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Fraud Insights: Cryptoasset Fraud and Civil Remedies

Posted on 22 June 2020

The popularisation of cryptoassets goes hand in hand with the rise of cryptoasset fraud. According to the Financial Conduct Authority (FCA) and Action Fraud, the number of reports on cryptoasset and exchange scams have more than tripled to over 1,800 from 2018 - 2019, with victims claiming losses on average of over £14,600. This trend is expected to increase and will no doubt result in many cryptoasset fraud cases being the subject of litigation. Recently, the Courts have provided much needed clarity on the fundamental legal status of cryptoassets and recent case law shows the Court's willingness to utilise common law tools to give victims access to civil remedies - such as proprietary injunctions and disclosure orders - to help them recover their misappropriated assets.

What are cryptoassets?

A cryptoasset is a digital representation of value which utilises cryptography, peer to peer networking and distributed ledger technology (DLT) to regulate the creation of new units and verify, record and secure transactions without the use of a central bank or government to manage systems. It is an umbrella term that covers cryptocurrency, utility tokens and crypto-fiat currencies.  See our dedicated Blockchain Blog for articles related to DLT such as blockchain and cryptoassets.

Legal status and civil remedies

On 18 November 2019, in what Sir Greggory Vos called "a watershed for English Law", the UK Jurisdiction Taskforce of the Law Society's LawTech Delivery Panel (UKJT) published a legal statement that cryptoassets are "sufficiently permanent or stable to be treated as property" under English law. The legal statement acknowledges five key characteristics of cryptoassets: (1) intangibility, (2) cryptographic authentication, (3) use of a distributed transaction ledger, (4) decentralisation, and (5) rule by consensus. It found that with such "novel" characteristics, a cryptoasset is not a 'thing in possession' (tangible property that can be the subject of physical possession and control) and not strictly a 'thing in action' (as a cryptoasset does not in itself embody any right capable of being enforced by action). However, the legal statement concludes that this does not mean that it cannot be treated as property. Rather, a cryptoasset may be best treated as being another, third kind of property which is neither a thing in action nor a thing in possession. You can find more details on the UKJT's legal statement here.

The recent developments in case law relating to cryptoassets have been in line with the UKJT's approach towards cryptoassets. The High Court's interim decisions in Liam David Robertson v Persons Unknown (unreported 15th July 2019) and Vorotyntseva v Money-4 Ltd and others [2018] EWHC 2596 (Ch), acknowledged bitcoin and Ether as legal property. On the basis that bitcoins were property, the Court granted Mr Robertson (Claimant) - (1) an asset preservation order (APO) against 100 bitcoins (BTC) (worth over £1 million at that time) which was stolen from him in a spear phishing attack; and (2) made Bankers Trust orders for the exchange platform to disclose information. Whilst the Court was able to grant an APO, it was not able to go so far as to grant a broader freezing injunction against the Defendants whilst their identity was still unknown. However, in its decision in Vorotyntseva, the High Court demonstrated its willingness to grant a freezing order over bitcoin and Ether fraudulently held by known persons. Despite their interim status, both judgments illustrate a decisive stance of the English Court in assisting victims of cryptoasset fraud to help identify and take action against suspected fraudsters.

Most recently, the High Court's decision in AA v Persons Unknown [2019] EWHC 3556 (Comm), which came soon after the UKJT's legal statement on cryptoassets, helpfully endorsed the UKJT's analysis on cryptoassets. The Court acknowledged that whilst the legal statement is not capable of being a binding statement in law, it is "compelling" and should be adopted. The Court did just that by concluding that cryptocurrencies are a form of property capable of being the subject of a proprietary injunction. As a result, the Claimant, the insurer of the victim of a ransomware, was granted a proprietary injunction against the Defendants over the 97 BTC in an account operated by cryptoasset exchange, Bitfinex. Despite the uncertainty around the identity of the hacker/s, the proprietary injunction was enforceable against the Bitfinex. This was where, through the use of tracing methods by a third party blockchain investigation specialist, it was found that most of the bitcoin which had been paid by way of ransom was held.

Our specialist team has investigatory capabilities and are well placed to contribute to similar cryptoassets tracing services.

Claire Broadbelt, Partner in the Fraud Defence and Business Disputes Group at Mishcon de Reya says:

"The UKJT and English Court's recognition of cryptoassets as a form of property provides the confidence and certainty sought by users of cryptoassets in this jurisdiction. As evident through the cases that have reached the Court - the biggest obstacle in obtaining a legal remedy for a victim of cryptoasset fraud is in identifying the fraudster and in tracing the proceeds of the fraud. This is due to the pseudonymous nature of cryptoassets that can make it very difficult to obtain the information a victim ordinarily needs in order to pursue a claim (i.e. name and address of the wrongdoer(s)). The use of public key cryptography and the lack of mandatory KYC/AML checks on many platforms makes it particularly difficult to identify wrongdoers and trace cryptoassets. Therefore, it is essential that the victim of a cryptoasset fraud should move quickly to engage specialist cryptoasset investigators and legal practitioners who are skilled and experienced in tracing the movement of cryptoassets and are well placed to seek interim remedies from the Court to maximise the prospects of preserving and recovering the misappropriated assets."

Thai Nguyen, Associate in the Fraud Defence and Business Disputes Group at Mishcon de Reya says:

"The changes brought about by the fifth money laundering directive to the UK's Money Laundering Regulations help to strengthen the AML regulation of cryptoassets and is another step in strengthening the UK's approach towards money laundering and fraud in the crypto market. Most significantly, it brings cryptoasset exchanges and wallet providers (who in many cases are the gatekeepers between cryptoasset transactions) under the supervision of the Financial Conduct Authority in its role as the supervisor of cryptoasset businesses in the UK for AML purposes. Cryptoasset exchange providers and wallet providers must carry out customer due diligence checks and comply with certain reporting requirements of any suspicious transactions, and the FCA will maintain a register of such entities. Victims of fraud involving cryptoasset exchanges may seek interim disclosure applications against regulated entities to obtain the KYC information that the exchange houses and wallet providers hold on their customers. This in turn will assist in identifying wrongdoers and tracing cryptoassets, so as to subsequently form the basis of legal proceedings to recover misappropriated funds."

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