Digital Digest – Volume 3
July 2024In this third edition of Digital Digest, we summarise the key developments in the digital asset space in the UK over the first half of 2024.
The English courts have continued to see new cases relating to cryptocurrency fraud and have also ruled on the identify of Bitcoin "inventor", Satoshi Nakamoto (in terms of who he isn't, rather than who he is). The Law Commission has consulted on the draft Digital Assets Bill, aimed at confirming the legal status of digital assets as property, and has issued a call for evidence to flush out the key governing law, jurisdiction, and enforcement issues in relation to digital assets and electronic trade documents.
Similarly, policy makers and regulators have made further strides to address the complexities introduced by digital assets, giving consideration to issues relating to cryptoasset-backed Exchange Traded Notes, changes to the eligibility criteria to qualify for exemptions under financial promotion regulations, and anti-money laundering rules relating to non-fungible token (NFT) providers.
Should you wish to discuss the issues covered in this edition or in the digital assets space more generally, we would welcome your comments and feedback.
CIVIL LITIGATION UPDATE
1. HIGH COURT GRANTS SUMMARY JUDGMENT IN RESPECT OF PROPRIETARY CLAIMS TO THE TRACEABLE PROCEEDS OF A FRAUDULENT CRYPTOCURRENCY SCHEME
In Tippawan Boonyaem v Persons Unknown Category (A) & Ors [2023] EWCH 3180 (Comm), the Claimant, who claimed to have been the victim of a cryptocurrency fraud, was granted summary judgment in respect of her proprietary claims to the traceable proceeds against defendants that fell into the category of persons unknown. The Claimant had been duped by fraudsters who contacted her via social media and persuaded her to participate in a fraudulent cryptocurrency scheme. She was subsequently unable to withdraw her cryptocurrency or contact the individuals who had recommended the scheme to her.
The High Court made a worldwide proprietary and non-proprietary freezing order and granted permission for substituted service on the Defendants by: (a) Facebook messenger; (b) by text and WhatsApp message; and (c) by transferring a non-fungible token to the relevant wallet addresses. The Claimant also obtained a disclosure order in an attempt to identify the perpetrators. Unsurprisingly, the Defendants failed to file an acknowledgement of service and the Claimant applied for summary judgment in respect of her proprietary claims to the traceable proceeds of the alleged fraudulent cryptocurrency scheme, continuation of the proprietary freezing injunction until the traceable proceeds had been recovered, and continuation of the worldwide non-proprietary freezing injunction in support of her non-proprietary claims.
Mr Richard Salter KC sitting as a Deputy Judge granted the Claimant’s application for summary judgment against D2 and D3, but not D1. The Court reaffirmed that digital assets are considered "property", and were therefore recoverable and traceable in equity. Mr Richard Salter KC went as far as to say that USDT (which are redeemable on a 1:1 basis for US dollars), unlike Bitcoin or Ether, can be properly regarded as ‘things in action’ for the purposes of classification.
Overall, this case is yet another example of the English courts’ willingness to help victims of crypto fraud. However, while the courts may permit claimants to commence proceedings against anonymous fraudsters, and allow interim relief against them, the English Courts in this case (and in contrast to the decision in Mooij (below)) stopped short at granting final judgment against unidentifiable defendants.
2. HIGH COURT GRANTS SUMMARY JUDGMENT AGAINST PERSONS UNKNOWN AS JURISDICTION ESTABLISHED BY ALTERNATIVE SERVICE
Mooij v Persons Unknown [2024] EWHC 814 (Comm) (Mooij) is the latest English authority concerning Bitcoin fraud. In Mooji, the High Court granted summary judgment in the form of an order for ‘delivery up’ of Bitcoin, as well as a money judgment for the value of the Bitcoin, and the continuation of freezing injunctions against defendants referred to as “persons unknown”.
In this case, the Claimant transferred 20.34 Bitcoin from a legitimate wallet held on the Kraken exchange, to a bogus trading platform known as MegaMarkets, which was set up and run by the defendant fraudsters. The Claimant made several further payments totalling EUR330,000 to the alleged fraudsters. The Claimant believed those funds were being used to purchase Bitcoin, but in fact, the funds never reached the intended account and were intercepted by the fraudsters.
The Claimant brought claims against multiple defendants, including D1 and D2, who were identified by the Court as the fraudsters and beneficiaries of the fraud, respectively. The Claimant also sought summary judgment and the continuation of freezing orders against D1 and D2 (as well as other defendants) to prevent the defendants from dissipating the assets, supporting the execution of the judgment.
In contrast to the decision in Boonyaem (above), in which the court declined to grant final judgment for non-proprietary relief due to the unknown identities of the defendants, the court in Mooji determined that it had jurisdiction to issue final judgment against both D1 (equivalent to the defendant in Boonyaem against whom judgment was not given) and D2 (equivalent to the defendant in Boonyaem against whom judgment was given) despite their unknown status.
