Digital Digest – Volume 4

In this fourth edition of Digital Digest, we highlight key developments in the UK digital asset space over the second half of 2024.

The Law Commission has recently introduced a revised draft Digital Assets Bill, which seeks to formalise the legal status of digital assets under English law. The courts have also delivered a significant judgment on the status of cryptocurrency as legal property, and the expectations for expert evidence in tracing stolen crypto, reinforcing the UK’s legal framework for determining disputes involving digital assets, as well as continuing to deal with issues flowing from the judgment in May 2024 that Dr Craig Wright is not Satoshi Nakamoto, the inventor of Bitcoin (covered in the third edition of Digital Digest, here). Other notable updates include further judicial approval of the use of NFTs for serving legal proceedings, as well as clarification of the approach to assessing damages in claims involving cryptocurrency.

The UK Financial Conduct Authority published a Roadmap setting out its timeline to developing a tailored regulatory regime for cryptoassets and associated activities and the UK Government has continued to express its commitment to driving economic growth and competitiveness in UK fintech/DLT.

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.

  

Update on the Digital Assets Bill

In Volume 3 of Digital Digest, we considered the Law Commission’s consultation on the draft Digital Assets Bill.

On 29 July 2024, the Law Commission released a supplemental report and revised draft Bill, titled the ‘Property (Digital Assets etc) Bill’, which comprises only two clauses and confirms that digital assets are capable of being recognised by the law as a ‘third’ category of property (ie distinct from ‘things in possession’ and ‘things in action’). The Bill has been introduced into the House of Lords under the special parliamentary procedure for Law Commission bills.

The Law Commission emphasises that the Bill is concise and technology-neutral. It affirms the approach adopted by the English Courts to date, namely that certain digital assets can indeed be property.

In its supplemental report, the Law Commission provides examples of what would not fall into this third category, including pure information, digital files, email accounts, and certain in-game assets and domain names.  

In the Law Commission’s view, the three categories of property are likely to be mutually exclusive. However, a digital asset could legitimately be associated with another category of thing (for example, a crypto-token could both be digital property, but also represent a legal right, or be legally linked to a physical thing such as land).

On 6 November 2024, the Bill had its second reading in Grand Committee in the House of Lords, and has now been committed to a Special Public Bill Committee.

 

D’Aloia Developments – Crypto as Property and Evidential Issues

The recent judgment in D’Aloia v Persons Unknown & Others [2024] EWHC 2342 (Ch) (D’Aloia) is the first time the Courts of England and Wales have determined, following a contested trial rather than an interlocutory application, that cryptocurrency constitutes legal property. The case also provides crucial insight into the importance of “methodologically sound” expert evidence when tracing crypto-assets.

Background

This recent judgment, principally concerning issues between Mr D’Aloia and the Thai-based cryptocurrency exchange, Bitkub, is set against the backdrop of wider proceedings involving summary judgment applications, a settled claim and a struck out claim, against various other defendants.

In December 2021, Mr D’Aloia, the founder of Microgame, sought to build his portfolio of investments and opened a trading account with td-finan. After transferring cryptocurrency to associated wallets, Mr D’Aloia realised that td-finan was a scam. Mr D’Aloia alleged that he had been deceived by third party fraudsters in transferring GBP2.5 million worth of cryptocurrency (ie the stablecoin USD Tether (USDT)) to a wallet controlled by the First Defendants (Persons Unknown Category A), resulting in the cryptocurrency being appropriated and transferred through a series of 14 ‘hops’ via various blockchain wallets. The cryptocurrency was eventually allegedly withdrawn through various cryptocurrency exchanges, most notably, a wallet controlled by Bitkub.

Mr D’Aloia claimed unjust enrichment against Bitkub and argued that a constructive trust existed over the misappropriated funds.

Judgment

The court dismissed Mr D’Aloia’s claim on the basis that there was no evidence that Bitkub received Mr D’Aloia’s cryptocurrency. A constructive trust did arise over the funds the First Defendants received from Mr D’Aloia, however, Mr D’Aloia failed to show that his funds were transferred to Bitkub or how the First Defendants’ breach of the constructive trust provided a claim against Bitkub.

