Cryptocurrency fraud and injunctive remedies from English courts

Mr Justice Lane, sitting in the High Court (Queens Bench Division), granted the Claimant, Sally Jayne Denisz (“SD”), an interim proprietary injunction, a worldwide freezing order and a banker’s trust order against Persons Unknown connected with ‘Matic Markets’, a suspected cryptocurrency investment scam.

Factual Background

SD discovered a website known as Matic Markets Ltd (“Matic”) in late 2021 and subsequently set up an account, making three separate payments in the form of Bitcoin in the total sum of £26,988.88 over a three-week period. SD made the investment in the belief that Matic would invest the Bitcoin on her behalf, that the Bitcoin would accrue in value and that it would be released immediately upon demand. Indeed, SD was encouraged to believe that the investments had accrued in value following the payment.

However, when SD attempted to withdraw the Bitcoin and the reported profits in December 2021, her request was refused by the apparent representative of Matic.

Eventually, SD’s suspicions were aroused and so she commissioned an expert report. The report found that shortly after SD deposited the Bitcoin, it was transferred out of the fraudster’s wallet without her knowledge or consent. Some of the Bitcoin was traced to a cryptocurrency end wallet at the Huobi exchange (“Huobi”), while the remaining Bitcoin had been dissipated beyond trace.

Mr Justice Lane commented on the report that, “there is a good arguable case that... Matic…is wholly fraudulent and, it seems, run by organised criminals. Not only does it appear that the entity is engineered to misappropriate funds invested in it by investors such as the claimant, but it also appears to have the capacity to interfere with banking and other online transactions”.

Decision

Following an ex parte hearing heard in private, Mr Justice Lane granted SD, inter alia:

• an interim proprietary injunction to prohibit the removal or disposal of the traceable Bitcoin;
• a worldwide freezing order against Persons Unknown which prohibited the disposing of or otherwise dealing with the Bitcoin in the end wallet at Huobi;
• a bankers trust order compelling Huobi to disclose certain payment-related information about the account holders at the end wallet; and
• permission for SD to serve outside of jurisdiction and by alternative means.

Urgency of Bitcoin transactions

In reaching his decision, Mr Justice Lane highlighted that investing in Bitcoin “is a form of transaction whereby, at the click of a mouse, an asset can be dissipated” when concluding the case was one of exceptional urgency.

Cryptocurrency recognised again as a form of property:

Mr Justice Lane also agreed with, and followed, AA v Persons Unknown, Re Bitcoin [2019] EWHC 3556 (commented on here). This case followed the UK Jurisdiction Task Force in its ‘Legal Statement on Cryptoassets and Smart Contracts’ and established that, "for the purpose of granting an interim injunction, cryptocurrency such as Bitcoin is a form of property capable of being the subject of a proprietary injunction". Please also see here for our previous LawNow on injunctions and cryptocurrencies.

Satisfying American Cyanamid:

In considering SD’s claim for the granting of an interim proprietary injunction, Mr Justice Lane held that the guidelines set out in the case of American Cyanamid Co (No 1) v Ethicon Ltd [1975] UKHL 1 (05 February 1975) were clearly satisfied. In concluding that there was a serious issue to be tried, it was found that the “Matic operation is, to put it at its mildest, highly problematic and is more likely or not to be thoroughly fraudulent”. Further, Mr Justice Lane held that the balance of convenience clearly favoured the granting of interim relief given that dissipation of the assets had already occurred to a substantial degree and that the interim injunction was necessary for any further dissipation to be ended.

Jurisdiction to hear the claim:

Regarding the worldwide freezing order, the court held that there was a strong underlying cause of action and that the High Court in England and Wales had the jurisdiction to hear the substantive claim. Here, Mr Justice Lane followed the reasons outlined by Butcher J in the case of ION Science Ltd v Persons Unknown (unreported, 21 December 2020), who held that, "[t]he lex situs of a crypto asset is determined by the place where the person who owns it is domiciled". Please click here for our analysis of the decision in ION Science.

Accordingly, as SD was domiciled in England and Wales and as she had provided funds to Matic from a bank account located in England and Wales, there was no question that the Court had jurisdiction to hear the claim.

Bankers trust disclosure order:

The court also stated that it was “entirely appropriate and necessary” to compel Huobi to disclose certain payment-related information to assist with the identification of the persons unknown connected with the end-wallet. It was noted that, by doing so, there “is a real prospect… that the supply of the information…will lead to the location or preservation of the Bitcoin”. It was also stated that the expert report had disclosed an arguable case that fraud had occurred.

Service outside of jurisdiction and by alternative means:

Since there was a likelihood that the persons unknown 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 Rule.

In this case, Mr Justice Lane held that the relevant gateways in PD6B 3.1 were met. In particular, it was held that the claim was made in tort whereby the damage was sustained within the jurisdiction.

The court also gave permission for alternative service, by way of serving on the email addresses that SD had corresponded with. In the present case this was required as there was no guarantee that the names of the people that SD had corresponded with at Matic were genuine and therefore ‘normal’ service would have been problematic.

Comment:

This judgment provides useful guidance as to the courts’ approach to dealing with cryptocurrency fraud and is another step forward for victims. In particular, the English court seems to be willing to act with urgency to counteract cryptocurrency fraud, by arming claimants with a number of injunctive remedies designed to assist the recovery of cryptoassets.