HHJ Russen KC’s reasoning was as follows:
- Since D1 and D2 did not contest the case against them, they had no realistic chance of successfully defending the claim;
- Despite the precedent set by Boonyaem, which raised concerns about granting relief when the identity of “persons unknown” remained undisclosed, in Mooji, the court established jurisdiction over both D1 and D2 through alternative service methods, including a non-fungible token (NFT) airdrop into the target wallet and filing relevant documents with the court. This method of service via NFT airdrop (as email addresses were not available) was first established in AA v Persons Unknown [2019] EWHC (Comm) 3556.
The judge questioned whether the principles from Cameron v Liverpool Victoria Insurance Co Ltd [2019] UKSC 6 (relied upon in Boonyaem) were directly applicable in this case:
- Unlike situations where anonymous “persons unknown” could not be served, the court’s alternative service methods in this case allowed for jurisdiction to be established.
- Accordingly, the judge concluded that the lack of knowledge of the defendants’ identities at the time of judgment should not prevent the court from exercising its jurisdiction to grant relief, a view supported by Wolverhampton City Council v London Gypsies and Travellers [2023] UKSC 47.
As such, HHJ Russen KC continued the freezing injunction, and granted full judgment both in relation to the Bitcoin and the EUR330,000 against D1 and D2. It was acknowledged that the defendants must be identified for this judgment to be enforced, but the court concluded this was not a reason to deny judgment against them.
3. HIGH COURT JUDGE RULES THAT CRAIG WRIGHT IS NOT SATOSHI NAKAMOTO
In the case of Crypto Open Patent Alliance (COPA) v Wright [2024] EWHC 1198 (Ch), the Defendant, Dr Craig Wright, was accused of fraud and perjury by COPA.
Dr Wright claimed to be Satoshi Nakamoto, the pseudonym given to the mysterious inventor of Bitcoin. Dr Wright also claimed that he invented the Bitcoin ‘system’, and was the author of the initial version of the Bitcoin software. In particular, he claimed that he published the 2008 Bitcoin ‘White Paper’.
COPA issued proceedings against Dr Wright, primarily to stop him issuing proceedings against Bitcoin developers by arguing that he owned the IP rights to the underlying cryptocurrency. COPA primarily sought declaratory relief from the Court, with their three main declarations being as follows:
- That Dr Wright is not the author of the Bitcoin White Paper;
- That Dr Wright is not the owner of copyright in the Bitcoin White Paper; and
- That any use by COPA of the Bitcoin White Paper will not infringe any copyright owned by Dr Wright.
After a month-long trial in the High Court, Judge Mellor declared both orally at the time of the trial, and in his written judgment, that:
- “Dr Wright is not the author of the Bitcoin White Paper”;
- “Dr Wright is not the person who adopted or operated under the pseudonym Satoshi Nakamoto in the period 2008 to 2011”;
- “Dr Wright is not the person who created the Bitcoin System”;
- “Dr Wright is not the author of the initial versions of the Bitcoin Software”; and
- That Dr Wright had lied “extensively and repeatedly” throughout the trial, and that “Most of his lies related to the documents he had forged which purported to support his claim”.
Further injunctive relief will be addressed at a later hearing.
The full written judgment has now been released (which can be found here).
4. LAW COMMISSION CONSULTATION ON DRAFT DIGITAL ASSETS BILL
On 22 February 2024, the Law Commission launched its consultation on the draft Digital Assets Bill. The draft bill comprises two clauses and confirms that digital assets are capable of being recognised by the law as a “third” category of property (i.e., distinct from “things in possession” and “things in action”).
The Consultation follows the Law Commission’s Final Report on Digital Assets, which we considered in Volume 2 of Digital Digest. In line with the views expressed in the Final Report, the Law Commission accepts that the proposed clauses leave questions to be answered by the common law, including: (i) what types of things fall within the third category of property; (ii) what personal property rights attach to third category things; and (iii) the consequences of such rights (such as tortious liability and applicable remedies).
The Law Commission’s consultation can be found here. The consultation period closed on 22 March 2024.
5. LAW COMMISSION LAUNCHES CALL FOR EVIDENCE ON PRIVATE INTERNATIONAL LAW ISSUES IN THE CONTEXT OF DIGITAL ASSETS AND ELECTRONIC TRADE DOCUMENTS
On 22 February 2024, the Law Commission launched its “Call for Evidence: Digital assets and ETDs in Private International Law: which court, which law?”, in connection with their project on private international law in the context of digital assets and electronic trade documents (ETDs). The call for evidence can be accessed here.
Prompted by the global nature of digital assets, this project concerns how private international law rules come into play in that context. It aims to understand how private international law issues, such as jurisdiction, applicable law and the enforcement of judgments in other jurisdictions, should apply in relation to digital assets, and, if necessary, make recommendations for reform. Responses to the call for evidence, which were due by 16 May 2024, will inform the Law Commission's views on the need, and proposals, for law reform in this area.
6. COMPETITION APPEAL TRIBUNAL CONSIDERED STRIKE OUT APPLICATION IN FIRST CRYPTOCURRENCY COMPETITION DISPUTE
Binance brought a strike out application at the Competition Appeal Tribunal (CAT) against most of a claim seeking GBP9 billion in damages regarding alleged collusion in relation to the BSV cryptocurrency.
