As the market for crypto assets has continued to grow, so the appetite for fraudulent behaviour and the resulting legal actions, has also risen to meet it.
Since the start of 2021, hacks and frauds worth a total value of almost $3 billion have taken place, with each case averaging a worth of $93.3 million. Since our last blog post on crypto assets and the legal issues surrounding them, the English courts have dealt with several further crypto dispute cases and offered clarity on a number of issues.
The two most recent cases, Fetch.AI and Ion Sciences, have both been ex parte applications in which the claimants have successfully sought injunctive relief against anonymous fraudsters, the ’Persons Unknown’. They have also sought disclosure orders against exchanges, to assist with the tracing of their misappropriated assets.
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1) Ion Science Ltd 2) Duncan Johns v 1) Persons Unknown 2) Binance Holdings Limited 3) Payment Ventures Inc (Unreported) – ("Ion Science")
Available through Practical Law here.
In early 2020 Duncan Johns, the sole shareholder and director of Ion Science (together "the Claimants"), was allegedly approached by a Ms Black, a representative of a Swiss Investment firm called Neo Capital. After giving Ms Black remote access to his computer, Mr Johns watched as she made several successful investments in cryptocurrencies. Mr Johns was thereon convinced that this was a profitable endeavour. Ms Black suggested investing in a pair of initial coin offerings (often known as "ICOs") with the promise of a substantial return on his investment. To make the investments (and later to pay the commission fees due to release the apparent profits), Mr Johns made several purchases of bitcoin, through the Coinbase exchange, and transferred them to Neo Capital’s wallet. However, the promised profit never materialised.
By September 2020 Mr Jones, and Ion Capital, had parted ways with 64.35 bitcoin (at the time valued at just under £600,000, current market rates would value them at over £2 million) and received nothing in return. Mr Johns sought to track down Neo Capital, only to find it was not a real company and that the Swiss financial services regulator had issued a warning about it. Expert evidence adduced to support the application indicated that the bitcoin had been transferred away but was traced to accounts held with the crypto exchanges, Binance and Kraken.
The first issue the court considered was whether it would have proper jurisdiction over the Persons Unknown as they could quite realistically be domiciled overseas. Butcher J found that it did, as there was a serious issue to be tried on the merits of the claim and the English courts were the proper forum for the claim to be heard. In appraising the governing law of the claims, the court found English law should apply, having looked to Article 4(1) Rome II and finding England to be the place where the damage occurred. This was either based on a few “simpler” grounds, such as that the bank account that funded the purchases was in England, or more significantly because the bitcoin was located in England prior to the transfer. In considering the lex situs of a crypto asset, Butcher J found that it is the location where the owner is domiciled that is relevant. In this case it would have been England and Wales since that was the location of the bitcoin prior to the transfer. He acknowledged there was no authority for this decision, instead having relied on an academic text for assistance in reaching this conclusion.
Relief Sought against Persons Unknown
Having established jurisdiction, the Claimants were able to obtain relief against the fraudsters in the form of a proprietary injunction, worldwide freezing order ("WFO"), and ancillary disclosure. The analysis on these points was relatively limited given that the court had already established that the respondent would have a serious case to answer.
In respect of the proprietary injunction, the balance of convenience favoured the grant of the injunction, given the suggested wrongdoing and that there was little doubt the respondents could satisfy a monetary judgment. It was also just and convenient to grant the order, given the Claimants appeared to be victims of fraud.
For the WFO, the court found a real risk of dissipation of assets because of the nature of the claim and the defendants’ conduct. Butcher J again found that it would be just and convenient to grant the injunction because it would assist the Claimants who appear to be victims of cyber fraud.
Relief against the crypto exchanges
The Claimants also sought disclosure from the second and third respondents. Both are foreign entities believed to be the parent companies of Binance and Kraken, the exchanges with which the accounts that the bitcoin had been traced to are held. Relief was sought in the form of a Bankers Trust order, and/or pursuant to 25.1(g) of the Civil Procedure Rules. Without the disclosure, the Claimants argued that the identity of the fraudsters may never be known and there would be no chance of recovering their assets.
Notably, the Claimants did not seek a Norwich Pharmacal order against the exchanges, citing the authority of AB Bank Ltd v Abu Dhabi Commercial Bank PJSC  EWHC 2082 (Comm) ("AB Bank") as preventing them. In this case Teare J had found that there was no gateway to permit service out of jurisdiction, for the purposes of a Norwich Pharmacal order against a third party. The Claimants suggested that this decision was incorrect, but Butcher J did not consider this argument. Instead granting a Bankers Trust order on the basis that the assets were the Claimants’ property and that obtaining the information from the exchanges would lead to a real prospect of the location and preservation of the cryptocurrencies.
This case was brought by Fetch AI Limited (an English company) and Fetch.ai Foundation PTE Limited (a Singaporean entity) (together "the Claimants") in which it was alleged that the fraudsters gained access to the first claimants’ Binance accounts containing several different cryptocurrencies. The fraudsters then proceeded to trade these cryptocurrencies at prices significantly under market value, to transfer them, inferentially, to their own accounts. This diminution in value was calculated at around $2.6 million. Claims issued were for breach of confidence, unjust enrichment and an equitable proprietary claim based on the fraudulently obtained property being held on a constructive trust.
Relief against Persons Unknown
Pelling J started by reviewing the defined groups that made up 'Persons Unknown', these initially being i) those who had gained access to the accounts, and ii) those who owned or controlled accounts that had received the assets. The court thought this to be too wide-ranging and that it would put any innocent receivers of the cryptocurrencies, i.e. those who could have no belief that they were in possession of property belonging to the Claimants, at risk of breaching the order. This resulted in the establishment of a third category which would make up the composite 'Persons Unknown' and the limitation of the proprietary relief available to only those who knew, or ought to have known, that the cryptocurrencies belonged to the Claimants.
