Posted: 09/02/2024
The number of cryptocurrency fraud claims in the English courts is on the rise. Despite the increasing sophistication of the fraudsters, the common law and the English courts have adapted admirably to the challenge. In particular, the High Court in London has been busy establishing clear, procedural ground rules in the otherwise borderless crypto-fraud landscape.
In a recent (extra judicial) speech, Judge Pelling KC (the judge in charge of the London Circuit Commercial Court) highlighted some of the key issues currently being tackled by the judiciary in cryptocurrency litigation.
A key problem for victims of crypto fraud is finding out who has defrauded them. Often, the fraudster can only be identified through the email address used to facilitate the fraud. Problems therefore arise in commencing, and then serving, proceedings. In some jurisdictions that in itself can prove an insurmountable obstacle. In England, however, the courts have shown themselves willing to adopt pragmatic solutions.
When bringing a claim against an unidentified fraudster, the courts have developed a practice of permitting proceedings to be commenced against ‘Persons Unknown’. A class of ‘Persons Unknown’ must be defined widely to ensure that any potential defendant on whom a claim form is served is able to ascertain whether they fall within the defined class.
In a crypto fraud case it is possible to bring a claim against various classes of ‘Persons Unknown’, including: (1) the individuals or companies who, without express authorisation or consent, obtain access to the victim’s accounts; (2) the individuals who are knowing receivers of the claimant’s cryptoassets; and (3) those who are an innocent receiver of the claimant’s cryptoassets (Fetch.AI Limited and another v Persons Unknown [2021] EWHC 2254 (Comm)).
The purpose of the third class of ‘Persons Unknown’ is, as explained by Judge Pelling KC, to enable those who have received the victim’s assets, without knowing or believing those assets belong to the victim, to be excluded from the scope of a potential claim/injunction. This third class also recognises that claims against such defendants might be made for the recovery of such assets.
While English law generally requires service on defendants located out of the jurisdiction in a way that complies with local law, the procedural rules permit service by alternative means where appropriate. In relation to ‘Persons Unknown’, there is often no practical way of serving proceedings other than by alternative means. Fortunately, the courts have been willing to permit service via a variety of alternatives. While this is most frequently by email, service has also been permitted on crypto exchanges via the administering wallets and via NFTs to wallets associated with the fraudsters.
When serving proceedings against a defendant (known and/or unknown) located out of the jurisdiction, the claimant must often obtain the court’s permission. On an application for permission to serve outside the jurisdiction, a claimant must satisfy the court that:
Claimants can generally satisfy these requirements in their claim against the fraudster. However, a preliminary step to finding the fraudster often involves obtaining information from third parties, such as banks, crypto exchanges or other technology providers who may also be located outside the jurisdiction.
English law permits a number of ways to obtain that information, including Bankers’ Trust orders and Norwich Pharmacal orders. In brief, both permit (subject to certain tests being met) a claimant to obtain a court order for the disclosure of relevant information.
However, until recently, whilst permission could in principle be obtained to serve applications for Bankers’ Trust orders outside the jurisdiction, such permission could not be obtained for Norwich Pharmacal orders. To overcome this, a new jurisdictional gateway was incorporated into paragraph 3.1 of Practice Direction 6B of the Civil Procedure Rules from October 2022. It permits service of proceedings outside of England and Wales where the claim is for information regarding the identity of a defendant, or what has become of a claimant’s property.
While this is a welcome development, obstacles remain in securing third party compliance. Even where the English courts grant permission for the order (and for service in other jurisdictions), it is not guaranteed that a foreign-based entity will comply due to practical issues or, as per Judge Pelling KC’s experience, failure of the courts in the defendant’s jurisdiction to recognise the permission given.
The other issue of ‘practical importance’ is the location of the cryptoasset.
While the initial approach adopted by the courts was to treat a cryptoasset as being located wherever the owner is domiciled, Judge Pelling KC noted that this position has been relaxed. The location of cryptocurrency is now tested by reference to residence. In Tulip v Van der Laan [2022] EWHC 667 (Ch), the Court of Appeal held there was a good arguable case that the claimant, despite being a company registered in the Seychelles, was resident in the jurisdiction as per the location of its central management and control. As such, the Bitcoin was treated as being located in England.
Cryptoassets are typically treated as property under English law, and as such cryptocurrency can be the subject of a proprietary claim. In a proprietary claim, as Judge Pelling KC explained, the courts must consider whether a victim’s proprietary interest in his/her cryptoasset(s) survives the fraud. It is usual for the courts to impose a constructive trust in respect of cryptoassets obtained by fraud.
In his recent speech, Judge Pelling KC uses the example of Bitcoin that was credited to a particular wallet and removed without a victim’s consent. In that instance, a constructive trust would generally be applied by the court. However, ‘it becomes more difficult at least potentially where the victim transferred fiat or crypto currency to a fraudster under a contract that the victim had been induced to enter by fraud’.
In English law, title passes to the recipient until the contract is rescinded, at which point the recipient then holds the sums received on constructive trust for the transferor but without retrospective effect. Judge Pelling KC explained that this could give rise to potentially difficult jurisdictional issues that the courts have not so far had to grapple with, because those with an interest in arguing the point have not come forward to do so.
In its 2023 report on digital assets, the Law Commission concluded that legislative reform was unnecessary and that the common law was capable of governing and regulating the challenges of new technologies. Judge Pelling KC is, however, sceptical of this position, remaining open to the idea that primary legislation may be needed in the future.
Whatever the future holds in terms of legislation, it is clear that enforcing legal rights in multi-jurisdictional cryptocurrency fraud is challenging. While English law and the English courts have adapted to the challenges, it may be that in the future, a form of ‘generally approved arbitral system’ for seeking information from crypto exchanges needs to be embedded into the sector at an international level. Merely national regulation, Judge Pelling KC suspects, will not provide an answer.
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