In the first ruling under English law on the treatment and status of cryptocurrency after a full trial, the High Court held that the claimant had failed to evidence that his stolen USD Tether had ended up in the specific wallet held by the cryptocurrency exchange.
The case gives valuable comment on the extent to which claimants must evidence the complicated movement of their cryptocurrency as it passes through the blockchain via various transactions.
Key Takeaways
- Cryptocurrency is property. USD Tether (USDT) stablecoins are ‘property’ for the purposes of English law and thus gives rise to the opportunity of freezing injunctions, proprietary claims in insolvency and constructive trust claims.
- The identity of USDT can be preserved despite mixing, and can be evidenced. In principle, there should be an option to follow the USDT through a mixed fund.
- This case failed on a lack of evidence to link the assets to a specific wallet. The evidence must clearly track the specific unit of Tether as it moves from wallet to wallet.
The Alleged Fraud
Fabrizio D’Aloia (Mr D’Aloia) was tricked by ‘Persons Unknown’ into transferring USDT cryptocurrency worth around £2.5 million away from his wallet, into wallets of a sham entity. The fraudsters later accessed the USDT through crypto exchanges including Bitkub Online Co Ltd (Bitkub).
Mr D’Aloia pursued other crypto exchanges in separate proceedings. However, his claim against Aux Cayes Fintech was struck out (D’Aloia v Persons Unknown Category A & Ors [2024] EWHC 895 (Ch)) and his claim against Binance Holdings was settled.
There were no allegations of fraud levelled against any of the exchanges.
In these proceedings, Mr D’Aloia claimed that Bitkub had been unjustly enriched by the receipt of 46,291 of his Tether coins, and / or that Bitkub held Mr D’Aloia’s USDT as constructive trustee.
Recovering the Assets – What has to be Proven
Given Mr D’Aloia’s USDT (among other cryptocurrency) had long been dissipated by the bad actor(s), his case was that some of his assets could be traced to money withdrawn by the alleged scammer.
Crucial to the case was being able to pinpoint ‘identifiable cryptocurrency’ within the USDT that was transferred to the 82e6 Wallet held with Bitkub. Mr D’Aloia had to ‘bridge the gap’ between the 1dDA Wallet into which he paid his USDT and the 82e6 Wallet, from which it left the blockchain and re-entered the traditional banking system.
This exercise was complicated. The cryptocurrency went through a series of 14 ‘hops’ on the blockchain. It was then swept into the Bitkub hot wallet.
Chain-hopping complicates the tracing process because cryptocurrencies are swapped from one token to another.
When crypto-assets are swept into a ‘hot wallet’ they go into a central unsegregated pool address. Hundreds of transactions an hour pass through the central pool and so it was said that any attempt to trace the Tether swept into the pool would be close to impossible.
Tracing Crypto Assets Through Mixed Funds
Judge Farnhill considered that USDT is ‘a persistent thing’ because it maintains a distinct identity, even in a mixture. Notably, Tether’s White Paper states it is capable of creating and destroying USDT, it is able to track each individual token and the transactional history of USDT is publicly audited. This was accepted by the Judge at trial.
Looking at the evidence, Judge Farnhill considered that the identity of the USDT was preserved despite mixing and could be evidenced. It could therefore be followed, including through different wallets used in various hops, even where those wallets contained or subsequently received USDT from other sources.
The judge concluded that at law USDT could have been followed but Mr D’Aloia’s USDT in this case was not successfully followed as a matter of fact.
Lack of Evidence
The issue in this case was a practical one. There was no evidence before the Court, from Tether Ltd or any other source, that would allow the ‘following’ exercise to be undertaken.
Even if tracing had been possible in principle, the judge found that Mr D’Aloia had not demonstrated that his funds could be traced to the 82e6 wallet as a matter of fact.
Mr D’Aloia failed to show on the balance of probabilities that any of his USDT ever arrived at the 82e6 wallet. In light of that, Mr D’Aloia had no claim against Bitkub because it did not receive anything from him. Bitkub held no funds as a constructive trustee for Mr D’Aloia.
Shortcomings in the Expert Evidence
Evidence was adduced from a blockchain tracing experts, but it was not clear from the evidence how and where D’Aloia’s assets had been moved.
Mr D’Aloia could not show how part of the missing stablecoin was offloaded through a range of cryptocurrency exchanges after it had mixed with money from other sources.
This case highlights how lawyers and experts need in depth knowledge of the way blockchain technology works, and how movements of funds can be evidenced practically. When funds are mixed, the crypto-assets can still be followed, but this needs to be dealt with meticulously and clearly in the expert evidence.
Read the full judgment here: Fabrizio D’Aloia v Persons Unknown Category A & Ors [2024] EWHC 2342 (Ch)