The claim relates to a series of tweets between 12 April 2019 to 19 April 2019 in which various cryptocurrency exchanges disclosed their intention to de-list BSV and called on other cryptocurrency exchanges to also de-list BSV. BSV was then ultimately de-listed. It is alleged by the claimants that the actions to de-list BSV prevented BSV from being a “top-tier” cryptocurrency and therefore the claimants all suffered loss. Loss has been calculated by reference to other cryptocurrencies which have been successful over the relevant period.
Binance along with Bittylicious, Kraken and Shapeshift are being sued on behalf of over 200,000 BSV holders.
Binance’s main argument for strikeout was that the claimants could have and should have mitigated their losses. Counsel for Binance, Brian Kennelly KC, said BSV holders "could reasonably have sold it and reinvested it in comparable cryptocurrency" as the alleged anti-competitive acts were open and public. The claimants who continued to hold BSV after the de-listing did not have to continue holding the cryptocurrency and suffer loss.
Counsel for the claimants, Sarah Ford KC, argued that the issue of mitigation for a class of claimants and, in particular, for a cryptocurrency is an important issue to be determined and therefore the claim is not suitable for strike out.
The CAT has not yet handed down judgment, so it remains to be seen whether Binance’s strike out application will be successful.
REGULATORY UPDATE
7. FCA UPDATE ON ITS POSITION RELATING TO CRYPTOASSET ETNS FOR PROFESSIONAL INVESTORS
On 11 March 2024, the FCA announced its position on cryptoasset-backed Exchange Traded Notes (cETNs), stating that it will support Recognised Investment Exchanges (RIEs) in establishing a UK listed market segment dedicated to cETNs for professional investors only.
This move enables RIEs to apply for a new UK listed market segment, subject to meeting stringent criteria set out in the Listing Rules. The FCA emphasises the importance of maintaining orderly trading and ensuring adequate protection for professional investors through proper controls. The FCA maintains that cETNs and crypto derivatives remain unsuitable for retail consumers, and therefore the ban on their sale to this demographic remains in effect.
To uphold these measures, the FCA continues to collaborate with government bodies, international counterparts, and industry stakeholders to develop robust regulatory frameworks and set global standards for cryptoassets.
In practical terms, RIEs must ensure that any new market segment adheres strictly to professional investor guidelines, with appropriate safeguards in place to limit access to qualified entities only. Exchanges seeking to admit cETNs must comply with UK Listing Regime requirements, including detailed prospectus and ongoing disclosure obligations.
8. CHANGES TO THE ELIGIBILITY CRITERIA FOR EXEMPTIONS UNDER FINANCIAL PROMOTION REGULATIONS
The Financial Services and Markets Act 2000 (Financial Promotion) (Amendment and Transitional Provision) Order 2024, published on 6 March 2024, introduced key changes to the eligibility criteria to qualify for exemptions under financial promotion regulations. These changes concern high net worth individuals and self-certified sophisticated investors. They address the qualifications required for individuals seeking exemption from the requirement that all financial promotions must be conducted by an authorised person, or approved by one, unless specific exemptions apply.
High net worth individuals must now demonstrate an annual income of GBP100,000 or more, while the net assets condition has been reduced to GBP250,000 or more. Similarly, self-certified sophisticated investors are required to have made at least two investments in unlisted companies over the previous two years, with a company turnover threshold lowered to GBP1 million.
These amendments respond to concerns voiced by various industry players, including the potential impediment to start-up businesses seeking investment and the financing of theatre productions through small-scale investors. Acknowledging these concerns, the Financial Conduct Authority (FCA) has issued a statement, affirming its commitment to working alongside the government to fortify the financial promotions regime while ensuring continued access to sustainable investment opportunities for burgeoning businesses.
To facilitate a smooth transition, the order includes transitional provisions, ensuring that investor statements complying with the prior criteria will remain valid until and including 30 January 2025. Starting with 31 January 2025, individuals must meet and sign off on the updated criteria to qualify for the exemptions. This transitional period offers individuals and businesses time to adjust to the updated criteria, ensuring that those who have recently met the prior criteria do not need to immediately adjust to the new standards. This provides clarity and stability amidst these regulatory adjustments.
9. FCA REGISTRATION FOR NFT PROVIDERS LIKELY UNDER PROPOSED ANTI-MONEY LAUNDERING RULES
The UK Treasury is currently consulting on anti-money laundering rules, indicating that Non-Fungible Token (NFT) providers may require registration with the Financial Conduct Authority (FCA). This registration may continue even after the introduction of a new authorisation system for the crypto industry.
The government intends to integrate crypto exchanges and custody providers into this new regime. However, certain assets like NFTs—unique tokens tied to the blockchain and often representing assets such as art—may not be covered by regulated financial services and could fall outside this regime. The consultation emphasises that firms dealing with such cryptoassets could pose money laundering risks.
The government clarified that NFTs are generally not suitable for financial regulation unless used in regulated activities. The government consultation period ended on 9 June 2024.
