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Fraud Insights Developments: Cryptoasset Fraud and Civil Remedies

Posted on 19 October 2021

As expected, a year on from our last Fraud Insights article on cryptoasset fraud and civil remedies, cryptoasset fraud continues to soar. Action Fraud has reported that reports of fraud to its hotline relating to crypto-assets / crypto-currency has surged 57 percent between 2019 and 2020. As a result, the English Courts are now seeing an increasing number of litigants seeking redress against fraudsters.

In the past year, the English Court are developing the law to assist the victims of crypto fraud.  In particular, the English Court has confirmed that:

  1. The lex situs (governing law) of a cryptoasset is the place where the owner of the asset is domiciled thus making it easier for actions to be commenced in the English courts.
  2. Bankers Trust orders can be obtained against crypto exchanges domiciled outside of the jurisdiction. This enables the victims of fraud to obtain information and documents from crypto exchanges outside of England in order to help them identify the fraudsters who have stolen their assets.

Two cases are notable: Ion Science Ltd v Persons Unknown (unreported, 21 December 2020) and more recently Fetch.ai Ltd and another v Persons Unknown Category A and others [2021] EWHC 2254 (Comm).

Background

The Ion case involved allegations of fraud in relation to a cryptocurrency initial coin offering (ICO), the cryptocurrency equivalent of an IPO, used to raise money to create and launch a new type of cryptocurrency. However, unlike the conventional IPO, which is heavily regulated, most ICOs are unregulated by the FCA and, as such, can often be the vehicle of fraudulent schemes

Ion is the first ICO fraud case to come before the High Court. The victims were allegedly induced by persons unknown to invest a total of £577,002 in the form of approximately 64.35 bitcoin in what turned out to be fake cryptocurrency products that did not exist. Through expert tracing work, the victims found that the proceeds of the fraud ended up in accounts held by two cryptocurrency exchanges, Binance and Kraken.

In Fetch.ai, it was alleged that persons unknown accessed the victim's accounts held with Binance. Binance held various types of cryptocurrencies (including USDT, BNB, BTC and FET) and traded the cryptoassets at an undervalue resulting in losses in excess of USD2.6 million.

Legal Status of Cryptoassets

In both Ion and Fetch.ai, the Court confirmed that cryptoassets are a form of property, following the decision of the High Court in AA v Persons Unknown [2019] EWHC 3556 (Comm).  The AA decision had in turn drawn on the analysis of the UK Jurisdiction Task Force Statement on Cryptoassets and Smart Contracts (see our article on this here), as well as the series of interim rulings that preceded it on cases involving cryptoasset fraud. This position has now been consistently adopted by the Courts providing certainty on the proprietary status of cryptoassets.

Important Developments

Beyond confirming the legal status of cryptoassets, Ion and Fetch.ai are significant as they provide much needed clarity on:

  1. Bankers Trust orders can be obtained against crypto exchanges domiciled outside of the jurisdiction. This enables the victims of fraud to obtain information and documents from crypto exchanges outside of England in order to help them identify the fraudsters who have stolen their assets.; and
  2. the lex situs (location) of cryptoassets such as bitcoin in determining whether the English court has jurisdiction to hear claims relating to cryptoasset fraud.

Bankers Trust Orders

A Bankers Trust order is a type of third party disclosure order – it is a form of injunctive relief that victims of fraud can obtain from Court to compel a financial institution to provide information and documents in respect of a customer who has perpetrated a fraud.

At the time of AA v Persons Unknown, there was conflicting authority as to whether Bankers Trust orders could be obtained against an entity domiciled outside of the jurisdiction.   The availability of such a remedy - compelling third parties such as cryptocurrency exchanges to disclose certain information such as the identity of the individuals involved in the fraud – is clearly significant in cryptoasset fraud cases. In the event, the claimant's application for Bankers Trust order in AA was adjourned and its availability for use out of the jurisdiction remained unclear.

However, in Ion, Butcher J decided in favour of granting an application for a Bankers Trust order out of the jurisdiction.  In so doing, he provided much needed direction for cryptoasset fraud cases. He distinguished the previous conflicting authorities and relied on MacKinnon v Donaldson, Lufkin and Jenrette Securities Corporation [1986] Ch 482, in which it was envisaged that a Bankers Trust order might be served out of the jurisdiction in exceptional circumstances, such as cases of hot pursuit.

This is a significant step forward in helping victims of cryptoasset fraud pierce through the semi-anonymous cryptocurrency transactions related to the fraud to help trace money. This approach was also adopted by Pelling J in Fetch.ai where the Claimant successfully obtained a Bankers Trust order against the Binance respondents (including out of the jurisdiction) in order to help it obtain critical information from Binance on the series of transactions made at an undervalue. This included the customer personal data relating to the accounts which received the benefit of the undervalued trades and IP addresses for tracing purposes.

Lex Situs

The further point of significance in Ion was the determination by Butcher J that the lex situs of a cryptoasset is the place where the person or company who owns it is domiciled. In the Ion case, that meant the English Courts had jurisdiction to hear the case as the Claimant (who owned the cryptoasset) was domiciled here (and there was a serious issue to be tried).  This position is supported by the analysis of Professor Andrew Dickinson in his book Cryptocurrencies in Public and Private Law. Prior to this, there was no decided case in relation to the lex situs of a cryptoasset in determining the Court's jurisdiction to hear the claims.

Pelling J in Fetch.ai further considered the lex situs of cryptoassets and, adopting Butcher J's approach, also concluded that the English Court had jurisdiction to hear the claims.

The decisions in Ion and Fetch.ai are to be welcomed and strengthen the English Court's approach to resolving cryptoasset fraud cases, bringing much needed certainty to the legal status of cryptoassets and civil remedies available for victims of cryptoasset fraud.

Commentary:

"This decisions in Ion and Fetch.ai are very significant in the emerging case law relating to cryptoasset fraud. The availability of Bankers Trust (and Norwich Pharmacal) relief against entities domiciled outside of the jurisdiction has been the subject of much litigation (and case law) in the past and the English Courts have previously curtailed the availability of these remedies against entities outside of England and Wales.  However, Ion and Fetch.ai appear to signal a more expansive approach from the English Court in the face of fraud involving cryptoassets. The position (at least for now) is that Bankers Trust orders can be obtained against crypto exchanges domiciled outside of the jurisdiction. This enables the victims of fraud to obtain information and documents from crypto exchanges outside of England in order to help them identify the fraudsters who have stolen their assets and the whereabouts of their assets." - Barry Coffey, Managing Associate.

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