Cryptocurrency as Property

The judgment, reflecting prior interim application decisions (such as AA v Persons Unknown¹), concluded that the USDT constituted property, notwithstanding that it does not fall within the two existing categories of person property under English law, ie “a chose in action” or “a chose in possession”. The USDT was considered a “distinct form of property not premised on an underlying legal right”. It was clarified that the property rights attach to the USDT itself – the property is both the data and the transactional functionalities associated with it.

Expert Evidence

Mr D’Aloia’s claim required him to prove that the misappropriated currency had reached the Bitkub wallet. However, the court held that Mr D’Aloia’s expert’s evidence was flawed and unhelpful.

In seeking to establish that his misappropriated cryptocurrency had reached the Bitkub custodial wallet, Mr D’Aloia relied on the evidence of a blockchain tracing expert, Mr Moore. Mr Moore’s expert report purported to rely on the ‘first in first out’ (FIFO) methodology, established in ‘Clayton’s case’ (ie Devaynes v Noble (1816) 35 ER 767). However, it became clear at trial that neither this methodology, which Mr Moore later accepted was unworkable, nor any other clear methodology, was properly evidenced by Mr Moore in coming to his conclusions.

Despite Mr Moore’s attempted later reliance on techniques taught by intelligence platforms, notably Crystal Blockchain and TRM Labs, his failure properly to explain his methodology led to “chaotic” and “contradictory” evidence, despite the “ample opportunity to expand upon and explain his analysis”. The judgment noted that “the Claimant’s expert case was, therefore, that Mr Moore had used FIFO…had not used FIFO…and that FIFO was not practically workable”.

As a result, Mr D’Aloia could not establish a claim against Bitkub on the basis of the imposition of a constructive trust and unjust enrichment.  The judge emphasised the importance of clear, compelling, and relevant evidence. He held that there was a “lack of transparency” on expert methodology and “doubt on reliability” of the expert’s conclusions, leading to results that were “fatal” to the case.

The judge also noted the distinction between tracing in equity and at common law, emphasising that tracing through mixed funds is only available with regards to equitable claims.

The judgment did confirm, however, that methodology other than the commonly used methods of FIFO, pari passu distribution, and the rolling charge method, can potentially be relied upon to trace assets in cryptocurrency cases, provided they are “methodologically sound and properly evidenced”.

 

High Court approves a Worldwide Freezing Order (WFO) concerning costs in the aftermath of a Bitcoin defamation claim

In Wright v McCormack (WFO Judgment) [2024] EWHC 1735 (KB), the High Court issued a worldwide freezing order (WFO) requested by the Defendant, McCormack (M), for approximately GBP1.5 million, along with asset disclosure orders. This WFO related to costs incurred from a deceitful defamation lawsuit initiated by Dr Craig Wright (W).

Backed by wealthy supporters, W claimed to be Satoshi Nakamoto, the creator of Bitcoin, in an attempt to gain access to billions of dollars’ worth of Bitcoin attributed to him. He used defamation laws in England and other countries to seek to silence those who disputed his claims. In separate proceedings, Judge Mellor found W’s allegations to be entirely fraudulent – we considered the case of Crypto Open Patent Alliance (COPA) v Wright [2024] EWHC 1198 (Ch) in Volume 3 of Digital Digest.

Due to financial hardship, M had to abandon most of his defamation defences, leading to cost orders against him (the Dagnall and Knowles Orders). The WFO was requested to cover:

• Costs connected with the defamation claim costs already ordered by Judge Chamberlain;
• Costs of the Dagnall and Knowles Orders; and
• Costs already paid to W under these orders.

Judge Mellor emphasized that W’s defamation claim was based on a lie, making it unfair if M couldn’t recover his costs for uncovering the fraud. The court found no public interest in maintaining the finality of the defamation judgment and Chamberlain orders due to the fraud. M had a strong case to recover around GBP1.5 million, which would help him challenge the defamation judgment and seek damages.

Despite Wright’s previous payments into court, there was still a genuine risk of asset dissipation, justifying the WFO.

 

Injunctions implemented in response to false allegations made by Dr Craig Wright

Linked to the above, in the case of Crypto Open Patent Alliance v Wright [2024] EWHC 1809 (Ch), Judge Mellor decided on the appropriate orders following the end of a joint trial of five actions ([2024] EWHC 1198 (Ch)) – see our update in Volume 3 of Digital Digest.

