are Remediating but what’s the consequence?

There are a growing number of decisions where courts are seeking to right the wrongs caused by fraudulent behaviour linked to crypto assets.  The English courts are taking action, but in their efforts to help the ‘victims’ in cases that are generally unopposed, there is little argument over how to treat crypto assets, and consequently they may be creating problematic precedent. The latest example is in Jones v Persons Unknown,[1] a case in which the Court decided that:

  1. There was there was a constructive trust between a crypto exchange and the victim of fraud; and
  2. Bitcoin is a property and therefore subject to an Order for delivery up; and
  3. Summary judgment may be served via NFT airdrop; and
  4. A costs award may be ordered to be paid in Bitcoin.

Factual Background

This case involved a ‘pig butchering’ scam. This is a where a person is contacted on social media or through their phone, and then lured into a digital relationship of trust. Once that trust is established, the victim is convinced to invest their money into an unregulated crypto-currency platform. The victim is unaware that the fraudsters also own the platform, and that the fraudsters will eventually take the money and break off contact.

Mr. Jones was subject to just such a scam and he was convinced to deposit c. 89.61 Bitcoin (c. £1.54 million on the date of judgment) into a wallet on a fake investment platform. Once he had deposited the Bitcoin, he did not get to make the trades himself, but rather the fraudsters used remote desktop software to purport to place trades on his behalf. When he attempted to withdraw his Bitcoin from the platform, he was given a list of excuses as to why this was not possible.

Mr. Jones instructed an investigations firm which traced his Bitcoin (through the unique identifiers that are generated for Bitcoin transactions) to a wallet belonging to a crypto-exchange Huobi Global Limited, which is a Seychelles company. Prior to the granting of summary judgment, Mr. Jones sought and was granted a worldwide freezing injunction against Huobi as the constructive trustee of his Bitcoin, and also against the fraudsters (as person or persons unknown).

Case and Judgment

None of the defendants engaged with the litigation at all. The judge found that Mr. Jones provided evidence of a ‘stark and simple case of deceit and unjust enrichment.’[2] Mr. Nigel Cooper QC (sitting as a Judge of the High Court) granted Mr. Jones summary judgment and in a first for an English High Court:

  1. Found that the crypto exchange held the Bitcoin on constructive trust for the victims of the fraud;[3] and
  2. That Bitcoin is a property and therefore is subject to delivery up ‘either pursuant to the common law rule in Saunders v. Vautier (1841) 4 Beav 115 or pursuant to s.37 of the Senior Courts Act 1981.’[4]

The judge also extended the worldwide freezing injunction until such time as the Bitcoin (or equivalent number of Bitcoin) was delivered up.[5] This is not an out-of-step position to adopt, but there remains a debate as to whether crypto assets should properly be treated as property or currency, and their status has legal consequences.  The UK Jurisdiction Taskforce’s Legal Statement on Cryptoassets and Smart Contracts,[6] as well as several UK decisions, and decisions elsewhere in jurisdictions like New Zealand have treated it as property. These decisions included the English High Court cases of Robertson v Person Unknown,[7]where cryptocurrency was the subject of an asset preservation order, and AA v Persons Unknown,[8] where Bitcoin were subject to an interim proprietary injunction.

For an asset to be classified as ‘property,’ it must be: (i) definable, (ii) identifiable by third parties, (iii) capable in its nature of assumption by third parties, and (iv) have some degree of permanence. It seems the trend is set that crypto should be deemed property. However, it should not be overlooked that submissions to the UK Government have been made to recognise stablecoins – which are asset-backed cryptocurrencies (e.g. 1 Tether = 1 USD) – as legal means of payment, and that would mean not all crypto is treated as property.  Consequently, we would observe that while the case law which so far has been concerned with righting wrongs has found defining crypto as property to be the solution, that may well evolve.

Unique Service

The Court granted permission to serve the Order via NFT airdrop to the wallet that currently held Mr. Jones’s Bitcoin.[9] While this was the first time this method of service has been ordered in a final relief matter, it had been ordered before in cases for interim relief.[10]

The reasons that the Court allowed the alternative service were as follows:

  1. No traditional means of service were likely to be effective in relation to the fraudsters;[11]
  2. Service by email, or by WhatsApp, or by way of NFTS would be the means most likely to bring the proceedings and the Order to the attention of the fraudsters;[12] and
  3. Service via the Hague Convention on the Seychelles company would be too slow. Service by email and NFT was appropriate because it was important that the order come to the attention of the defendants quickly, not least because that much Bitcoin could be ‘dissipated at any moment simply at the flick of a mouse.’

Commentary

Constructive Trust/Bitcoin as a Property

The finding that a crypto-exchange holds crypto-currency as a constructive trustee will be important for victims of crypto-fraud going forward. As the judge said:

”There is no evidence that either the [exchange] nor any other party has any proprietary interest in respect of the claimant’s Bitcoin, which would override the claimant’s beneficial interest in that Bitcoin.”[13]

This means that victims of crypto-fraud who are able to trace their lost crypto back to exchange, will be able to claim their crypto back from that exchange, even where registered company in an offshore jurisdiction.