The court then turned to the jurisdiction of the claims. This was relatively straightforward, finding that all of the claims were reasonably arguable to the required standard, as well as maintainable under English law. Pelling J considered Ion Science, agreeing with the conclusion Butcher J had reached regarding the lex situs of crypto assets. Finally, Pelling J assessed whether the claims could fall under any of the gateways found in the Part 6B Practice Direction, to allow service out of jurisdiction. Again, the court was clearly satisfied that this was the case.
Relief against the exchange
As in Ion Science (although without adducing the expert evidence), the Claimants sought disclosure remedies against the exchange, to assist their efforts to find out who was behind the fraud. The remedies were sought against Binance’s UK entity, and it’s supposed Cayman registered holding company.
As in Ion Science, a Norwich Phamacal order was not sought against the offshore entity, with Teare J’s judgment in AB Bank again being cited. A Bankers Trust order was sought, and granted, with Pelling J noting the difficulties that arose by allowing the distinction between the two to be maintained. However, he left it for the second respondent, if it chose to apply to discharge the order, to raise those issues.
In granting the order, Pelling J did give thought to the risk of the interests of third parties, particularly regarding their confidentiality. However, he ultimately decided that this limited interference was a worthwhile risk to enable the victim to potentially recover their assets.
A Norwich Pharmacal order was granted against the UK based Binance entity with the appropriate grounds easily made out.
Although neither cases are binding authority, both cases follow the finding that crypto assets are property in AA v Persons Unknown  EWHC 3556 (Comm). It therefore now looks increasingly safe to assume that, in the eyes of English law, crypto assets will be considered property. Internationally, they join the Singapore International Commercial Court (see B2C2 Limited v Quoine PTC Limited  SGHC (I) 03) and the New Zealand High Court (see Ruscoe v Cryptopia Ltd (in liquidation)  NZHC 782) which have also recognised that crypto assets are property.
In England and Wales though, the legal basis is still up in the air. The English law of property generally recognises no forms of property other than choses in possession and choses in action. In Ion Science , Butcher J recognised that "cryptoassets such as bitcoin are property within the common law definition of that term" but he did not expand on this any further, beside reference to the UK Jurisdiction Taskforce’s statement on crypto assets and smart contracts, and the New Zealand trusts case of Ruscoe v Cryptopia Ltd (in liquidation). In Fetch.AI, Judge Pelling stated that crypto assets are a chose in action but did not provide any analysis as to how he had reached this conclusion, despite it being contrary to the analysis conducted in AA v Persons Unknown. In that case Bryan J had expressed the view that "[bitcoins] are neither chose in possession nor are they chose in action", but still went on to find that crypto assets are property having looked to Lord Wilberforce’s definition of property in National Provincial Bank v Ainsworth  1 AC 1175 and finding crypto assets to be "definable, identifiable by third parties, capable in their nature of assumption by third parties, and having some degree of permanence".
Victims can at least be pleased that they will not be left without remedy, as the courts are clearly amenable (at least at this point in time) to granting injunctive relief to those who find themselves suffering from crypto fraudsters. We are, of course, yet to hear opposing argument on these issues (beyond what is required under the applicant’s duty of full and frank disclosure) and it will be interesting to see how far this favour extends when the courts hear their first contested hearing. Whilst it would take a foolish fraudster to appear in court and waive his anonymity to attempt to discharge the orders, there are two categories of parties whose appearance in court is far easier to conceive:
Innocent third parties - Pelling J drew attention to the fact that in granting a disclosure order against the exchanges in Fetch.AI there was a risk that the confidentiality of innocent third parties would be breached. Whilst he felt the risk was justifiable for the victims to have a legitimate chance of seeking remedy for the fraud, given the desire of many crypto asset holders to have anonymity, it may not be long before these actions are opposed. Likewise, it is not inconceivable that an innocent receiver of crypto assets could find themselves in breach of a proprietary injunction. This is again an issue that Pelling J gave thought to, and by carefully considering the categories of ‘Persons Unknown’ to which an order may apply, has hopefully established a precedent for how these orders will be made in the future.
Crypto exchanges - It has become clear that seeking assistance from the exchanges directly is not necessarily the easiest route to obtaining information about account holders, but it is necessary in order to assist with the tracing exercise. None of the exchanges involved in the cases above have (at least at the time of writing) sought to dispose of the orders made against them, but if put under pressure by users concerned with their privacy and the precedent being set, they may well do so. Should an exchange seek to put forward arguments, they may well focus on the apparent discrepancy the court has found itself with through granting disclosure orders out of jurisdiction. Our experience to date has found that the willingness of exchanges to assist with such enquiries varies greatly amongst exchanges.
Finally, the two alleged acts of fraud themselves demonstrate two of the most likely routes for an individual involved in crypto assets to find themselves parted from them. In Ion Science, it was an old fashioned ‘confidence trick’, the fraudsters relied on an individual’s desire to achieve a high return on their investment to induce them into releasing control of their assets. In Fetch.Ai, the claimants were victims of more modern thievery in the form of a hack. Individuals should also be aware of social engineering, a technique by which hackers manipulate their targets into revealing personal information to gain access to their accounts and assets.
Whilst the courts have now consistently shown that they can and will be of assistance in a worst-case scenario, the easiest way of resolving a crypto dispute will always be by preventing it from occurring in the first place. Whilst this won’t protect all instances of fraud, crypto assets holders should prepare themselves by being aware of common techniques used by fraudsters, and protecting their assets using security such as cold storage wallets and two-factor authentication.
Published by Amy Spencer and Alex Jenkins
For more information on crypto-related cases, please contact us.