In these proceedings, COPA sought various injunctions against Dr Craig Wright, ie:

• an anti-suit injunction preventing Dr Wright (and his associates) from pursuing further proceedings in England or other jurisdictions to re-litigate Dr Wright's claim to be Satoshi Nakamoto (first injunction);
• an injunction preventing Dr Wright from threatening such legal proceedings (second injunction);
• an order preventing Dr Wright from asserting legal rights as Satoshi (third injunction);
• an order preventing Dr Wright from re-publishing his fraudulent claim to be Satoshi (fourth injunction); and
• an order requiring him to delete published statements of that fraudulent claim (fifth injunction).

COPA also sought to prevent Dr Wright from encouraging or permitting any third party from doing any of the relevant acts above. Dr Wright objected to the third to fifth injunctions on various grounds, including that, on his view, there would be an unjustifiable interference with his right to freedom of expression.

The judge agreed that the first and second injunctions above were clearly warranted to prevent Dr Wright from reasserting his claim to be Satoshi, given the “unusual” circumstances. Further noteworthy points include:

• The affirmation of the principle that injunctive relief can be sought where there is an interest meriting protection.
• The dismissal of Dr Wright's argument that his repetition of his falsehoods was similar to wrongfully imprisoned individuals asserting their innocence.
• The denial of the third and fourth injunctions (i.e., preventing Dr Wright from claiming legal rights as Satoshi or reasserting his fraudulent claim to be Satoshi) – the Judge opined that much of the substance of the third injunction was covered by the second injunction. However, the claimants were granted the right to apply, for two years, for any additional injunctive relief needed to protect their interests and those of others in the Bitcoin community who had been harmed by Dr Wright’s false claims to be Satoshi.
• The issuance of a dissemination order requiring Dr Wright to distribute details of the findings against him, to eliminate any remaining uncertainty. This included the publication of the granted injunctions on the homepage of his website for six months and the same revised notice pinned on his X feed and all Slack channels for three months.

 

English Courts Permit Service of legal proceedings via NFTs

In Tai Mo Shan Ltd v. Persons Unknown [2024] EWHC (Comm) 1514, the High Court allowed proceedings (to enforce a New York judgment in a cryptocurrency fraud case) to be served outside the jurisdiction via non-fungible tokens (NFTs). This follows similar decisions in:

• D’Aloia v. Person Unknown & Others [2022]: service by NFT and email.
• Jones v. Persons Unknown [2022]: service by email and NFT.
• Osbourne v. Persons Unknown [2023]: NFTs were the sole method of service.

Key points include:

• Qualification: Service must comply with the laws of the defendant’s location.
• Response Time: A 31-day period for responses was deemed appropriate.
• Document Protection: Password protection for sensitive documents was introduced to prevent public access.

 

High Court clarifies approach to contractual remedies for breach of an obligation to transfer cryptocurrency

In Southgate v Graham [2024] EWHC 1692 (Ch), the Claimant, pursuant to an oral agreement, lent 144 Ethereum tokens (ETH) (worth c. GBP50,000 at the relevant time in June 2018), to the Defendant, expecting a 10% premium upon repayment. The Defendant argued that the loan was for GBP50,000 (ie the fiat GBP equivalent of the price of ETH when the loan was provided), with ETH merely being the medium of exchange. However, when the Defendant failed to repay the full amount, the Claimant demanded either the return of ETH115.69 (taking into account of a prior part repayment of the loan by the Defendant of GBP6,000), or damages equivalent to its value.

The County Court agreed with the Claimant’s interpretation of the loan agreement, determining that the agreement required the return of ETH158.4 (ETH144 plus 10%). However, the County Court refused to grant specific performance due to potential hardship for the Defendant in acquiring the outstanding ETH115.69, which had risen in value to approximately GBP320,000 at the date of judgment. Instead, the court ordered the Defendant to pay damages of the value of the ETH as at 1 October 2019, ie the date the Defendant was found to have breached the loan agreement.

The Claimant appealed, arguing that the damages should be based on the value of ETH at the date of judgment (28 September 2023), given the significant increase in ETH price. The High Court allowed the appeal regarding the valuation date, but refused the appeal as to specific performance. The judge determined that an appeal court will not interfere with a trial court’s findings, unless the trial judge was plainly wrong in law. The judge also noted that damages are generally assessed as at the date of breach, but this rule can vary based on the contract’s nature and the breach’s particulars.

