Author: Syedur Rahman
5 February 2021
4 min read
Syedur Rahman of Rahman Ravelli details a recent judgement that could be of huge importance in crypto-related fraud and asset recovery cases.
Judgement in a recent case looks set to be potentially significant in relation to cryptocurrency fraud and asset recovery.
The applicants were represented by Rahman Ravelli in Ion Science Ltd and Duncan Johns v Persons Unknown, Binance Holdings Limited and Payward Limited. It is a case that can be considered a landmark, and may be set to have relevance in many future, crypto-related cases.
The case is notable because:
While Freedman J expressly made clear that this judgement should not be considered authority - in line with the practice direction dealing with the status of judgements on ex parte applications - it is particularly interesting to assess how the court approached this case.
The applicants allege that, as part of a fraud, the first respondent induced the applicants to invest £577,002 (equating to 64.35 Bitcoin) into various cryptocurrency investment opportunities. The first respondent had stated that the investments had proved to be successes, but no initial investment sums or profits have since been returned to the applicants.
To begin the process of seeking to recover the alleged misappropriated sums invested, the applicants sought various forms of relief from the court on an urgent ex parte application, for the following:
On 22 December 2020, Butcher J granted the applicants’ application for (inter alia) a worldwide freezing order, a proprietary injunction and a disclosure order against the first respondent, persons unknown, and disclosure orders against Binance Holdings Limited, and Payward Limited.
We believe this is the first initial coin offering (ICO) fraud case heard before the Commercial Court. It is the applicants’ case that they have been the victims of a cryptocurrency ICO fraud. An ICO, much like an initial public offering (IPO), is a type of fundraising exercise using cryptocurrencies. An ICO is often – as happened in this case - used to raise money to create and launch a new type of cryptocurrency. Unlike IPOs, which are strictly regulated, a general lack of regulation in the crypto field has led to ICOs becoming the vehicle of choice in many fraudulent schemes.
The applicants were induced by persons unknown to transfer the £577,002 (64.35 Bitcoin) in the belief that they were making investments in real cryptocurrency products. As part of the alleged fraudulent scheme – and on the back of successful investments claimed to have been achieved for the applicants by persons unknown in Ethereum and Dimecoin - the applicants were persuaded to invest further in an ICO for a new cryptocurrency called Uvexo. A few months later, they were also convinced to invest in another, separate ICO for a new cryptocurrency called Oileum.
The supposed profits made in relation to each of the ICOs, however, has not been returned to the applicants. The applicants have embarked on an asset tracing and recovery exercise to recover the alleged misappropriated funds. As a result, this case is the very first case concerning an ICO fraud to reach the UK’s Commercial Court.
The case is also particularly noteworthy as it is the first case in which the court has granted permission to serve a freestanding Bankers Trust order out of the jurisdiction against cryptocurrency exchanges. Previous authority in AA v Persons Unknown was reluctant to do the same.
A Bankers Trust order is an order made to a third party (for example, a bank) compelling it to disclose certain information to the applicant. Typically, it is only made against a legal entity within the UK (although there is an exception). In the case of AA v Persons Unknown, a third-party disclosure order was granted, but it was not on a Bankers Trust basis – instead, it was an auxiliary order to a proprietary injunction.
The facts of this case were deemed appropriate for there to be a Bankers Trust order in respect of the two exchanges outside the jurisdiction.
Finally, the third issue of significance in this continuing case is that it is the first time a court has considered the lex situs (location) of Bitcoin.
In considering whether the court has jurisdiction over the first respondent (not knowing their location) and with the applicants seeking to serve out of the jurisdiction, part of the test to obtain leave to serve out involved considering whether England is the appropriate forum for the trial of the dispute.
There is no decided case in relation to the lex situs for a cryptoasset. The judgement reflects an analysis of Professor Andrew Dickinson, in his book “Cryptocurrencies in Public and Private Law’’, that the lex situs of a cryptoasset is the place where the relevant participant in the Bitcoin system (in this case the person or company who owned the Bitcoin) is domiciled. The facts of the case where judged to arise out of acts committed or events occurring within the jurisdiction (i.e. the fraud) and related to assets within the jurisdiction (i.e. the Bitcoin). The Bitcoin are, or were, in the UK, and so the lex situs is the UK. It is a decision that may prove to bring much-needed clarity to this issue.
It is to be noted that the judgements by Butcher J, and latterly Freedman J, are noteworthy in several key areas relating to cryptoasset fraud and asset recovery. Whilst Butcher J expressly made clear this judgment should not be considered authority, it is interesting how the court has approached this case. It has showed the flexibility that the court is willing to extend to assist victims of fraud involving cryptocurrency and the ever-evolving nature of the legal landscape involving cryptoassets.
Syedur Rahman is known for his in-depth experience of serious fraud, white-collar crime and serious crime cases, as well as his expertise in worldwide asset tracing and recovery, civil recovery, cryptocurrency and high-stakes commercial disputes.