Crypto-fraud: ease of seeking remedies from English courts

England and Wales

Taking effect from 1 October 2022, the Civil Procedure (Amendment No. 2) Rules 2022 (SI 2022/783) and 149th Practice Direction Update amend CPR Practice Direction 6B (“PD6B”) by creating new ‘gateways’ for service outside of the jurisdiction as well as amending the wording of existing gateways.

In this Law-Now, we will consider specifically the creation of an entirely new gateway and the effect that this will have in the context of cryptocurrency frauds.

Gateway 25 (paragraph 3.1(25) of PD6B) reads as follows:

                Information orders against non-parties

(25) A claim or application is made for disclosure in order to obtain information—

(a) regarding:

(i) the true identity of a defendant or a potential defendant; and/or

(ii) what has become of the property of a claimant or applicant; and

(b) the claim or application is made for the purpose of proceedings already commenced or which, subject to the content of the information received, are intended to be commenced either by service in England and Wales or pursuant to CPR rule 6.32, 6.33 or 6.36.”

In our experience, cryptocurrency fraud is often perpetrated by sophisticated fraudsters operating from around the world against victims who hold their assets in exchanges domiciled outside of England and Wales. Indeed, Sir Geoffrey Vos, Master of the Rolls, stated: “[i]n the world of crypto fraud, there are no national barriers and unlawfully obtained cryptoassets can be difficult to trace".[1] This has created a number of difficulties that the Courts of England and Wales has had to grapple with.

For example, the fraudsters often leave the victims of such fraud with precious little information regarding what has happened to their assets. Whilst tracing experts may be able to provide further details, to have any chance of obtaining redress, the victim would usually require the Court to order disclosure from the cryptocurrency exchange of the information held by the exchange regarding the fraudster. This information may, in theory, be ordered by the Court in the form of a Norwich Pharmacal Order or a Bankers Trust Disclosure Order.

However, as cryptocurrency exchanges are not always domiciled in England and Wales, the Court will almost invariably need to consider if it has territorial jurisdiction to hear the claim. Here, the Court will consider PD6B and, in particular, whether any of the gateways for service outside of jurisdiction can apply.

Whilst a developing area of the law, victims’ ability to apply for a Norwich Pharmacal Order over a foreign party was impacted by the case of AB Bank Limited v Abu Dhabi Commercial Bank [2016][2], which held that pre-amendment PD 6B (paragraph 3.1(5)) was not available to permit service out of an application for Norwich Pharmacal relief in support of proceedings within the jurisdiction.

Accordingly, victims of cryptocurrency fraud have had to apply for disclosure under the Bankers Trust jurisdiction which may be granted against a third party to a claim (such as an exchange) which holds misappropriated or stolen funds, or through which such funds passed. Whilst the Court has shown an increased willingness to act with urgency to combat cryptocurrency fraud by making Bankers Trust Disclosure Orders against exchanges based outside of the jurisdiction in appropriate cases[3], the pre-amendment system contained a number of drawbacks. For example, in order to successfully serve a claim outside of England and Wales, a victim of cryptocurrency fraud would need to bring a claim against ‘Persons Unknown’, which would then be treated by the Court as the anchor for jurisdictional purposes.

There were also added complications in how these claims were formulated and technical arguments about constructive trusts and jurisdictional issues. Any application would therefore involve the Claimant needing to pay significant costs to bring the claim without a guarantee of obtaining satisfactory (if any) information regarding the fraudster.  In addition, it created legal issues that cryptocurrency exchanges have to grapple with in terms of whether or not they concede to the jurisdiction of the English courts, or whether to defend claims to which they have been added as a party solely for purpose of provision of information etc. 

The introduction of Gateway 25 therefore goes some way to alleviating the problems highlighted above by expressly allowing service outside of England and Wales for information orders against non-parties. It assists Claimants in being able to approach the English court for remedies that can be obtained swiftly and provide an effective means to recovery of assets.  It could also prove to be a move welcomed by cryptocurrency exchanges who may no longer have to deal with complicated claim documents that were needed to overcome some of the procedural difficulties detailed above.  With this change, England and Wales has further solidified its attractiveness as a jurisdiction which will look to aim fraud victims.

However, whilst an encouraging step, there remain potential issues to consider. For example, whilst it is now easier for victims to serve orders for information out of the jurisdiction, making an application is likely to remain an expensive endeavour. Further, it is unclear as to whether, in non-urgent cases, the Court will agree to make both an order for permission to serve out and an order for immediate disclosure at the same time. We will therefore continue to keep a keen eye on the Court’s application of the new gateway in relation to cases involving cryptocurrency fraud. We anticipate that this new gateway will ease the way for applications to be made by victims of crypto (and other) fraud, and as such, the Court can expect to see an increase in applications of this nature.

[1] Contracts, just smarter. Seizing the opportunity of smarter contracts, Lawtech. UK Launch of Smarter Contracts report, 24 February 2022 at paragraph 19

[2] [2016] EWHC 2082 (Comm)