Cryptocurrency fraud – English Court to the rescue 

England and Wales

In another helpful decision, the English Commercial Court has granted freezing and disclosure orders in relation to a significant alleged fraud affecting cryptocurrency holders. In doing so, the court considered some key legal issues affecting cryptocurrencies, including:

  • Confirmation of cryptocurrency as property

  • Which court has jurisdiction and the implications for service;

  • The appropriate cause of action for theft of a private key; and

  • When it is appropriate to permit service by alternative means in the context of crypto-frauds rather than by the centralised channels provided by the Hague Service Convention.

Background

The central allegation in Fetch.ai Ltd and anr v Persons Unknown Category A and ors [2021] EWHC 2254 (Comm) is that a fraudster was able to gain access to the private keys associated with cryptocurrency accounts held by the claimant. This allowed the alleged fraudster to remove the assets held in the account and sell them on. The claimant applied for a proprietary injunction to freeze the assets or their proceeds, a worldwide freezing injunction against any person knowingly involved in the fraud, and disclosure orders against certain third parties believed to have access to information which might assist in tracing the assets. In order to resolve these applications, the court had to consider a number of issues which demonstrates the ability of English law and English courts to cater for one of the most modern-forms of technology and protection of assets.

Order against persons unknown

This decision is a further example of the English court making orders against persons unknown, but doing so with caution and scrutiny to ensure the class of persons is not to widely defined. In the judgment, it is clear that the class of persons unknown against whom the court was prepared to make orders had to be narrowed to three categories: (i) those who were involved in the fraud; (ii) a class designed to capture those who have received assets without having paid a full price for them; and (iii) and most importantly, those who fall within the category of innocent receivers, which the court was most concerned to ensure was defined in a way which makes clear that those innocent receivers, who have no reasonable grounds for thinking that what has appeared in their account belongs to the claimant, will not find themselves unwittingly in breach of the order.

Cause of action

Judge Pelling QC (sitting as a judge of the High Court) began by considering what cause of action might be available to the claimant, since this would determine the answer to several of the other issues. The suggested causes of action were breach of confidence, unjust enrichment and constructive trust. The court held that the claimant had reasonably arguable claims for each of these.

In particular, Judge Pelling held that the claimant’s private key was to be regarded as confidential information, since in essence it was a code provided to the claimant in order to operate its private accounts. This meant that the claimant had an arguable claim for breach of confidence, potentially giving rise to remedies in the form of an injunction, damages and/or an account of profits.

Categorisation of cryptocurrency

In reaching this conclusion, the judge held that the assets in the claimant’s account constituted at least a chose in action and were thus to be recognised as a form of property under English law. This is a decision in relation to an interim remedy, and the characterisation of cryptocurrency as a chose in action or chose in possession will, no doubt, require further judicial scrutiny as and when the English courts get the opportunity to determine the question in a trial. 

Jurisdiction

The court then had to consider whether England was the appropriate jurisdiction for the claimant’s potential causes of action. The claimant argued that its breach of confidence claim fell within the Rome II Regulation, a statutory instrument that has been incorporated into English law and deals with jurisdiction over non-contractual claims.

The judge held that breach of confidence is capable of constituting a tort or delict, which falls within Article 4.1 of Rome II. This provides that the action should be heard in the courts for the place where the damage is suffered. In the case of a cryptocurrency, the judge found that the asset was located where the owner had its place of residence or business, following the unreported case of ION Science v Persons Unknown (21 December 2020) and an analysis by Professor Andrew Dickinson in his textbook Cryptoassets in Public and Private Law. In this case, the judge had no doubt that the claimant’s business operations were located in England. There was some suggestion that the first claimant might have been operating as agent for the second claimant, a Singapore-registered company. The judge did not have enough material available to decide that question, but found that even if that were the case, the second claimant had no business operations other than those conducted by the first claimant in the UK, and therefore the potential agency had no real significance for the location of the assets as a matter of law. Please click here for our analysis of the decision in ION Science

Although the judgment focused on the breach of confidence claim, the court held that the potential claims for unjust enrichment and constructive trust would also fall within Rome II. Both claims arguably fell within Article 10, and the trust claim could potentially also fall within Articles 3 or 11. In all those circumstances, the relevant governing law would be English.  

Service out of the jurisdiction

Since there was a likelihood that the unknown defendants were located outside England and Wales, the court had to consider whether or not the claim could be served outside the jurisdiction under one of the gateways set out in Practice Direction 6B of the Civil Procedure Rules. Judge Pelling held that the claim fell under the following gateways:

  • Gateway 21 – a claim for breach of confidence where detriment has been, or will be, suffered within the jurisdiction.

  • Gateway 11 – a claim whose subject matter is property located in England and Wales.

  • Gateway 16 – a claim for unjust enrichment obtained within the jurisdiction or which is governed by English law.

  • Gateway 15 – a claim made against the defendant as a constructive trustee relating to assets within the jurisdiction.

In each case, the fact that the assets were deemed to be located in England was the key factor in determining that the gateway was available, since the governing law, the place where the enrichment was obtained and the place where the damage was suffered all flowed from this.

Alternative service

Previous case law suggested that exceptional circumstances are required in order for the court to allow service by alternative means where service via central authorities is available under the Hague Service Convention. There was some dispute as to whether or not the need for an injunction to be brought to a party’s attention as a matter of urgency is sufficient to establish exceptional circumstances, but the tendency of the case law appeared to be in that direction. The present case confirms that this is correct, at least where Hague service will take “weeks or months”.

The orders

In light of the above, the judge granted the orders sought, having first satisfied himself that the freezing order was drafted narrowly enough to avoid catching innocent third parties who might have received some of the assets unknowingly.

The judge also had to resolve a conflict of authority as to whether or not the disclosure orders could properly be made against parties located outside England and Wales. Having reviewed the previous authorities, he concluded that the current state of the law is that a so-called Bankers Trust order, which is aimed at protecting a proprietary interest, can be made against a party outside the jurisdiction. However, a standard Norwich Pharmacal order, which aims to identify a wrongdoer, cannot. He indicated, however, that this distinction might require to be reviewed by a higher court in due course.

Comment

This is an important and useful judgment which provides useful guidance. In particular, claimants will want to take note of the following points:

  • When seeking orders against persons unknown, ensure the class is clearly defined and does not cause prejudice to innocent parties who may be caught in the class.

  • In the absence of a contractual agreement with the proposed defendant, the appropriate court in which to bring the claim will normally be the court for the jurisdiction in which the claimant operates its business, or the part of the business with which the cryptocurrency is most closely connected. This is on the basis that the English court has accepted at least for the purposes of this interim application that there is a good arguable case that the lex situs of cryptocurrency is where the person or company who owns the assets is located. This will be welcome, because it is likely to mean that the claimant can sue in a jurisdiction where it is used to operating.

  • If that jurisdiction is England, there is unlikely to be any great difficulty in getting permission to bring a claim against a defendant located outside the jurisdiction.

  • The English courts will recognise a cryptocurrency as a form of property, with all the advantages which flow from that as regards jurisdiction, available causes of action and available remedies.

  • Where the remedy sought is an urgent injunction, the English courts are likely to allow alternative service. It may be helpful, however, to provide the court with evidence as to the time which is likely to be required to effect service under the Hague Convention on any defendants whose location is known. In respect of persons unknown, alternative service may of course be the only realistic option.