High Court grants the first Bankers Trust Order against overseas cryptocurrency exchanges using new 'gateway' for service out of the jurisdiction

EXECUTIVE SUMMARY

On 29 November 2022, Mr Justice Butcher handed down judgment in LMN v Bitflyer Holdings Inc. and others [2022] EWHC 2954 (Comm), which is the first successful Bankers Trust application against overseas cryptocurrency exchanges based on the new ‘gateway’ for service out of the jurisdiction at CPR Practice Direction 6B §3.1(25) (known as the disclosure gateway). A DLA Piper team of Chris Harvey, Sam Gokarn-Millington and Atacan Aydinli acted for one of Defendant exchanges together with Nik Yeo of Fountain Court.

In LMN, LMN sought disclosure of customer and transactional information from several overseas cryptocurrency exchanges, to trace stolen cryptocurrency which had, according to LMN’s expert, passed through those exchanges. When faced with similar applications, the English Courts have shown a willingness to assist victims of cryptocurrency theft in tracing their stolen digital assets across to other exchanges and to identify those responsible.

Whilst, as recognised by the judge, certain of the exchanges were prepared to provide information to LMN, there was disagreement over the scope of information sought, as well as certain confidentiality restrictions which LMN sought to impose. The claim therefore proceeded to a hearing at which, following representations by Mr Yeo, the order made by Mr Justice Butcher was substantially narrower than that sought by LMN.

This note seeks to: (i) set out the law on Bankers Trust orders; (ii) consider the use of the new service out gateway in cases where the victims of hacks seek to trace misappropriated funds / assets; and (iii) consider the steps which could be taken to limit overly wide disclosure requests sought in similar applications.

 

LMN -v- Bitflyer and Others

Background

LMN, which operates a cryptocurrency exchange from England, was the victim of a hack in 2020 which resulted in the transfer by hackers of several million dollars’ worth of cryptocurrencies from its systems.

After failing to obtain the necessary assistance from UK regulatory and law enforcement agencies, LMN instructed an expert to seek to trace the stolen cryptocurrency (Target Cryptocurrency). Using proprietary software and public records, the expert was able to identify addresses under the same control, and through further software-based analysis of transactions was able to identify ‘address clusters’ that could be inferred to be under common control. However, on any occasion where the chain of transactions reached an "exchange address", the expert could not then discover what became of the cryptocurrency, as these exchange addresses were operated by the Defendant exchanges.

LMN accordingly sought disclosure, through a Bankers Trust application, from the Defendant exchanges. Disclosure was sought on the basis that their users were alleged to have received misappropriated cryptocurrency in their accounts, and the disclosure would assist in identifying the hackers and tracing the cryptocurrency. In particular, LMN had reason to believe that each Defendant exchange collected 'Know Your Customer' information which could be relevant to the identification of the hackers.

At an ex parte hearing on 28 October 2022, LMN sought a ‘rolled up’ hearing of applications for permission to serve the Defendant exchanges out of the jurisdiction and by alternative means, and of the substantive application for information orders. The judge permitted LMN to serve out of the jurisdiction and by alternative means, but he was not prepared to proceed with the Bankers Trust application without notice to the Defendant exchanges. That application was considered at a further hearing on 11 November 2022.

Bankers Trust order

The requirements for an order under the Bankers Trust Co -v- Shapira [1980] 1 WLR 1274 (Bankers Trust) jurisdiction were summarised in Kiriakou -v- Christie’s [2017] EWHC 487 (QB).

The jurisdiction arises where there is strong evidence that a claimant's property has been misappropriated. Where there is such evidence, the court will not hesitate to make orders to ascertain the whereabouts of the property and to prevent its further disposal. These orders may require disclosure of what would otherwise be confidential customer information.

The principles derived from the authorities are:

1. there must be good grounds for concluding that the assets about which information is sought belonged to the claimant, and there must be a real prospect that the information sought will lead to the location or preservation of such assets;
   
   
2. the order should, so far as possible, be directed at uncovering the particular assets which are to be traced. The order should not be wider than is necessary in the circumstances, and the court should seek to achieve a just balance between those who seek such orders and those against whom they are sought (Marc Rich -v- Krasner [1999] EWCA Civ 581); and
   
   
3. the applicant must provide undertakings: (i) to pay the expenses of the defendant complying with the order; (ii) to compensate the defendant in damages should they suffer loss as a result of the order; and (iii) only to use the documents or information obtained for the purpose of tracing the assets or their proceedings.

On the merits of the application, Mr Justice Butcher considered that LMN had a good claim to Bankers Trust relief. In doing so, he considered the dicta of Hoffman J in Mackinnon -v- Donaldson, Lufkin & Jenrette Corp [1986] Ch 482 (Mackinnon), that Bankers Trust orders made against foreign parties amount to an infringement of the sovereignty of a foreign jurisdiction and should only be made in exceptional circumstances. He held that this approach was inapplicable in the present case, where it was not known where the documents sought by LMN were located, and despite the possibility that the documents were in another jurisdiction, they could be in the jurisdiction of England and Wales.

The judge further stated when the court is faced with the novel challenges of fraud in relation to cryptocurrency, an approach adopted in relation to banks in 1985 does not seem to be apposite, and the "exceptional circumstances" in Mackinnon were found where crime and fraud were involved. He concluded that it would be contrary to the interests of justice to require a victim of fraud to make speculative applications in different jurisdictions to seek to locate the relevant exchange company and then to seek disclosure, probably in aid of foreign proceedings. Concerns regarding national laws can be catered for by the terms of the order.

Consistently with previous cases, Mr Justice Butcher agreed that "[t]here is a good arguable case that cryptocurrencies are a form of property", and that they are recoverable and traceable in equity. He considered arguments that the transfer of Bitcoin on the Bitcoin blockchain may create a new asset in the hands of the acquirer, but held that that there is a good arguable case that the transfers can be the subject of tracing, on the basis that there is a relevant substitution.

