Cryptocurrency fraud - The High Court considers the position of "cryptoassets"

Cryptocurrency fraud - The High Court considers the position of "cryptoassets"

Cryptocurrency - is it recognised as "property" under English law?

In our article last year we discussed the extent to which cryptocurrency is considered to be “property” for the purposes of English law and recent case-law which clarified the remedies available to victims of fraud concerning the digital currency. Despite cryptocurrency being in use for some time, having been first created in 2009, investing in it has become increasingly prevalent in recent years. As its use and popularity grows an increasing number of disputes involving cryptocurrency are being dealt with by the English courts, and while the approach of the courts in dealing with this kind of fraud may not have crystallised yet, the position is becoming clearer. 

A recent High Court decision in Ion Science Limited & Duncan Johns v Persons Unknown & Others, has provided further guidance and we discuss the decision below.

Background

The case arose from proceedings brought by Ion Science Limited (ISL) and its sole director Duncan Johns, who claimed to be victims of a cryptocurrency initial coin offering, or ICO, fraud. Mr Johns claimed he was persuaded by an individual said to be connected to a Swiss entity called Neo Capital, Ms Black, to transfer funds which were converted into Bitcoin by Ms Black, granting Ms Black remote access to his computer to manage this. Mr Johns also made further transfers to an escrow account, claiming Ms Black informed him these payments were needed to release commission payments from one of the investments, the “Oileum ICO”.

The applicants said they subsequently discovered that Neo Capital was not a real company and the Swiss regulator had issued a warning that it may be providing unauthorised services. Neither Mr Johns nor ISL received any profits supposedly made in relation to the Oileum ICO or received back any of the funds invested. The court heard evidence from an expert in cryptocurrency frauds who concluded that (i) a substantial part of the Bitcoin transferred or their traceable proceeds were held by the Binance and Kraken cryptocurrency exchanges; and (ii) both exchanges held information about the customers to whom those accounts belong. 

Alleging the sums invested had been misappropriated, the applicants applied for a proprietary injunction, a worldwide freezing order and an ancillary disclosure order against persons unknown, the individuals or companies describing themselves as being or connected to Neo Capital. In addition, the applicants sought a disclosure order against Binance Holdings Limited, a Cayman company believed to be the parent of the group of companies that operates the Binance Cryptocurrency Exchange and Payments Ventures, a US entity believed to be the parent of the group of companies that operates the Kraken Cryptocurrency Exchange. The applicants further asked for permission to serve the proceedings out of the jurisdiction and by alternative means.

Outcome

In a significant judgment highlighting the court’s approach towards cryptocurrency fraud, Mr Justice Butcher granted the relief sought by the applicants, making the following findings:

The legal status of cryptocurrency: Drawing on recent decisions and analysis of the position in the 2019 UK Jurisdiction Task Force statement on Cryptoassets and Smart Contracts, the court found there was at least a serious issue to be tried that Bitcoin was property under the common law definition. 

Claims against persons unknown: The applicants applied for a proprietary injunction and a worldwide freezing order against persons unknown. The court confirmed it is possible to grant relief against persons unknown if the description used is sufficient to identify those included and those who would not be, and it was satisfied this was the case here. 

Jurisdiction: The court concluded the applicants had shown there was a serious issue to be tried on the merits of their claims being brought or intimated in deceit, unlawful means conspiracy and by way of an equitable proprietary claim. Furthermore the proper jurisdiction for the trial of the claim was found to be England. The applicants could meet the requirements for serving out of the jurisdiction on the basis that the damage occurred within the jurisdiction, or the claim arose out of acts committed or events that occurred within the jurisdiction, the applicants are domiciled in England and the relevant funds and Bitcoin were based in England.

Lex situs: English law was found to apply as England was the place where the damage occurred. This was on the basis that Mr Johns’ bank account was an English account or that the funds were taken from the applicants’ control in England because either Mr Johns’ computer was in England or because the relevant Bitcoin was located in England prior to the transfer. As to the latter point, this was said to be on the basis that the lex situs of a crypto-asset is the place where the person or company who owns it is domiciled, although Mr Justice Butcher acknowledged there is no decided case on this point and relied on textbook authorities.

The applications: The court granted the relief sought by the applicants, finding:

  • The balance of convenience in favour of the grant of a proprietary injunction had been shown. There was no certainty that the persons unknown would be able to satisfy damages and it was just and convenient to grant the order as it appeared there had been extensive cyber fraud.
  • A worldwide freezing order and ancillary disclosure against the persons unknown was justified. The applicants had shown a good arguable case, there was material that demonstrated a real risk of dissipation given the alleged fraudulent conduct of the respondents and the fact there was no way of showing that assets could be caught by it did not bar the granting of a freezing order.
  • The applicants should be granted disclosure orders against Binance Holdings Limited, Payment Ventures Inc. on the basis that the identity of the individuals alleged to be involved in the fraud may otherwise never be known, and the applicants left without an effective remedy. The court found the Bitcoin was the applicants’ property and there was a real prospect that the information sought would lead to the location and preservation of the property.
  • The applicants should be permitted an order for alternative service as Binance Holdings Limited and Payment Ventures Inc. were domiciled in the Cayman Islands and the US. As the application contained urgent injunctions and the property, the Bitcoin, could be easily dissipated, exceptional circumstances existed to justify such an order.

Conclusion

Cryptocurrency, can by its nature be transferred easily and quickly, and is favoured by some investors because of the reduced regulation governing these transactions. Its use continues to increase, and it was reported earlier this year the digital currency Bitcoin had risen to new record high value of more than US$50,000 with speculation the increase had been driven by the widely reported purchase by electric carmaker Tesla of US$1.5bn of the currency. However there are significant risks associated with dealing in cryptocurrency. It is perceived to very volatile, and it is susceptible to fraud and cyber-crime. Furthermore, the reduced regulation of cryptocurrency transactions can make tracing and investigating this type of fraud very difficult. The FCA issued stark guidance earlier this year warning consumers to be aware of the risks of investing in cryptoassets, stating it had received a high number of reports of scams involving these types of assets. 

The court decision in Ion Science is understood to be the first fraud case involving an ICO that has come before the Commercial Court. While some of the issues had been considered previously, the decision offers new guidance on the way in which the courts will treat cryptocurrency fraud and, in particular, the lex-situs of cryptoassets. While the guidance from the FCA offers a harsh warning to potential investors to be prepared to lose money, the popularity of cryptocurrency nonetheless continues. It seems likely we will see more crypto-asset fraud dealt with by the courts and the case offers helpful insight in an evolving area of law and litigation, and important guidance into the assistance the courts may be prepared to offer to victims of this increasingly-prevalent type of claim. 

(1) Ion Science Ltd (2) Duncan Johns v (1) Persons Unknown (2) Binance Holdings Limited (3) Payment Ventures Inc

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