Syed Rahman explains how a Law Commission proposal could assist those looking to regain what is rightfully theirs
An idea put forward by the Law Commission could, if introduced, help victims of cryptocurrency frauds perpetrated by unknown persons.
Under the Commission’s proposal, crypto fraud victims would find their route to redress simplified thanks to the creation of a new type of information order that could help in the early stage of an investigation. The proposal has been detailed in a consultation paper about applying international law in relation to digital assets and electronic trade documents. Responses to it can be made until September 8.
The Commission argues that crypto assets pose a challenge to established legal principles because the nature of distributed ledgers means that any action, event or object can exist 'nowhere and everywhere, at the same time'. As a result, there is a difficulty when it comes to resolving conflicts of jurisdictions and applicable laws – something the Commission refers to as “omni territoriality’’.
Difficulties
According to the Commission, there can be difficulties in the first stages of a fraud claim, as often the only information a crypto fraud victim has is the address of an intermediary such as a crypto exchange. To obtain an information order from these parties requires the bringing of substantive proceedings in England and Wales - even though there may be no knowledge of who the defendant will be or even if they are in England or Wales.
To tackle this problem, the Commission proposes the creation of a new free-standing information order to help claimants obtain information about the perpetrators or the whereabouts of their tokens without them having to go through existing civil procedure gateways. In practical terms, this would mean the claimant would have a new set of guidelines to meet when applying for an information order. These would be less strict than those that apply in the current system for the likes of Norwich Pharmacal Orders and Letters of Request.
The Commission also proposes modernising section 72 of the Bills of Exchange Act 1882 - a private international law provision that identifies the law applicable to particular contractual issues. The Commission wants changes to more accurately reflect modern-day commercial realities caused by globalisation and use of digital and decentralised technologies and provide more autonomy over choosing the governing law; without reliance on outdated factors such as place of issue or delivery.
The Law Commission’s David Hertzell said: “From assisting victims of crypto fraud to recognising how users interact with smart contracts and coding protocols, our provisional proposals respond to the socio-economic realities of the 21st century to ensure that the law of England and Wales remains at the cutting edge.’’
Rules
Omni territoriality, with digital assets having simultaneous and equally valid connections to multiple jurisdictions, certainly creates evidential difficulties. Claimants often have to rely on intermediaries, such as crypto exchanges, to obtain information or recover assets. Yet the current rules for information orders, such as Norwich Pharmacal Orders and Bankers Trust Orders, require either a connection to proceedings in the jurisdiction or an intention to commence proceedings in the jurisdiction. So there is no one, clear jurisdiction to work from.
Yet the Law Commission seems to be proposing an inventive solution that could tie crypto assets down to a jurisdiction. The Commission believes that crypto tokens should be "localised", based on where they can be effectively controlled at the time proceedings begin. Courts are, therefore, being encouraged to avoid reliance on practices such as such as linking crypto tokens to the domicile of the owner and instead adopt a principled approach that reflects the realities of the decentralised environment.
Beneficial
This new approach could prove beneficial and bring a common sense approach to what has been a problematic area. There is no point chasing down a defendant domiciled in the Middle East when the crypto tokens at the heart of the case are actually in the UK.
But while the proposal addresses the challenge of obtaining information, it does not provide much assistance when it comes to enforcing the information orders once they have been obtained. There are still some guardrails to ensure information orders are exercised in a proportionate way on the basis of a “merits test” and the necessity/impossibility of making the application elsewhere. And the proposal still emphasises how important it is to avoid conflict with international principles or jurisdiction, so information orders are not unduly burdening innocent third parties or being used as fishing expeditions when no case is certain.
There is also the possibility that third party exchange platforms will be concerned about providing information in good faith to assist prosecution of the direct defendant if there is a chance they could be pulled into the proceedings themselves as a co-defendant. As a matter of principle, disclosure should not be used to build a new case against an entity and information must be sought legitimately for an existing claim.
It is important that claimants are advised realistically of the challenges of enforcing their information orders once obtained. It is also important that third parties, such as crypto exchanges, understand their own rights to protect themselves and not be put under duress that could impose unreasonable time and cost demands upon them.
