English Court Remedies when Cryptocurrencies are Misappropriated

The English courts are increasingly being asked to grapple with cases involving the misappropriation of cryptocurrencies. In a series of recent decisions, the English courts have demonstrated they are just as willing and able to grant interim relief, including freezing and disclosure orders, in cases involving cryptocurrencies as they are in cases involving more traditional forms of property. These cases also show that the English courts are willing to take jurisdiction where England is the residence or place of business of the rightful owner of the cryptocurrency, even where it has been dissipated out of the jurisdiction or where the identities of the perpetrators are unknown.

Cryptocurrencies as Property

In a significant development in cryptocurrency cases, the English court established, in the context of an interim decision, in AA v Persons Unknown¹, that Bitcoin (and other cyrptocurrencies) are considered as property under English law such that they are capable of being the subject of injunctive relief. This decision relied in part on the analysis put forward by the UK Jurisdiction Taskforce in its Legal Statement published in November 2019, which considered that cryptoassets may constitute property under English law (depending on the nature of the cryptoasset). Since then, there have been a number of cases in the English courts that have applied AA v Persons Unknown and show the wide-ranging-remedies that are available in relation to cryptocurrency.

Ion Science Ltd v Persons Unknown

In Ion Science,² the court granted the first third-party debt order in relation to cryptocurrency. Third party debt orders are a method of enforcing money judgments, allowing the recovery of sums (usually in the form of cash) from a third party.

In this case, the claimants alleged that they had been victims of a fraud in the context of an Initial Coin Offering and had been induced by “Persons Unknown” (i.e. individuals who had claimed to be connected with a Swiss entity named Neo Capital) into transferring sums in the belief they were investing in cryptocurrency and making commission payments to advisers at Neo Capital. The claimants appointed an expert who traced the claimants’ cryptocurrency to accounts held by Binance Holdings and Payward Ltd (Payward), a subsidiary of Kraken Exchange (the Cryptocurrency Exchanges).

The claimants successfully obtained a proprietary injunction, a worldwide freezing order and disclosure orders against the fraudsters. Further, the claimants obtained Bankers Trust disclosure orders against the Cryptocurrency Exchanges requiring them to disclose information in relation to the identity of the fraudsters and the location of the cryptocurrency. As a result of the disclosure orders, Payward informed the claimants that a company called Mirriam Corp LP (Mirriam) was the beneficiary of the frozen account (containing both cryptocurrency and cash) that was used to carry out the fraud.

The claimants commenced a claim against Mirriam and when Mirriam failed to respond, the claimants obtained a judgment for circa GBP2.9 million. Upon a further application by the claimants, the court then made an interim third party debt order relating to debts owed by Payward to Mirriam as its customer so that the claimants could be repaid using the sums owed by Payward to Mirriam. Since Payward had no objection to the order and Mirriam did not respond to the claimants’ application, the debt order was made final, enabling the claimant to recover the misappropriated sums.

Crucially, in an earlier decision in this case,⁴ in determining that it had jurisdiction in the application for interim relief and that the governing law of the claim was English law, the court took into account, among other matters, the fact that the damage occurred in England and the cryptocurrency was taken from the claimants’ control in England. Further, in the absence of decided case law on the issue, the court referred to the analysis of Professor Andrew Dickinson³ in determining that the lex situs of cryptocurrency (i.e. the law of the place in which the currency is situated) is the law applicable where the person or company who rightfully owns the cryptocurrency is domiciled or has its registered office (i.e. in this case, English law).

Sally Jayne Danisz v (1) Persons Unknown (2) Huobi Global Ltd⁵

In this case, the English court granted a series of injunctive remedies in light of a suspected cryptocurrency investment scam.

The case concerned the transfer of the claimant’s Bitcoin to a cryptocurrency platform, Matic Markets. When the claimant believed the cryptocurrency had increased in value, she sought to withdraw her funds, but was refused. Suspicions were raised, causing the claimant to commission an expert to trace the location of her Bitcoin. It transpired that the Bitcoin had been transferred out of the Matic Markets wallet without her knowledge or consent. While some of the Bitcoin could be traced to an “end wallet” at the Huobi exchange, the remainder was untraceable.

The claimant commenced proceedings before the English court, seeking interim relief in the form of (i) a proprietary injunction prohibiting the Defendant from further disposing of or dissipating the traceable Bitcoin; (ii) a worldwide freezing order against Persons Unknown preventing further dissipation of the remaining Bitcoin in the end wallet at Huobi exchange; (iii) a Bankers Trust disclosure order compelling Huobi, the third party exchange, to disclose payment related information about the end wallet account holders; and (iv) permission for the claimant to serve outside of the jurisdiction and by alternative means.

The claimant’s applications were granted in full. In doing so, the court recognised that the case was of exceptional urgency because “at the click of a mouse” cryptocurrency can be dissipated. The court also permitted alternative service, given that, amongst other things, the whole nature of the Matic Markets organisation meant that there was no certainty that the names of the persons with whom the claimant corresponded were real, such that traditional service would be difficult if not impossible.

Key Takeaways

These cases demonstrate that the English courts are willing to treat cryptocurrency as property, enabling claimants to seek proprietary injunctions, freezing orders, and other interim measures, and that the location of cryptocurrency is determined by the residence or place of business of the rightful owner. Crucially, this will permit companies and/or individuals domiciled in England to take action in the English courts regarding cryptocurrency even where it has been dissipated outside of the jurisdiction and where the perpetrators are unknown.

Individuals or companies that suspect their cryptocurrency investments have been dissipated or misappropriated in some way should take immediate action to instruct experts to trace the cryptocurrency and consider applying for injunctive relief as soon as possible. Victims of crypto fraud should not be discouraged just because they do not know the new location of their cryptocurrency or the identities of the fraudsters.

However, it is important to note that there are limits to the remedies the English courts are willing to grant, even in cases involving fraud. For instance, in Tulip Trading Limited v Bitcoin Association⁶, the courts have confirmed that Bitcoin software developers do not owe fiduciary duties or a common law duty of care to cryptocurrency owners such that victims will have no recourse against the developers in cases of lost Bitcoins (or other cryptocurrencies) due to hacks and/or fraud by third parties.

Should you be faced with issues regarding misappropriated cryptocurrency or other cryptoassets, it is crucial to seek legal advice at an early stage. Please do not hesitate to get in touch with us if you wish to discuss any of the issues covered in this article.