It is important to note, however, that this case applies only to crypto-exchanges, it does not apply the networks that hold the crypto itself (such as the BSV Network for the original Bitcoin). As recently as March 2022, in Tulip Trading v Bitcoin Association,[14] Mrs. Justice Falk said that there was no ‘realistic prospect of establishing that the facts pleaded amount to a breach of fiduciary duty owed by the [networks] to the [alleged victim of fraud].’[15] She also found that there was no tortious duty of care due owed by the networks to the alleged fraud victim in the context of that claim.[16] The appeal in this case is currently being heard by the Court of Appeal, with a decision expected next year.

The other key finding in Jones was that Bitcoin (and by extension other crypto-currency and crypto-assets) was ‘property’ for the purposes of making an application for delivery up. As the judge noted, the concept of crypto-assets as property has be much debated in English law, but the judge felt that there was now sufficient authority to make a final decision that that they are. This will again make it easier for victims of fraud to have their crypto-assets returned.

Digital Service

Whilst many legal communications are sent via email, under the Civil Procedure Rules, in order to serve documents by email, the party receiving the documents generally must have agreed to service of such via email in advance.[17] Where for some reason the parties have not been able to agree digital service, then Court may make an order for substituted service.[18] This is generally used to allow service via email, but in a number of recent cases, it has been used to effect service via more modern technologies such as NFT airdrop. In a highly digital age, it is encouraging the Courts are willing to embrace these alternate forms of service, though ideally the rules will be updated to make it more straightforward to use them. What the Court considers ‘exceptional’ this year, may well become commonplace in the future, especially as the world becomes gradually more interconnected and speed is of the essence when it comes to preventing the dissipating assets (especially virtual assets).

Costs in Crypto-Currency

The final point to mention in terms of the Court moving with the times, is that the Court order that the defendants should pay the claimant’s cost in Bitcoin, rather than in GBP or some other fiat currency. This is odd because within the space one of case, the Court has treated Bitcoin as property, then as akin to currency.  This shows the flaws in the approach, though it is understandable as to why it was seen as a neat practical solution.  Use as a way to satisfy a costs order may make it easier for the victims of fraud to recover their costs, but it leads to a legal anomaly.  Practically though, the exchanges being ordered to pay costs as crypto-currency may mean they comply with more promptness, though we have yet to see what the reaction is to such orders and if compliance is an issue.  Regardless, crypto-currency, if that is the right term, is not the same as fiat currency. Indeed there is an interesting trend in the use of crypto as currency, when the law is busy stating it is property.  There are even law firms offering to accept crypto-currency as payment,[19] and such use by lawyers may lead to regulatory attention in the new future.

2022 has been a busy year for High Court decisions on crypto.  Separately to the cases discussed in this article, the Court has been so keen to help the victim of crypto-fraud that it has allowed a cross-undertaking for damages (as is the requirement for an interim injunction) where the Court knew that undertaking would be worthless, as the fraudsters took the victim’s life savings, and so she would not be able to pay anything should be the undertaking need to be relied upon.[20] The Court has also made a Bankers Trust Order (similar to a Norwich Pharmacal Order but targeted at a financial institution that has received the proceeds of fraud) against crypto-exchanges (including Binance, the largest crypto-exchange in the world) for information about the owners of accounts to which the allegedly stolen crypto-currency had been transferred to, and where that crypto-currency had been transferred on to.[21] As we mentioned above, the Tulip case has already moved on to the Court of Appeal, and the decision we await there may add further clarification to the rapidly evolving understanding of what crypto is and what it is not. As a result, we expect to be returning to this topic in 2023 when we see what the Court of Appeal has to tell us.

[1]  Jones v Persons Unknown and Others [2022] EWHC 2543 (Comm)

[2] Ibid. at 15.

[3] Ibid. at 21.

[4] Ibid. at 22-23.

[5] Ibid. at 27.

[6] https://www.judiciary.uk/wp-content/uploads/2019/11/LegalStatementLaunch.GV_.2-1.pdf at paragraph 12.

[7] Robertson v Person Unknown CL-2019-000444 (unreported)

[8] AA v Persons Unknown & Ors, Re Bitcoin [2019] EWHC 3556 (Comm)

[9] Above n. 1 at 14.

[10] E.g. D’Aloia v. Persons Unknown [2022] EWHC 1723 (Ch) at 38-40.

[11] Above n. 1 at 32.

[12] Above n. 1 at 34.

[13] Above n. 1 at 21.

[14] Tulip Trading Limited v Bitcoin Association For BSV (a Swiss verein) & Ors [2022] EWHC 667 (ch)

[15] Ibid. at 72.

[16] Ibid. at 109.

[17] Practice Direction 6A, Paragraph 4.1(1).

[18] CPR 6.15.

[19] E.g. gunnercooke – see https://www.law.com/international-edition/2022/02/21/uk-law-firm-starts-accepting-crytpo-as-payment/?slreturn=20221029090649

[20] XY v Persons Unknown and Binance Holdings Ltd [2021] EWHC 3352 (Comm) at 19-20.

[21] LMN v Bitflyer Holdings Inc & Ors [2022] EWHC 2954 (Comm)

Authored by James Tumbridge