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Crypto Case Analysis

13 December 2022

Cryptocurrency fraud and claims involving digital assets are on the rise. The English Courts are adept at dealing with them and victims of crypto-fraud have a number of innovative weapons available to seek to recover their losses.  Below, we summarise some of the key English court decisions in this rapidly developing area. 

Tulip Trading v Bitcoin Association BSV and others

Issues

  • What duties do developers of cryptoassets owe to users of their software?
  • Where can you sue in relation to your crypto assets?

Decision

A CEO of a company (incorporated in the Seychelles) was a victim of computer hacking. The result was the misappropriation of "private keys", which allowed dealing in cryptocurrency worth over £3 billion the claimant was said to own. It was argued that the developers of the software used on the networks where the cryptoassets were held, controlled these networks and owed duties to the company, meaning that they were under an obligation to assist the company in regaining control and use of its cryptoassets by creating and implementing a software "patch".

The developers challenged the jurisdiction of the English Courts. The Court held that the developers did not owe the duties as alleged by the company. The developers were a fluctuating body of individuals and it could not be realistically argued that they owed continuing obligations to remain as developers and make future updates whenever it might be in the interests of crypto owners to do so. Further, the change sought could be to the disadvantage of other crypto owners and even if it could be argued that there was some form of relationship of trust and confidence, it does not follow that a duty to the company arose to the exclusion of others. The developers were not required to make changes in the circumstances where there was no known bug or defect affecting the software. No duty of care was found to exist.

The Court also held that the Bitcoin was located in England on the basis that the company's CEO was resident in England regardless of the fact that the country of the company's incorporation was Seychelles. This is because a company is resident where its central management and control is located, which is where its "real business" is carried on. Although the company had no active business, it was crucial that the company's CEO had the ability to deal with cryptoassets in England.

Danisz v Persons Unknown

Issues

  • Can the English Courts grant worldwide freezing orders to protect cryptoassets?

Decision

Yes. The High Court granted a UK resident who fell victim to a suspected fraud a combination of remedies including a worldwide freezing order prohibiting the defendants from unjustifiably disposing of, or otherwise dealing with, Bitcoin.

Fetch.ai Ltd v Persons Unknown Category A

Issues

  • Can you get a court order forcing a third party based outside England and Wales to provide documentation?

Decision

Yes. The victim had allegedly been defrauded out of cryptocurrency assets and sought to trace them.  In order to do so, they needed information from a cryptocurrency exchange located in the Cayman Islands which held the accounts into which the assets were transferred.

The English Court allowed the victim to seek information from the exchange even though it was based outside of England and Wales.

In making its decision, the Court stated that cases of 'hot pursuit' could justify the making of such an order and that this was indeed such a case.

AA v Persons Unknown

Issues

  • Are cryptocurrencies a form of property, which can therefore be subject to a proprietary injunction?

Decision

Yes. A proprietary injunction is an injunction in relation to property which is the subject matter of a claim, where a victim alleges it owns property which is held by someone else. Usually a proprietary injunction prevents the person holding the property from disposing of it until the claim is determined.

In this case, in which the claimant transferred Bitcoin on the instructions of the perpetrators of a ransomware attack, it was established that cryptocurrencies are a form of property capable of being the subject of proprietary injunctions. The Court granted a proprietary injunction preserving the Bitcoin transferred to an address linked to an exchange operated by two of the defendants in the claim, so that the Bitcoin could not be transferred.

AA v Persons Unknown, Ion Science Limited v Persons Unknown, Fetch.ai Ltd v Persons Unknown Category AWang v Darby

Issues

  • Can cryptocurrencies be held on trust?

Decision

Yes, they can. This is significant because if a cryptoasset is held on trust, a person has more legal options for preserving and recovering it in the event that it is stolen or misappropriated.

In AA v Persons Unknown, the Court permitted service of the claim form out of England in relation to a claim based on a trust.

In Ion Science Limited v Persons Unknown, it was held that there was a serious issue to be tried in respect of the Bitcoin, which was obtained by fraud and was held on trust for the victim.

In Fetch.ai Ltd v Persons Unknown, it was held that a victim of cryptocurrency fraud had a reasonably arguable claim based on a trust in respect of his assets, which were dishonestly misappropriated.

In Wang v Darby, the Court concluded that no form of trust arose, because the assets were subject to a contractual arrangement that meant that a trust relationship had not been created.

For more information, contact Darren Kenny, Ben Griffin, Vadims BovtramovicsOleksandra Vytiaganets and Sarah Deloison.

Further Reading