The judge ordered the valuation date be determined at a remedies hearing, which could examine all relevant factual matters (including evidence as to what did or could have happened between the date of breach and the date of judgment). However, the Judge did signal that there appeared to be merit in the Claimant’s argument that the date of judgment was a more appropriate valuation date, not least because the overriding aim is to put the Claimant in the same position they would have been in if the contract had been performed. This is particularly pertinent in cases involving cryptocurrency, where extreme price volatility is not uncommon.

 

The Courts grapple with the OneCoin Cryptocurrency Fraud

In McAdam and others v. Ignatova and others (case number: CL-2024-000213), judge David Foxton continued a worldwide freezing order (WFO) against several individuals and companies alleged to have been behind the USD4 billion OneCoin cryptocurrency scam, in the wider context of a group action claim brought by the scheme’s investors.

The continuation of the WFOs against the defendants highlights the English legal system’s ability to prevent the dissipation of assets in large-scale fraud cases.

 

Singapore High Court considers issues pertaining to cryptocurrency valuations in the context of assessing damages for breach of contract

In Fantom Foundation Ltd v Multichain Foundation Ltd and another [2024] SGHC 173, the Singapore High Court was tasked with determining the appropriate amount of damages to be paid to Fantom Foundation Ltd (Fantom) after it lost several cryptoassets in a security breach.

Pursuant to various agreements, Fantom deposited a variety of cryptocurrency assets into a Multichain Bridge operated by Multichain Foundation Ltd (Multichain). Fantom also provided liquidity to Multichain in the form of FTM4.175 million (Fantom’s native coin) on its side of the Multichain Bridge, in return for an equivalent value in FTM (ERC-20), on the Ethereum blockchain side. By way of explanation:

• A multichain crypto bridge allows assets to be transferred between different blockchain networks, solving the issue of interoperability.
• Crypto source assets are deposited and locked on one side of the bridge – the bridge locks the original token in a smart contract on the source blockchain. ‘Wrapped tokens’ of equivalent value are then minted on another blockchain on the other side of the bridge. These source assets act as collateral for the wrapped tokens, which can be traded on the second blockchain.
• The source assets are then released when the equivalent value is returned to the Multichain Bridge.

• For tokens that exist natively on multiple blockchains, the bridge uses liquidity pools. These pools hold reserves of the token on both blockchains, allowing for direct swaps without the need to mint.

Fantom’s assets were later extracted from the Multichain Bridge due to a security breach. Fantom claimed that this breach was possible because Multichain failed to implement certain security safeguards, thereby violating a key term of one of the relevant agreements.

At trial, Fantom obtained a default judgment against the Multichain Defendants, which included damages for breach of contract to be assessed and the return of certain cryptoassets.

Assessment of damages

There were two facets to consider in the assessment of damages; firstly the damages claim, and secondly the FTM claim.

The damages claim

The Singapore High Court agreed with Fantom’s assertion that the damages should be determined by the difference in value of the original assets just before the security breach, and the value of the wrapped assets held by Fantom when the claim was filed. This decision is based on the principle that a claimant in the position of Fantom should be returned to the position it would have been but for the breach.

The Court considered using the date immediately after the breach was reported to evaluate the post-breach value. However, it ultimately accepted evidence adduced by the General Counsel of Fantom that the assets’ price would have been too volatile on that date to be useful.

The judge concluded that the damages claim should be valued at USD58,620.55.

The FTM claim

A valuation expert confirmed that the FTM cryptocurrency is most frequently traded against the stablecoin USDT. The expert suggested that the value of the FTM claim should be determined by the cost of trading FTM4.175 million in exchange for USDT on a particular global exchange on the date it was transferred to the Multichain Bridge. This date was considered appropriate as it was when Multichain allegedly breached its security obligations.

During the hearing, the value of FTM1 fluctuated by about 2.5% within half an hour. This led to a debate as to whether a spot value or a volume-weighted average price on a particular day should be used for valuation. The court determined that the lower amount proposed by Fantom based on a spot value was more appropriate in the circumstances, and accordingly, the judge valued the FTM claim at USD 2,129,250.00.

However, the judge clarified that this decision should not be considered as endorsing Fantom’s valuation method as the best or only method in all cases. The judge acknowledged that using the date of the breach as the reference point for assessing damages may not always be fair or reflect reality and left the question of valuation open for future cases.

