High Court grants summary judgment in respect of proprietary claims to the traceable proceeds of a fraudulent cryptocurrency scheme

Summary

In Tippawan Boonyaem v Persons Unknown Category (A) & Ors [2023] EWCH 3180 (Comm), the Claimant, a victim of a cryptocurrency fraud, was granted summary judgment in respect of her proprietary claims to traceable proceeds against defendants that fell into the category of persons unknown. The case illustrates the extent to which claimants will need to be able to identify defendants with specificity in order to bring successful claims.

 

Facts

The Claimant invested USDT425,836.62 (Tether) (worth circa USD425,500) in a fraudulent cryptocurrency scheme based on instructions from unknown individuals who contacted her via social media (defendants (D) 1, 2 and 3 – see below).

In January 2022, the Claimant was contacted by a person calling himself Suthep Chansudarat (D1) via Facebook. The Claimant was told that D1 was using an online investment platform called INGFX (operated by D3). D1 claimed to be making strong profits and created an account for the Claimant on the platform. Upon D1’s request, over the course of several transfers, the Claimant transferred Thai Baht (TBH) 14,604,000 (USD438,120¹) to BitKub Thailand (a Crypto Exchange) for the purposes of purchasing USDT².

Once the Claimant had obtained USDT for her TBH, she made a series of transfers of USDT from her Bitkub Thailand wallet to various wallet addresses designated to her by D1. The Claimant was led to believe that those transfers were deposits into INGFX wallets, which D1 would then invest on her behalf. Over the course of her “trades”, INGFX reported her account as having made profitable returns.

When the Claimant attempted to redeem her money from the platform, she was told that she had to pay tax, an insurance fee and a withdrawal fee. She transferred USDT259,835.15 (worth circa USD259,630) in payment. The Claimant was thereafter not able to withdraw her cryptocurrency and was unable to contact the individuals that had recommended the trades to her.

 

The English Proceedings

Upon instructing lawyers, the Claimant was able to trace the proceeds of her USDT transfers to a number of "Last-Hop Wallet" (final identified address of funds) addresses on various cryptocurrency exchanges.

The Claimant issued claims against several defendants, which the Court divided into three categories:

• D1 – Category A persons unknown, i.e. persons describing themselves as connected to the fraudster or the investment platform;

• D2 – Category B persons unknown, i.e. persons who operated and/or owned the wallet addresses to which the Claimant’s USDT had been sent; and

• D3 – an English registered company that was linked to the scam trading platform INGFX.

On 30 August 2023, the Court made worldwide proprietary and non-proprietary freezing orders and granted permission for alternative service on the Defendants by: (a) Facebook messenger; (b) text and WhatsApp message; and (c) transferring a non-fungible token containing the claim details to the relevant wallet addresses. The Claimant also obtained a disclosure order in an attempt to identify the identities of the perpetrators of the alleged fraud. 

The Order gave D1 and D2 a period of 23 days from the date of service to file an Acknowledgment of Service (AoS). The Defendants failed to do so, nor did they provide the disclosure required.

 

Decision

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. The Defendants did not appear at the hearing.

The judge granted the Claimant’s application for summary judgment against D2 and D3, but not D1. The Court reaffirmed previous decisions that digital assets are considered "property"³, and are therefore traceable in equity and recoverable. The judge noted the rule established in Westdeutsche Bank v Islington LBC [1996] AC 669; where a property is obtained by fraud, equity imposes a constructive trust on the recipient. Therefore, the USDT was recoverable.

• The judge found that D1 fell into the category of persons unknown who were anonymous and could not be identified, and so proceedings could not be brought against such individuals as it was not possible to locate or communicate with them. The judge acknowledged that courts have always sought to take a pragmatic approach with fraud cases involving digital assets, particularly, by allowing claimants to bring proceedings against unidentified persons for the purposes of interim relief. However, as this was a matter for summary judgment, he was not prepared to give a final decision on a category of persons unknown who could not be properly sued until they were identified.

• However, with respect to D2, while their names were not known, they were identifiable persons or entities, namely the owners/operators of the various wallet addresses, and they would have had to identify themselves if they wished to lay claim to the contents of the wallets. While it was true that a claim of a bona fide purchaser for value would likely defeat the Claimant's claim to the funds traced to the wallets, neither D2 nor D3 had engaged with the action, and therefore they had no real prospect of defeating the Claimant's claim concerning the traceable proceeds.

• D3 had been served in the conventional manner. The evidence established that D3 had played a central part in the fraud and the Claimant was entitled to rely upon her claim against D3 under CPR r.6.26 and CPR PD6B 3.1(3) in order to found jurisdiction against D2 as a proper party to the action. There was sufficient evidence to justify coordination and receipt of the transactions; noting that D3 chose not to defend the claim.

The judge determined that in order to protect the Claimant's property, the proprietary injunction would continue against D2 and D3 until satisfaction of the judgment or further order of the court and the worldwide non-proprietary freezing injunction would continue against D2 and D3 until further order of the court. The evidence established a sufficiently good arguable case and the nature of the fraud demonstrated a sufficient risk of dissipation. With that said, the injunction would not continue against D1 as they could not be identified with sufficient certainty to make such an order enforceable.

The judge granted permission under CPR 40.12 to amend the previous Order, to include certain omitted gateways to serve the substantive claim documents out of the jurisdiction – there was good reason to authorise alternative service on D2 via transfer of a non-fungible token to the addresses of the "Last-Hop Wallets", and by text and WhatsApp message to the telephone number used to communicate with the Claimant.

 

Comment

This case is another example of the English court’s willingness to help victims of crypto fraud. As well as confirming that digital assets will generally be treated as property, the judge showed flexibility in determining that the Claimant was not required to undertake the costly exercise of identifying the individual identities of D2 since they could be sufficiently identified by reference to their wallet addresses.

However, while the courts may permit claimants to commence proceedings against anonymous fraudsters, and allow interim relief against them, they have showed reluctance to grant final judgment against unidentifiable defendants (D1 in this case), given the practical unworkability of enforcing a judgment against someone who cannot be identified at all.

 

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¹ Calculated at the exchange rate for January 2022, which at the time was 0.030 TBH to 1 USD.
² USDT is a common stablecoin that purports to have an equal redeemable ratio of 1 USDT to 1 USD. It is pegged to the USD and enables the use of fiat currencies in a digital manner for cryptocurrency conversion purposes.
³ The judge went as far as to say that USDT, unlike Bitcoin or Ether, can be properly regarded as a "thing in action" for the purposes of classification.