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Fraud in cryptoassets – proper place to be tried?

  • United Kingdom
  • Financial services and markets regulation
  • Fraud and financial crime
  • Litigation and dispute management
  • Financial services

27-08-2021

Background

In our February 2021 briefing regarding ‘Persons Unknown’ litigation1 (where, initially at least, it is not possible to identify the likely defendants to a fraudulent action), we discussed that fraud rates are at record highs and that cyber-crime is particularly prevalent2. In light of that, we discussed the options available through the civil courts to victims of fraud in respect of recovery against the perpetrators of fraud. We noted that since 20183, the civil courts have embraced innovative approaches to facilitate “obtaining information about fraudsters’ identities and the location of misappropriated funds to then pursue legal action against them”.

In the recent decision of Fetch.ai Ltd and another v Persons Unknown Category A and others4, the Commercial Court was asked to consider jurisdictional questions in the context of the theft of cryptocurrency. Fetch.ai Ltd confirms the earlier decision of Ion Science5  that the place where a crypto-asset is situated for the purposes of court jurisdiction is where the person or company who owns it is domiciled.

The Facts

The Applicants suffered a loss of $2.6m after unidentified fraudsters gained access to their cryptocurrency accounts. Those accounts were maintained by the Fourth Respondent to the application (the crypt exchange, Binance, based in the Cayman Islands) on the Fifth Respondent’s cryptocurrency exchange (Binance based in the UK). The application was also made against three categories of ‘Persons Unknown’, namely:

  • “Those who were involved in the fraud, against whom it was appropriate to seek both heads of relief;
  • Those who had received assets, without having paid the full price for them;
  • Innocent recipients of the crypto-assets”.

In support of a claim for breach of confidence, an equitable proprietary claim and a claim in unjust enrichment, the Applicants sought:

1. A proprietary order – to either freeze the assets moved from the crypto accounts or to restrain third parties from dealing with the traceable proceeds.

2. A worldwide freezing order – against those knowingly involved in the fraud.

3. An ancillary disclosure order – against Persons Unknown.

4. A Bankers Trust Order – against the Fourth and Fifth Respondents.

5. A Norwich Pharmacal Order – against the (UK-based) Fifth Respondent.

Crypto-assets – location

Before the Commercial Court considered granting any orders in Fetch.ai Ltd, it was necessary for the Applicants to obtain the court’s permission to serve Respondents outside of the jurisdiction. In many cases of fraud, fraudsters will dissipate assets and will be based in far flung locations outside England and Wales.

As the nature of the potential claim in this case was a non-contractual liability, the Rome II Regulation applied6 when deciding the appropriate location of the court seised. Pelling J had regard to the decision in Ion Science and analysis in the literature7  that the “lex situs of the crypto-asset was the place where the person or company who owns it is domiciled”. This has the obvious advantage to a party pursuing such loss that they will not have to grapple with issues as to where the cryptoassets have been dissipated to.

The Bankers Trust / Norwich Pharmacal orders

  • A Bankers Trust Order (“BTO”) will only be granted where there is a “fairly clear cut” case of fraud in order to obtain confidential documents from a third party (usually the fraudster’s bank, but in this case their cryptocurrency exchange) to support a proprietary tracing claim.
  • A Norwich Pharmacal Order (“NPO”) is similarly used against innocent third parties to obtain relevant confidential documents, and is usually used to identify defendants to an action and/or to plead a claim against them.

These litigation tools were particularly useful in this case, because the Fourth and Fifth Respondents were administering the fraudsters’ crypto-asset accounts. Therefore, the information obtained at account opening should enable the Applicants to “identify the individuals responsible, or who controlled the account or accounts to which the assets were transferred”.

The point of interest in Fetch.ai Ltd surrounded whether a BTO can be served out of the jurisdiction (in exceptional circumstances, including urgent pursuit of fraud). It is well regarded that a NPO cannot be served out of jurisdiction. Therefore the BTO was sought and granted against both the Fourth and Fifth Respondents, but the NPO only against the UK based Fifth Respondent.

Alternative service

The court also considered that it was appropriate to grant alternative service orders against Persons Unknown, so that traditional post or personal service methods (which were likely to be rendered redundant) could be replaced by other methods. The basic position is that alternative service should only be granted in exceptional circumstances, but it is becoming far more common for the civil courts to grant orders in cases such as these. As well as email, courts have granted authorised service by Whatsapp, Facebook Messenger and access to a data room.

Wider implications

  • The key takeaway from Fetch.ai Ltd is that the Commercial Court considers that loss will have been suffered within the jurisdiction if misappropriated crypto-assets were owned by a person or company within England and Wales.
  • For victims of fraud who have had such digital assets misappropriated, this will provide some comfort that they are able to use their local courts to obtain relief.
  • However, the Commercial Court made it clear that there is no authority on this point. It was only deciding this issue for the purpose of deciding jurisdiction. Therefore, for that purpose, it was decided that there was a serious issue to be tried that this was the correct analysis.
  • In the above regard, it remains to be seen whether such cases proceeding to trial will facilitate recovery of that loss as being suffered within England and Wales, but this is a strong indication that it will.

[1] https://www.eversheds-sutherland.com/global/en/what/articles/index.page?ArticleID=en/Fraud_and_financial_crime/Persons_unknown

[2] PWC Global Economic Crime and Fraud Survey 2020

[3] The decision in CMOC v Persons Unknown [2018] EWHC 2230 (Comm)

[4] [2021] EWHC 2254 (Comm)

[5] Ion Science Ltd v Persons Unknown and others (unreported), 21 December 2020 (Commercial Court)

[6] EC) 864/2007) (Rome II)

[7] Professor Andrew Dickinson in David Fox and Sarah Green, Cryptocurrencies in Public and Private Law (OUP Oxford, 2019), paragraph 5.108

 

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