While this was a decision of the Singapore High Court, it provides helpful clarification on key valuation issues that will likely come before the English High Court over the coming years,

 

Successful contempt proceedings arising from a cryptocurrency fraud

On 24 July 2024, a defendant was convicted and incarcerated for a period of 18 months after a contempt trial that took place in June 2024 (Wang v Darby [2024] EWHC 1394 (Comm)). This followed the defendant breaching asset disclosure provisions of a global freezing order by providing false asset information and presenting misleading evidence to support that information.

This is one of the earliest successful contempt application against a defendant accused of cryptocurrency fraud.

 

The opening salvo from the FCA on the UK cryptoasset framework

On 24 November 2024 the UK Financial Conduct Authority (the FCA) published a Roadmap setting out its timeline to developing a tailored regulatory regime for cryptoassets and associated activities (the Roadmap). This new regime will sit alongside the existing cryptoassets anti-money laundering and financial promotions regimes and is expected to be in place by 2026.

On 16 December 2024, the FCA published its first discussion paper on cryptoassets regulation since the publication of the Roadmap, which focuses on establishing an admissions and disclosures regime; and a cryptoassets market abuse regime (Cryptoassets DP). The FCA will publish a series of discussion papers, consultations papers, policy statements and final rules during 2025, covering such matters as trading platform rules, intermediation rules, lending rules, staking, prudential (capital and liquidity) requirements, custody, and the regulation of stablecoin activities and services

HM Treasury will introduce the legislative framework for this new cryptoasset regime, which is expected to be published during 2025.

This client briefing provides a summary of the Cryptoassets DP.

We have also prepared an EU alert which analysis the key elements of the Regulation (EU) 2023/1114 of 31 May 2023 on markets in crypto-assets (MiCA) which applied from 30 December 2024. Please see our EU alert for further details.

 

UK Government commitment to driving economic growth and competitiveness in UK fintech/DLT

Recent government statements have been intended to underline commitment to opportunities built on developing and supporting innovative financial services technologies.

Mansion House speech

On 14 November 2024, the Chancellor of the Exchequer delivered her first Mansion House speech with the clear focus on economic growth and an emphasis on increasing private investment and reforming our economy.

The government will publish its first Financial Services Growth and Competitiveness Strategy in Spring 2025. This strategy will focus on: fintech, sustainable finance, asset management and wholesale services, insurance and reinsurance and finally capital markets. The call for evidence closed on 12 December 2024.

The speech announced the pilot Digital Gilt Instrument (DIGIT), where digital versions of gilts utilising distributed ledger technology will make use of the Sandbox. The government acknowledges that this is a “hugely significant milestone”.

On capital markets reform, the commitment to establishing PISCES by May 2025 as a new regulated market for private company shares. Consultation is underway.

Tokenisation

Economic Secretary to the Treasury, Tulip Siddiq MP made a keynote address at the Tokenisation Summit on 21 November 2024, focussing in particular on distributed ledger technology.

She highlighted the Bank of England and FCA’s Digital Securities Sandbox which will help the adoption of distributed ledger technology in UK markets.

The recently introduced Digital Assets Bill was highlighted, which provides clarification on the legal categorisation of digital assets.

The Secretary, emphasised the importance of cryptoassets and how they should be seen as having the potential to mix with traditional finance to benefit both traditional and newer types of finance. The value of securities tokenisation was called out, in the context of facilitating “atomic settlement” with concurrent payment and transfers of security ownership.

 

Staking not a Collective Investment Scheme: UK Government confirms new law

The UK Government has passed legislation to confirm that staking does not fall within the regulatory scope of Collective Investment Schemes.

The Financial Services and Markets Act 2000 (Collective Investment Schemes) (Amendment) Order 2025 comes into effect on 31 January 2025.

Staking is now defined as a concept as a consensus mechanism used by proof of stake blockchains. As the UK moves closer to establishing an overarching regulatory framework for digital assets, for firms navigating the boundaries between established financial services regulation and new regulatory landscapes, this provides welcome clarification. The statutory instrument is helpful for assessing the status of projects and offerings in this legislative context. Using the concept of “the use of a qualifying cryptoasset in blockchain validation”, the statute defines staking as the validation of transactions on a blockchain or a network that uses distributed ledger technology (or similar).

It is noteworthy that the government explanation accompanying the regulation holds the costs of current uncertainty and the number of firms affected by it as a key reason for the change.

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¹EWHC 3556, [2019].