Cryptoasset fraud: the English court makes pre-emptive remedies available to victims of international fraud

In a recent judgment, the English court has demonstrated that pre-emptive remedies are available to litigants who have been subject to cryptoasset fraud even where the alleged fraud originates outside the UK.¹ From orders freezing the assets held globally by presently unidentified fraudulent actors, to disclosure orders against cryptocurrency exchanges based outside the UK, international litigants can access a range of highly effective remedies to tackle cryptoasset fraud.

Key takeaways

• As investments in cryptocurrencies and the use of cryptoassets gains in popularity and continues to grow around the world, the English court is showing flexibility in its willingness to adapt existing remedies to protect market participants in the event of cryptoasset frauds.  
• These remedies are powerful, and those who disobey the English court’s orders can be subject to serious sanctions. For example, with respect to WFOs, respondents who breach the terms of a WFO (and any third parties assisting them to do so) can face fines, imprisonment, sequestration of assets or a civil claim for damages.
• Dechert’s international litigation team has a breadth and depth of experience in acting for international litigants in claims before the English courts and dealing with the types of urgent remedies described in this OnPoint. 

The Facts

An English company and its sole director/shareholder claimed that they had been the victims of a cryptocurrency fraud relating to an initial coin offering (ICO)² for a new cryptocurrency. The applicants alleged that they had been induced by unidentified persons, who had held themselves out to be linked to a purported Swiss company (which turned out not to be a registered entity and to be on a regulator’s warned list), to transfer a significant amount of bitcoin and associated commission payments to invest in two ICOs, in the belief that they were making investments into real cryptocurrency products. 

A cryptocurrency fraud expert provided evidence to the court that a substantial part of the monies transferred, or their traceable proceeds, appeared to be in accounts held by certain cryptocurrency exchanges. The applicants believed that the exchanges were likely to hold information about the customers to whom those accounts belonged. 

The applicants applied to the court for orders against the unidentified persons who had held themselves out as representing the purported Swiss company, as well as against the parent companies of the cryptocurrency exchange groups, to:

1. secure the transferred bitcoin, or their traceable proceeds;
2. preserve the assets of the unidentified persons; and
3. discover the true identity of the unidentified persons so that effective remedies could be pursued against them.

The application was heard in private and made without notice to the respondents on the grounds that a public hearing would have risked tipping off respondents and frustrated the object of the relief sought. 

The Decision

The judge granted the orders sought by the applicants. In summary:

1. Worldwide Freezing Order (WFO).  A WFO is one of the most potent weapons available to international litigants in the English courts.  In addition to restricting what a party can do with its assets globally (the effect of which is typically significant), a WFO can also force a party to disclose often sensitive and highly guarded information about the assets it holds, even where its total assets far exceeds the frozen amount.  In this case, a WFO was granted against the presently unidentified persons (whose location, whether inside or outside the UK, was also presently unknown) on the grounds that, amongst other things, there was a real risk of their assets being dissipated.  An ancillary disclosure order was also made requiring those persons to provide information on their assets, even though no evidence could be provided about the existence of such assets.
   
   
2. Bankers Trust Orders. A Bankers Trust order is a type of disclosure order, through which an English court may direct a party to provide information about the location of property or about assets which either are or may be the subject of an application for a freezing injunction. In this case, a Bankers Trust Order was granted against each of the cryptocurrency exchanges, compelling them to provide information relating to the cryptoassets in question. The purpose of the orders was to facilitate the identification of the alleged fraudulent actors against whom the WFO and proprietary injunction could then be enforced.  According to the court, these orders were granted even though the cryptocurrency exchanges were based outside the UK because there was a good arguable case that the exchanges were necessary or proper parties to the claim against the alleged fraudulent actors . In the view of the court, there was also a real prospect that the information from the exchanges would lead to the location and preservation of the applicants’ bitcoin.
   
   
3. Cryptoassets as property/proprietary injunction. As part of its reasoning, the court concluded that there was a serious issue to be tried as to whether cryptoassets were to be treated as property under English law.  This follows a string of recent English cases in which, for the purposes of interim applications at least, cryptoassets have been considered to amount to property.  This conclusion enabled the court to grant a proprietary injunction against the unknown persons on the grounds that, amongst other things, (i) there was no evidence that the individuals in question would be able to satisfy an award of damages and (ii) it was just and convenient to grant the injunction as it appeared that the applicants had been the victims of an extensive cyber fraud.
   
   
4. Location of cryptoassets. The court also concluded that there was a serious issue to be tried as to whether the location of cryptoassets, for the purposes of determining the applicable law of a given dispute, is the place where the owner of the cryptoassets is domiciled (in this case, England).  We believe that this is the first time that this issue has ever been considered by the English court.

The authors are grateful to Harriet Geddis, Trainee Solicitor in London, for her valuable contribution to this OnPoint.

Footnotes

1) Ion Science Limited and Duncan Johns v Persons Unknown, Binance Holdings Limited and Payment Ventures Inc. (unreported, 21 December 2020).

2) An ICO is a fund-raising exercise, conceptually similar to an Initial Public Offering in equity capital markets.