There has been a surge in the popularity of cryptocurrency in recent years. With its growth in use has come a parallel growth in fraud, much of which is enabled by the same elements that are behind its appeal – decentralisation and light regulation. The English Courts have, however, provided some comfort with respect to the claims and relief potentially available to victims of cryptocurrency fraud.
Is cryptocurrency actually property?
Faced with disputes involving cryptocurrencies, the English Courts have had to determine which claims and relief are available. The first key question to consider was whether cryptocurrency – which is virtual in nature and ultimately exists (only) on a distributed computer ledger, rather than being akin to the types of “property” with which English law is more familiar – constitutes property under English law at all.
In answer to that question, English Courts now proceed on the basis that cryptocurrency is a form of property under English law. Currently the leading case is AA v Persons Unknown , where the Court considered the "Legal statement on cryptoassets and smart contracts" published that same year by the UK Jurisdictional Task Force. The Court decided in AA that cryptocurrency could be treated as property, being “definable, identifiable, capable in [its] nature of assumption by third parties, and [having] some degree of permanence”. Further cases, such as Ion Science v Persons Unknown  and Wang v Darby , have since confirmed this approach. In the Wang case, the Court stated that “fungible and non-identifiable digital assets constitute property that is capable of being bought and sold as well as held on trust as a matter of English law”.
Where is the cryptocurrency located?
Typically, courts in any country will need to consider the location of the assets in dispute in order to determine whether the court can exercise jurisdiction over the assets and the dispute. Given the intangible nature and decentralised status of cryptocurrency, determining the jurisdiction where a dispute should be tried is not obvious. In the Ion Science case, the English Court was willing to proceed on the basis, even if it did not determine the issue conclusively, that territorial jurisdiction is based on the place where the person who owns the asset is domiciled. For now, this appears to be the most likely approach the English Court will take to questions of jurisdiction regarding cryptocurrency.
Practical implications when considering Court claims about cryptocurrency frauds
- The English Courts have proved agile in applying established legal concepts to cryptocurrencies and adapting the legal framework in order to provide relief for victims of cryptocurrency fraud. This provides a solid platform for claims concerning cryptocurrency fraud to be pursued before the English Courts.
- While specific challenges are likely to arise (such as difficulty identifying perpetrators), the position explained above about the status of cryptocurrency under English law means that claims and relief that are usually available from the English Courts (in the context of fraud and asset recovery cases involving more “traditional” forms of property) are also likely to be available in respect of claims concerning digital assets and cryptocurrency. This may include, for example: claims about the proper ownership or transfer of property (including in the context of trusts); or claims against third parties for unjust enrichment.
- Similarly, relief under English law such as asset freezing or preservation orders and / or proprietary injunctions ought to be available to the victims of frauds involving cryptocurrency.
- It also appears that the usual tools available in respect of information disclosure should be available. This can be a powerful weapon to allow victims of fraud to obtain information from third parties such as cryptocurrency exchanges and their parent companies (including where those exchanges/companies are located outside the UK).
- Many cryptocurrency “wallet” providers will provide for ownership of the assets to pass to the wallet provider. This could limit the types of claim that can be pursued by the “depositor” under English law: contractual and personal claims will remain possible; but proprietary claims (which are often more beneficial to a victim of fraud) may not. The law on this point is likely to undergo further evolution in due course, but in the meantime cryptocurrency investors should consider this issue carefully when selecting a wallet provider.
- The world of cryptocurrency disputes is a rapidly evolving landscape in which the law is still being developed. Notwithstanding that, some practical principles are already emerging. In particular, victims of fraud should pursue their claims without delay and any Court orders granted should be brought to relevant parties’ attention (usually third parties) as a matter of urgency. This should help mitigate asset dissipation or the asset becoming impossible to trace (for example where it may be converted or transferred many times). It is, therefore, key to seek legal advice as soon as possible once any wrongdoing has been detected or reasonably suspected.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, January 2022