The rise of cryptocurrency fraud
Crypto fraud losses in the UK have increased by 40% in the past year according to Action Fraud, and the English Court has in turn seen an increase in the number of crypto-related fraud cases being brought before the courts. The English court has shown its willingness to assist victims of crypto fraud by deploying its arsenal of injunctive remedies in respect of crypto assets, such as ordering the disclosure of KYC information and records under the Court's Norwich Pharmacal/Bankers' Trust jurisdiction, and freezing crypto assets. In doing so, the court has demonstrated its willingness to adapt and sometimes expand the application of these remedies so that effective relief can be obtained in crypto fraud cases.
In the majority of these cases, the relief has been obtained on an ex parte basis (without the respondent being given notice of the application or attending the hearing) against 'persons unknown' or parties based in other jurisdictions, who have not subsequently engaged in the proceedings. Although any applicant must comply with their duty of full and frank disclosure, this means that the Court would not have had the benefit of getting the Respondent's side of the story or hearing their counterarguments. Recently, we are seeing more cases where a respondent, often a cryptocurrency exchange, has engaged in proceedings and challenged the basis on which orders have been made against them.
Piroozzadeh v Persons Unknown Category A & Others [2023] EWHC 1024 (Ch) is one such case, in which the English High Court discharged an interim proprietary injunction made against Binance Holdings Ltd ("Binance") in respect of Tether deposited at the exchange. The judge discharged the injunction for breach of the applicant's duty of fair presentation. However, he concluded that even if there had been fair presentation, he would not have continued the injunction against Binance. The case highlights the importance of targeting applications for interim relief narrowly and against the appropriate respondents, and of making full disclosure of all relevant facts and possible defences, in accordance with the duty of full and frank disclosure.
Background in Piroozzadeh
In Piroozzadeh, the Claimant was induced to transfer nearly CAD$2 million to bank accounts and 870,818 Tether to four separate cryptocurrency wallets controlled by the alleged fraudsters. Some of the Tether tokens were subsequently traced by the Claimant's investigators to deposit addresses, aka "hot wallets", at Binance.
At the ex parte hearing before Sir Anthony Mann in October 2022, Sir Anthony Mann granted a proprietary injunction requiring Binance to preserve the Claimant's Tether or its traceable proceeds and a disclosure order under the Bankers' Trust jurisdiction. The order was subsequently served on Binance outside of the jurisdiction.
Binance brought an application to discharge the application. It argued that it had been inappropriate to seek the interim relief without notice to Binance, as Binance had not been accused of any wrongdoing and there was no evidence that Binance would take steps to tip off the other defendants.
Binance made four key arguments in support of its application to discharge the injunction:
- The Claimant had not explained the possible defences available to Binance in respect of its alleged liability as a constructive trustee, in breach of their duty of full and frank disclosure. Specifically, they had not raised the possible defence that Binance had been a bona fide purchaser for value of the Tether deposited with it.
- In any event, there was not a sufficient risk of a breach of trust by Binance to justify the injunction made against it.
- The Claimant did not explain why damages would not be an adequate remedy.
- The injunction could not practically be complied with as hot wallets operate as a central pool and any one user's tokens are not specifically segregated and identifiable.
Findings: the importance of explaining the technical and tailoring your relief appropriately
The Judge discharged the injunction against Binance, accepting Binance's arguments above.
The Judge criticised the Claimant for failing to properly explain how the Tether was held (i.e. in a pooled wallet) and for failing to explain how Binance would be able to freeze the Tether as a matter of practical reality. Although the judge concluded that he did not need to reach a conclusion on whether Binance was a constructive trustee for the purposes of his judgment, there are indications in the judgment that he had serious doubts about that in the absence of any evidence that Binance was mixed up in the wrongdoing.
The Judge also criticised the Claimant for failing to differentiate between the various defendants against whom the orders were sought, i.e. the alleged fraudsters on the one hand and the exchanges (against which no fraud allegations were made) on the other. In doing so, he accepted Binance's submissions that the obvious solution in this case would have been to seek the proprietary injunction against the fraudsters and serve any order on Binance as a non-respondent.
Conclusion: the high burden on claimants seeking ex parte interim relief
This is a developing area of the law which has seen some landmark cases in the past few years. The English High Court has proven its willingness to assist victims of fraud by freezing crypto assets and ordering disclosure of key information to identify wrongdoers and recover assets such as exchanges' KYC information and trading records. However, this case shows the high burden on claimants seeking ex parte interim relief and the importance of providing full and frank disclosure. When seeking ex parte relief, there is a duty on claimants to make all the relevant technical facts known to the Judge and to anticipate the defences that the other side would have run had they been present at court.
In many instances, the key to unlocking crypto fraud is obtaining disclosure from third party cryptocurrency exchanges that have received the stolen funds. However, it is key to differentiate between this type of relief, which does not implicate the respondent in the wrongdoing, and the more onerous type of interim injunction aimed at preventing any further dealing with assets. This latter form of relief will only be available when the relevant assets have not been acquired by a bona fide purchaser for value and, crucially, when it is technically possible to ringfence the particular assets in respect of which a proprietary claim is made.