New Service Gateway

The requirements for the service of a claim form out of the jurisdiction were summarised in Altimo Holdings and Investment Ltd -v- Kyrgyz Mobil Tel Ltd [2011] UKPC 7 at [71], namely: (1) was there a serious issue to be tried on the merits?; (2) was there a good arguable case that the claim fell within one of the "gateways" in paragraph 3.1 of CPR PD 6B?; and (3) was England and Wales the appropriate forum for the claim to be tried?

Focusing on the second of those requirements, Mr Justice Butcher considered that the “new” jurisdictional gateway in PD 6B §3.1(25) was available. This gateway, which came into force on 1 October 2022, permits service out where:

"A claim or application is made for disclosure in order to obtain information –

(a) regarding:

(i) the true identity of a defendant or a potential defendant; and/or

(ii) what has become of the property of a claimant or applicant; and

(b) the claim or application is made for the purpose of proceedings already commenced or which, subject to the content of the information received, are intended to be commenced either by service in England and Wales or pursuant to CPR 6.32, 6.33 or 6.36."

Mr Justice Butcher determined that the information sought by LMN fell within limbs (a)(i) and (ii) above, and LMN had stated its intention to commence proceedings against the hacker in England, which satisfied (b).

In light of this approach from the Court, and the continuing willingness of the English judiciary to assist victims of fraud, we expect that applications of this nature will increase, perhaps significantly, over the coming years. It should be noted, however, the Defendant exchanges in LMN retained the ability to challenge the jurisdiction of the court under CPR 11, as well as the order permitting service of out of the jurisdiction.

Targeting of parent company and the provision of undertakings

LMN was unable to identify the exact legal entities responsible for operating the exchanges which the Target Cryptocurrency passed through, and which therefore held the information and/or documents which LMN sought. Consequently, LMN opted to issue the Claim Form against the parent or “Topco” for each exchange, an approach which was accommodated by Mr Justice Butcher.

However, in circumstances where a Defendant was willing or able to identify the entity believed to hold the information sought, Mr Justice Butcher asserted that the correct approach was for a substitution of the Topco for the correct entity.

Where the Topco exchange was not willing or able to identify the correct entity, or simply did not engage with the terms of the order sought, Mr Justice Butcher addressed this by seeking to add a "Persons Unknown" defendant for each exchange; that being the companies or other entities who are identified in the exchange platform's terms and conditions.

The judge rejected LMN’s request that any subsidiaries of Defendant exchanges who are contacted in relation to the order be required to provide an undertaking that it would not disclose the existence of the proceedings or order. This included an obligation to submit to the jurisdiction of the English courts. That is, in our view, plainly the correct approach, since it would otherwise impose obligations under English law on entities which are not parties to the order. Further, it would force those entities to submit to the jurisdiction of the English courts without the claimant ever having the right to serve proceedings on those overseas entities.

Narrowing the scope of disclosure

So far as we are aware, this is the first case where a defendant exchange, which sought to engage constructively with the terms of a Bankers Trust order, has challenged in Court the extremely wide scope of the disclosure sought.

In making representations at the hearing, one Defendant exchange was able to significantly narrow the scope of information that it was required to provide, and was further able to convince the Court of the need for redactions to be applied to sensitive customer information provided to LMN (including bank account details).

Furthermore, in light of the Defendant exchange’s representations, the judge included a carve-out specifically for that exchange in respect of the provision of information regarding any onward transactions relating to the Target Cryptocurrency. Specifically, this meant that this exchange (unlike other exchange Defendants) was not required to provide information relating to any subsequent transactions undertaken by the relevant user to any other recipient address (to the extent that those recipient addresses are associated with customers of the relevant exchange). The provision of information relating to onward transfers of the Target Cryptocurrency could have been time consuming, and potentially expensive, to collate given the unknown number of further transfers.

 

COMMENT

Jurisprudence on the above issues, to date, illustrate that English courts are prepared to grant wide ranging Bankers Trust orders and permit service out of jurisdiction to assist the victims of a hack identify the hackers in question. In the context of cryptocurrency exchanges, such previous orders have, to our knowledge, been granted without representations being made on behalf of exchange defendants. That approach may be a result of those exchanges being outside the jurisdiction of England. Nevertheless, the upshot is that courts have, until LMN, not heard directly from defendant exchanges, meaning that the appropriateness of Bankers Trust orders in these circumstances have not yet been fully tested.

Given the new jurisdictional gateway under PD 6B, which makes it easier to satisfy the rules for service out in these types of applications, we only expect such applications to increase in scope and volume in the coming years.

Accordingly, this judgment is significant in so far as we believe this is the first case where a defendant exchange has actively participated in the hearing and, in so doing, achieved a substantial narrowing of the terms of the order and the scope of the disclosure sought by LMN.

While accepting that there is a costs risk associated with this approach, the potential upside in participating is the ability to influence the judge’s decision on the scope of the order sought, whilst still, if possible, preserving an ability to contest the Court’s jurisdiction in cases where (as in LMN) claimants are seeking determination of their claims on an expedited basis.

Participating and pushing back against orders sought may also be beneficial to exchanges in the long term. Such a proactive approach should encourage claimants making similar such applications in the future to take a less expansive approach to the scope of the orders sought. If that does not happen, it will be open to defendant exchanges to contest the terms of any order and seek appropriate relief in costs in the event that the claimant's approach is deemed to be unreasonable.

Should you have any queries arising out of this judgment or if you wish to discuss further, please do not hesitate to contact Chris Harvey, Sam Gokarn-Millington and Atacan Aydinli.