Cryptoassets and Litigation

Syedur Rahman of Rahman Ravelli considers the issues that have been established regarding cryptoassets in litigation – and those that still need to be addressed.

The shape of fraud is ever changing due to the digital age, as shown by the use of cryptoassets.

Bitcoin was invented in 2008 by an unknown person (or group of people) using the name Satoshi Nakamoto. In 2009, the first Bitcoin was mined. A system was created recording the transactions made in Bitcoin across computers linked in a peer-to-peer network, better known as the blockchain. Now global institutions and banks raise billions of dollars selling blockchain-related instruments and there are over 5,000 different cryptocurrencies being traded with a total market capitalisation of approximately $201 billion.

In November 2019, the UK Jurisdiction Taskforce (UKJT) published its legal statement, identifying key questions that needed to be answered about English law’s approach to cryptoassets and smart contracts. The report was described by Sir Geoffrey Vos, the Chancellor of the High Court, as something that no other jurisdiction had attempted. While the document is not a legal precedent, the aim of the legal statement was to afford a degree of “legal certainty”.

In December 2019, the landmark cryptocurrency case of AA v Persons Unknown & Ors [2019] EWHC endorsed and approved the UKJT’s analysis of cryptoassets and recognised it as “property”. As such a proprietary injunction was granted over the cryptoassets. In this case, I acted for one of the defendants. This was a multijurisdictional matter including - but not limited to - regions such as Canada, BVI and the UK. This case led to include proprietary claims in restitution and/or constructive trustees or for the tort of intimidation and/or fraud and/or conversion.

In January 2020, new regulatory powers were introduced by the Financial Conduct Authority (FCA) for financial crime prevention. The regulatory powers allowed the FCA to supervise how cryptoasset businesses conduct their business with consumers. The FCA highlighted the risks involved in cryptoassets and, in particular, how the marketplace is a target for fraud.

Fraud and Cryptoassets

With the rapid expansion of the cryptocurrency markets and its largely - until recent times - unregulated growth, this new asset class has inevitably attracted fraudulent activity.

In the case of AA v Persons Unknown, Justice Bryan delivered an interim ruling for a propriety freezing injunction to stop Bitcoin from being dissipated. While this is a giant leap, the case raises more questions in the legal sector for future cases rather than providing clarity. 

At the time of writing, the only other case in the High Court is Robertson v Person Unknown. This related to Mr Liam Robertson, a cryptocurrency trader and CEO of a digital asset management advisory business, who was a victim of “spear phishing” attack. Mr Robertson’s email was hacked and the investment of 100 Bitcoin was misdirected to fraudsters. Legal action was taken against these “unknown persons” as the first defendant.

The Judge, Mrs Justice Moulder, had concerns about granting a freezing order given that the claimants did not know anything about the person who committed the fraud – including his identity or his known assets. This proved to be an obstacle. Having said that, she did find that an Asset Preservation Order was an option. The court needed to be satisfied that there is a serious issue to be tried concerning a proprietary claim. 

In both cases, the court was prepared to proceed on the basis that Bitcoin could constitute legal property and made proprietary injunctions and asset preservation orders. 

Key Questions for Future Litigation

The cases mentioned earlier have considered some matters regarding litigation and cryptoassets. But other issues need to be addressed.

These include:

• The extent to which courts will be asked to grant innovative legal arguments in order to secure cryptoassets in the future.
• Establishing identities of those holding the Bitcoin in question. Applications will be made by legal teams for a High Court to direct relevant exchanges to produce information on this. This will prompt exchanges to assess whether they have a duty to comply, depending on the jurisdiction they are based in.
• The problem of tracing cryptoassets. This can be a challenging task. Cryptoassets are held on a blockchain where there is no intermediary (such as a bank) to apply freezing injunctions and to secure those assets once they are frozen.
• Legal arguments relating to jurisdiction and the governing law. It is imperative to establish that the grounds or “jurisdictional gateways” under CPR, Practice Direction 6B apply when advancing a claim in the High Court. 

But with the right expertise and strategies, the above hurdles can undoubtedly be overcome. Cryptoasset litigation is a growth area in which legal practitioners are tailoring frameworks to recover losses for clients and courts are finding suitable remedies for victims.

This article was also featured on Lexology.com.