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Knowledge is power – new jurisdictional gateways for information applications make pursuing crypto claims easier

Posted on 1 November 2022

The rise in the popularity of cryptocurrency over the past decade has inevitably led to a rise in cryptocurrency related litigation.

Perhaps unsurprisingly, the majority of crypto cases heard in the English courts thus far have involved an element of fraud. Generally, the fact pattern for these cases is largely similar: an individual is enticed to invest in a fictitious opportunity. Typically, this is either the purchase of a sham cryptocurrency, or a sham purchase of a genuine cryptocurrency through a sham trading platform. When the individual then wants to cash in their investment or transfer the control of the cryptocurrency back to themselves, they are either entirely unable to do so or are requested to pay a further amount in "commission". It is at this point that the individual tends to recognise that they may have been the victim of fraud and looks to the law for help.

The challenges for crypto asset claims

When this happens there are two initial issues which commonly arise in the context of crypto fraud: (1) identifying who the wrongdoer is; and (2) determining what remedies can be sought. Whilst these questions arise in the context of any commercial litigation, they have proven significantly more difficult to determine when dealing with claims in relation to crypto assets.

The answer to the second question has received some helpful clarity thanks to the welcome judgment of Mr Justice Bryan in the seminal case of AA v Persons Unknown, in which he confirmed that cryptocurrency is in fact property which is capable of being held on trust. This is important as it means that proprietary remedies are available in cases involving cryptocurrency fraud – including proprietary injunctions and tracing. It should however be noted that the classification of crypto assets as "property" has not yet been challenged in a full trial or at appellate level.

The question of who the action is to be taken against can prove tricky to determine in cryptocurrency cases. As Judge Mark Pelling KC set out in his speech in July of this year, "the problems that arise are generally ones of identification and jurisdiction in relation to those who have engineered the fraud, those to whom assets belonging to the victims have been transferred and received either unconscionably or otherwise and those who can provide relevant information about the identity of those responsible for the fraud or the whereabouts of the victim' assets or their traceable equivalent." This is due largely to the fact that, prior to the introduction of the new jurisdictional gateway "Gateway 23" in the Civil Procedure Rules Practice Direction 6B paragraph 3.1(25), there was no authority in English law which allowed Norwich Pharmacal orders to be served on third parties outside of the jurisdiction.

The preceding case law

Norwich Pharmacal orders may be obtained against third parties that may have information about the ultimate wrongdoer, where the third party is involved or "mixed up" in the wrong-doing, whether innocently or not, but is not likely to be a party to the main proceedings.

It is not necessary to have commenced substantive proceedings against the ultimate wrongdoer when a Norwich Pharmacal order is sought. Norwich Pharmacal orders are often used to discover the identity of the suspected fraudster, whereas Bankers Trusts order are sought where there is a clear case of fraud and disclosure of information is necessary to trace a claimant's assets. Accordingly, the application of a Norwich Pharmacal order, when the court permits one to be obtained, is wider. The benefits of being able to obtain a Norwich Pharmacal order in crypto asset fraud are therefore significant, especially as a pre-action tool to identify the suspected fraudster without having to issue proceedings.

However, the case law on this point to date has been somewhat conflicting, making it difficult to obtain Norwich Pharmacal orders to be served outside of the jurisdiction in crypto asset claims.

In Ion Sciences Limited & Another v Persons Unknown & Ors, Mr Justice Butcher granted the claimants a Bankers Trust order to be served outside the jurisdiction, even though no other positive remedy was sought against the respondent other than information. Butcher J's reasoning for allowing this was that he was satisfied that there was a good arguable case that the respondents against whom the disclosure order was being sought would be necessary or proper parties, within the meaning of CPR PD 6B paragraph 3.1(3), to the main claim. As the claimants in the present case were seeking a Bankers Trust order, this could be granted as the case involved "hot pursuit" which could be deemed an exceptional circumstance – allowing the court to grant such an order to be served outside of the jurisdiction.

