Author: Syedur Rahman
26 January 2023
3 min read
Syed Rahman of Rahman Ravelli considers how far the imposition of a constructive trust can go towards reimbursing victims of fraud.
In a recent summary judgment decision, Jones v Persons Unknown  EWHC 2543 (Comm), the High Court held that a crypto wallet provider was the constructive trustee of stolen funds.
This development in the growing area that is the fight against cryptocurrency fraud offers an additional level of protection to investors. However, it is not without its limitations, and enforcing a judgment against unknown fraudsters remains problematic.
Mr Jones was a victim of cryptocurrency fraud. He was persuaded by fraudsters to set up a trading account and transfer his cryptocurrency to a fake investment platform. Mr Jones bought and transferred around 89.6 bitcoin to the fake platform. That was valued at around £1.54 million at the time of the judgment.
Mr Jones attempted to access his funds, but was prevented from doing so on several occasions. Becoming suspicious, he engaged the services of a cyber-investigation consultancy, who successfully traced his bitcoin to a crypto wallet held by Huobi Global Limited, a Seychelles-based crypto exchange platform.
Mr Jones brought a claim for deceit and unjust enrichment against the perpetrators of the fraud. He issued proceedings against Huobi as the constructive trustee in respect of the stolen bitcoin, held in a crypto wallet that it operated. None of the defendants engaged in the proceedings and the case was assessed by the court summarily.
The court made the following findings:
Constructive trusts are unusual concepts. They are trusts that are implied by law, in the absence of an express declaration of trust. They arise when the trustee has induced another person to act to their own detriment, in the belief that doing so they would acquire a beneficial interest in the property.
It was decided that Huobi held the assets on trust for Mr Jones, and in the circumstances it would be unconscionable to deny Mr Jones’ beneficial interest in the assets (the stolen bitcoin). Neither Huobi, nor any other party had a legal interest in the bitcoin that overrode Mr Jones’ interest as the rightful owner.
With the constructive trust established, the court ordered Huobi and the fraudsters to deliver up the bitcoin to Mr Jones.
The court’s willingness to imply a constructive trust creates a pathway for victims of cryptocurrency fraud to retrieve their money, even when the identity of the fraudsters is unknown.
However, victims of fraud may still face challenges when recovering their money. The grant of a delivery-up order is step one. Step two is enforcing that order. Only then will a victim be reimbursed.
In Mr Jones’ case, none of the parties engaged in the litigation. Indeed, Mr Jones does not even know who the fraudsters are. Service of the order was via an NFT airdrop, so there is no guarantee that the order has come to the attention of the people that perpetrated the fraud, even though it was deemed the means “most likely to bring the proceedings and the order to the attention of” the fraudsters.
Enforcement relating to a cryptocurrency wallet provider should be more straightforward. In theory, by establishing the constructive trust, it should be simple for victims to receive their pay-out from innocent facilitators (the exchanges and crypto wallet providers). And by making the fraudsters and Huobi jointly and severally liable, Huobi may end up shouldering the entire burden of reimbursing Mr Jones.
But if Huobi continuously fails to engage, there may be more litigation before the money is recovered.
Importantly, cryptocurrency wallet providers should make sure that their due diligence processes are robust in order to make sure that the assets they hold are not the proceeds of fraud.
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, international arbitration, civil recovery, cryptocurrency and high-stakes commercial disputes.