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Cryptoassets and gateways

Author: Syedur Rahman  31 January 2023
5 min read

Syed Rahman details a case that considered various issues relating to gateways allowing service out of the jurisdiction.

The recent judgment handed down in the High Court Case of Osbourne v (1) Persons Unknown Category A (2) Persons Unknown Category B (3) Thembani Dube [2023] EWHC 39 (KB) deals with numerous issues arising as a result of the constructions of the present gateways allowing service out of the jurisdiction for claims relating to property in the jurisdiction, and regarding claims in constructive or resulting trust relating to assets within the jurisdictions.

It is notable that Mr Justice Lavender highlights the fact that the lex situs of the relevant property (or asset) may be of importance not when the initial cause of action arose, but rather when the application for permission to serve out is made.

Case Background

The claimant, Mrs Osborne, purchased two “Boss Beauties” non-fungible tokens (NFTs) in November 2020 and held them in an account on an online cryptoasset marketplace trading as Opensea. On 17 January 2022, the two NFTs were transferred out of the account without the claimant’s knowledge or consent. Mrs Osbourne became aware of this on 17 February 2022. An investigator traced these NFTs, following a number of transfers to various wallets linked to different accounts with Opensea.

Thereafter, security experts Mitmark were able to confirm further transfers for one of the NFTs through several intermediary wallets to a final wallet which was “associated with a certain social media handle and a certain South African email address…There is evidence linking the email address with an individual by the name of Thembani Dube. Various social media posts suggest that Thembani Dube lives in South Africa.” It came to light that one of the NFTs was being advertised for action on the LooksRare cryptoasset marketplace. It was not suggested that the other Non-Fungible Token'>NFT was transferred out of the original wallet identified.

The claimant, therefore, made an application to amend the claim form to include the newly-identified defendants, extend the previous order of HHJ Pelling to the new defendants and gain permission to serve various documents out of the jurisdictions. 

Decision

Interim Injunction

Mr Justice Lavender agreed with HHJ Pelling’s conclusion in his previous judgment in this matter that there was at least a realistically arguable case that the NFTs were to be treated as property as a matter of English law, with parallels drawn to AA v Persons Unknown [2020] 4 WLR 35, Ion Science Ltd. v Persons Unknown (unreported) and Fetch.ai Ltd. v Persons Unknown [2021] EWHC 2254 (Comm). Lavender J also considered the principles set forth in American Cyanamid Co v Ethicon Ltd [1975] AC 396. He was further satisfied that there was a serious issue to be tried as to whether the third and fourth defendants held one or more of the two NFTs on constructive trust for the claimant.

Lastly, he agreed that damages would not be an adequate remedy on two grounds. Firstly, given there was no present information on persons unknown, there was nothing to conclude that they would have the means to satisfy any damages awarded. Secondly, the assets had a particular, personal and unique value to the claimant which extends beyond their mere fiat currency value.

Service out of the jurisdiction

It was noted that in order to satisfy the court, there were three thresholds to be met in that (i) there was a serious issue to be tried; (ii) there was a good arguable case that the claim falls within one of the ‘gateways’ set out in sub-paragraph 3.1 of PD 6B; and (iii) that England and Wales was clearly the most appropriate forum for the trial of the dispute.

Lavender J was satisfied that points (i) and (iii) were met. In respect of the gateways under point (ii), six were put forward by the claimant, albeit that four were discounted for varying reasons. The other two gateways sought to be relied on were Gateways 11 and 15:

Gateway 11: “The claimant may serve a claim form out of the jurisdiction with the permission of the court under rule 6.36 where – (11) The subject matter of the claim relates wholly or principally to property within the jurisdiction, provided that nothing under this paragraph shall render justiciable the title to or the right to possession of immovable property outside England and Wales.”

Gateway 15: “…where – (15) A claim is made against the defendant as constructive trustee, or as trustee of a resulting trust, where the claim – (a) arises out of acts committed or events occurring within the jurisdiction; (b) relates to assets within the jurisdiction; or (c) is governed by the law of England and Wales.”

The claimant relied on the ruling of Butcher J in Ion Science to meet the threshold of there being a serious issue to be tried, and that the lex situs of the cryptoasset was the place where the person who owned it was domiciled (as supported in the ruling of HHJ Pelling in his earlier judgment in these proceedings). It was not contested that the NFTs were located in England and Wales whilst they were in the claimant’s own wallet. However, it was questioned by Lavender J whether they could be said to have been located in England and Wales when they were further transferred to a wallet in the possession or control of an unknown person who may have been domiciled outside the jurisdiction.

The judge noted a further problem that arose in respect of these gateways. With reference to Fetch.ai and D’Aloia v Persons Unknown [2022] EWHC 1723, This focussed on where the asset was located prior to the justiciable act occurring. Lavender J took the view “that the wording of the introduction to paragraph 3.1 of PD 6B suggests that the question whether property (or an asset) is within the jurisdiction is to be determined when the application is made for permission to serve the claim form out of the jurisdiction, rather than when the cause of action arose.

Ultimately, in respect of gateway 15(c), the judge took the view that it was strongly arguable that the constructive trust that was alleged to have been created when the alleged hackers transferred the two NFTs from the claimant’s wallet was governed by English law and, consequently, that the question whether the third and fourth defendants in turn became constructive trustees when they received the trust property was also governed by English law. Permission to serve out was, therefore, granted under this gateway.

Alternative service

Service by NFT was granted on the basis that the claimant has no other means to serve the amended claim documents on the defendants. Reference was again drawn to D’Aloia. Permission was also granted for a redacted copy to be served, given the public nature of the blockchain (once approved by Lavender J), so long as the defendants were given the option of being provided with the non-redacted versions.

Conclusion

The issues dealt with in this matter in respect of service out of the jurisdiction have the potential to be considerable stumbling blocks for those seeking to recover assets which have been misappropriated. This is rather disappointing given the recent case of LMN v Bitflyer Holdings Inc & Ors [2022] EWHC 2954, which was the first successful order for service out of the jurisdiction under the new gateway. It was hoped that this set forth the new standard by which the court intended on aiding those who had been subject to cyber crimes.

That said, the track record of the courts to date must be kept in mind. They continue to show their willingness to be adaptive to the novel nature of crypto-related matters and this case is no exception. Lavender J went so far as to refer to supporting evidence and legislation that had not been relied on by the claimant.

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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.

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