Butcher J addressed the case of AB Bank Ltd v Abu Dhabi Commercial Bank PJSC, wherein Mr Justice Teare stated that there was no jurisdictional gateway by which the English courts could make a Norwich Pharmacal Order against a party located outside of the jurisdiction. Butcher J, however, declined to give a view as to whether the AB Bank Ltd case was incorrectly decided and distinguished the Ion Sciences case from AB Bank Ltd by the fact that the parties were only seeking a Bankers Trust order against a third party located outside of the jurisdiction which, for the reasons set out above, he believed could be granted by the court.

The basis for Butcher J's distinction between a Banker's Trust order and a Norwich Pharmacal order is not entirely clear. However, in paragraph 22 of the judgment, Butcher J seems to suggest that a Bankers Trust order can be granted for service outside the jurisdiction because, as stated above, cryptocurrency is now considered property and therefore proprietary remedies can be sought. Thus, a Bankers Trust order can be served outside the jurisdiction and used to obtain a propriety remedy – i.e the tracing of the crypto asset. This seems to distinguish the order from a Norwich Pharmacal order – which may be used to seek a personal remedy.

Similarly, in the case of Fetch.ai Limited v Persons Unknown His Honour Judge Pelling KC applied Butcher J's reasoning, stating that a Bankers Trust order could be served out of the jurisdiction with reference to one of the jurisdictional gateways identified in Ion Sciences. His Honour Judge Pelling KC went on to say that, having regard for Teare J's decision in AB Bank Ltd, he could not consider making a Norwich Pharmacal order for a third party located outside the jurisdiction. The Judge in this case did, however, note at paragraph 30 of his judgment that there were "serious issues to be considered as to whether or not the distinction between a Norwich Pharmacal order and a Bankers Trust order can be maintained."

In the 2021 case of Mr Dollar Bill Ltd v Persons Unknown & Ors, however, Mr Justice Trower took a different view, granting the claimants permission to serve Norwich Pharmacal orders against two cryptocurrency exchanges located outside the jurisdiction.

The new gateways

Fortunately, the introduction of the new jurisdictional gateway for service of Norwich Pharmacal orders provides certainty as to the court's jurisdiction. This is because, with effect from 1 October of this year, CPR PD 6B 3.1 (25) now states: "the claimant may serve a claim form out of the jurisdiction with the permission of the court under rule 6.36 where a claim or application is made for disclosure in order to obtain information (a) regarding: (i) the true identity of a defendant or a potential defendant; and/or (ii) what has become of the property of a claimant or applicant; and (b) the claim or application is made for the purpose of proceedings already commenced or which, subject to the content of the information received, are intended to be commenced either by service in England and Wales or pursuant to CPR rule 6.32, 6.33 or 6.36."

Paragraph 3.1(25) now expressly provides a jurisdictional gateway for a Norwich Pharmacal order to be served on a party outside of the jurisdiction. As evidenced above, it was previously unclear whether the court had such jurisdiction, but the introduction of paragraph 3.1(25) removes any uncertainty.

This will assist those who have been the victim of cryptocurrency fraud and its inclusion demonstrates, once again, the English court's dynamic attitude to this developing sector.

Other jurisdictional issues

A further jurisdictional issue that crops up in the context of cryptocurrency cases is the question of where the assets are located. The jurisdiction of the location of such assets relevant to the governing law and to the process for service of any orders.

This remains an area of uncertainty under English law. In Ion Sciences, Butcher J determined that the lex situs of the asset was where the owner of the cryptocurrency is domiciled. Conversely, in the more recent case of Tulip Trading Limited v Bitcoin Association for BSV & Ors, Mrs Justice Falk, with reference to Butcher J's judgment, decided that it makes more sense to look at where the owner of the crypto asset is resident, rather than domiciled. In reaching this conclusion, she commented that Butcher J refers to both "residence" and "domiciled" in his judgment "strongly indicating that he was not intending to say that domicile was the sole relevant test."

It therefore remains to be seen what the courts will consider is the correct lex situs of the asset – however given that cases which involve fraud often will have companies or individuals domiciled in obscure jurisdictions, it is perhaps the residence test which is the more relevant.

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