Long arm of the law: where are we now on crypto fraud claims in England & Wales?

The “King of Crypto”, Sam Bankman-Fried, was last year convicted of committing one of the biggest financial frauds in US history, stealing billions of dollars from customers of his cryptocurrency exchange, FTX. It took five days for his company to collapse, five weeks for prosecutors to charge him with multiple counts of fraud related offences, and just five hours for a US jury to find him guilty as charged. He now faces decades in jail.

If Bankman-Fried’s conviction is evidence of the criminal court system countering crypto fraud, what of the civil courts? How has the law evolved to deal with this complex legal landscape, addressing the myriad of legal challenges posed by crypto fraud?

Legal systems worldwide are grappling with the development of jurisprudence to enable parties to seek justice and recover misappropriated assets. This article gives a whistlestop tour of how the courts of England and Wales have adapted existing legal frameworks to establish new legal precedent and become a leading forum for claims involving crypto fraud. The following cases show the evolution of English law, and lessons learned along the way:

Are cryptocurrency assets even “property” under English law?

In Vorotyntseva v Money-4 Ltd (T/A Nebus.com) [2018], the Court considered the legal treatment of cryptocurrency and whether it is possible to be classed as “property” under English law. The Court proceeded on the assumption that it can be and, while not yet firm authority for the principle, the decision was seen as instructive that the Court was willing to treat cryptocurrency as property.

The UK Jurisdictional Taskforce (UKJT)’s first statement, “Legal Statement on Cryptoassets and Smart Contracts” in November 2019, concluded that whilst a cryptoasset “might not be a thing in action on the narrower definition of that term”, that “does not in itself mean that it cannot be treated as property”. Whilst not legal authority as such, this was strongly indicative of the direction of thinking and laid the groundwork for the next case to come before the courts.

In AA v Persons Unknown & Ors Re Bitcoin [2019], the Court was willing to grant proprietary injunctions against all defendants, freezing the fraudulently obtained Bitcoin. In granting the injunctions, the Judge affirmed that “cryptoassets such as Bitcoin are property”. A great deal of weight was given to the UKJT statement in reaching this conclusion, noting that their “analysis as to the proprietary status of crypto currencies is compelling”.

Other takeaways included the fact that the Claimant was successful in establishing that the hearing should be held in private, due to the risk of the dissemination of the Bitcoin, as well as of revenge attacks upon the Claimant and their insurer. In addition, the Judge permitted documents to be served by email because of the unknown location (and, in some cases, identity) of the Defendants, and because of the urgency of the application.

If cryptocurrency only exists online, where is it actually located?

In Ion Science Ltd v Persons Unknown(unreported, 21 December 2020), the Court considered the lex situs of cryptoassets, a point on which there had previously been no decided case. In the absence of prior case law, the judgment relied on academic commentary to conclude (to the standard of a serious issue to be tried) that the lex situs of a cryptoasset is the (same) place where the person or company who owns the assets is located.

Can third parties be compelled to disclose information to victims?

In the Ion Science case, the Court also granted permission to serve a free-standing Bankers Trust Order (an order made to a third party compelling it to disclose certain information) out of the jurisdiction against cryptocurrency exchanges.

However, in Scenna v Persons Unknown and Others [2023], the Court discharged a disclosure order against two foreign banks. In this case, in which the authors acted for one of the two Australian defendant banks, the Court considered the circumstances in which a foreign bank could be compelled to provide information in England about its customer (who was accused of orchestrating a substantial crypto fraud) when such disclosure would raise competing issues (in the bank’s home jurisdiction) around domestic privacy and banking secrecy laws.

Similarly, in Jahangir Piroozzadeh v Persons Unknown et al [2023] freezing injunctions granted on a without notice basis relating to misappropriation of crypto assets were subsequently discharged by the High Court. While many of the earlier cases have involved relief obtained on a without notice basis against persons unknown or parties located in other jurisdictions, Piroozzadeh is notable as an example of a recent trend of more cases where a respondent, often a cryptocurrency exchange, has engaged in proceedings and challenged the basis on which orders have been made against them. In this case, challenging successfully.

What about NFTs?

In Osbourne v (1) Persons Unknown and (2) Ozone Networks Inc trading as Opensea [2022] and Osbourne v Persons Unknown & Ors [2023] the Claimant was successful in establishing that NFTs are legal property and as such are subject to enforceable rights and protections (including, as in this case, a freezing order). Following that initial success in obtaining the freezing order, the Claimant subsequently successfully asked the Court for permission to serve the English proceedings on further unidentified prospective defendants by way of an NFT (as the sole means of service). Service by NFT was permitted because there was no other available method of service.

Can cryptocurrency be subject to a trust?

By the time Jones v Persons Unknown [2022] was heard, it was well-established caselaw that Bitcoin is property, and accordingly proprietary remedies are available to claimants in relation to the recovery of crypto assets. This case is notable in that it was the first example of the Court deciding that a constructive trust could arise in the context of crypto assets. This opens the door in England for proprietary claims and remedies regarding crypto assets.

Does the Court have its own cryptocurrency wallet?

This question was considered in the case of Joseph Keen Shing Law v Persons Unknown & Huobi Global Limited [2023]. As the Court did not have a crypto wallet, the transfer of cryptocurrency into its control required a conversion of the cryptocurrency into non-crypto currency. A cross undertaking in damages was provided by the Claimant for any costs of conversion and fluctuation in price (the risk of this being significant given the volatility of various cryptocurrencies). The Court having its own crypto wallet in the future would arguably remove the risks of currency fluctuation in a delivery up order.

Could someone re-write the code to fix the problem and restore missing crypto assets?

The case which might answer this question is Tulip Trading Limited v Bitcoin Association For BSV & Ors [2023]. Here, the Court of Appeal considered whether Bitcoin developers owe fiduciary duties to users, which could include a requirement to take active steps to introduce codes to assist with the recovery of stolen Bitcoin. The Court of Appeal unanimously held that there was a serious issue to be tried on this point and remitted the case for trial before the High Court. If a duty is found to exist, it would, in the words of Lord Justice Birss “involve a significant development of the common law on fiduciary duties”. In practical terms, it could also lead to an outcome which challenges the very premise of decentralised cryptocurrency transactions.

Where next?

So, there were have it. Crypto assets are incontrovertibly property under English law. Though ethereal in nature, they can be held to be located in England (for the purposes of establishing jurisdiction). In the right circumstances, documents can be served by NFT under English law. A constructive trust can arise over cryptocurrency (and thus proprietary remedies are available to a claimant) under English law. The Court might at some point soon have its own crypto wallet and, more fundamentally, cryptocurrency developers might be found to owe fiduciary duties to users (and be obliged to fix / restore stolen digital assets). But important third parties, such as banks and cryptocurrency exchanges, are beginning to fight back and protect their own rights and obligations.

Looking ahead, cryptocurrencies look like they are here to stay, and their wider acceptance is likely to lead to greater prevalence of crypto frauds. That said, two powerful macro trends may serve to reduce the damage somewhat. First, the high-profile demise of some well-established crypto names, such as FTX, may give prospective investors pause to consider whether offers really are too good to be true. Secondly, the UK has now enacted legislation to bring crypto assets into the FCA’s remit as regulator: the relevant provisions of the Financial Services and Markets Act 2023 (FSMA 2023) came into force on 29 August 2023. The changes bring crypto assets within the scope of “regulated activities” meaning they must not be carried out by an unregulated person, and the promotion of crypto assets is now subject to stricter promotion and communication rules. As fast as the fraudsters develop crypto scams, the law (in England, at least) is hot on their heels.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, February 2024