English Court breaks new ground in crypto fraud case | Dechert LLP

In a recent judgment¹ the English High Court has again shown its ability to innovate so as to assist victims of crypto fraud. By imposing a constructive trust² on a crypto exchange and permitting service of an order for summary judgment by NFT airdrop (both for the first time in a final judgment), the English Court continues to adapt existing law to new technologies.

The Facts

The Claimant was the victim of a large-scale fraud. A group of online criminals targeted individuals through a website known as Extick Pro (EP). The fraudsters convinced the Claimant to set up an account with them and transfer cryptocurrency to the fake trading platform. Between January 2019 and 2020, the Claimant invested £480,206 in Bitcoin (worth approximately £1.536 million at the time of judgment) which was then transferred to the EP platform. EP purported to action trades on behalf of the Claimant using remote desktop software and displayed fictitious profits accruing on his account, when in fact none of the trades requested by the Claimant had taken place. Following the Claimant’s largely unsuccessful attempts to withdraw his funds from the EP platform, he instructed an investigator who traced his Bitcoin to a wallet held by the Seychelles-based Huobi Exchange (Huobi).

The Claimant sought to recover his Bitcoin (or its proceeds) by issuing proceedings against (i) the persons (whose identity was unknown) responsible for the fraud, for deceit and unjust enrichment; and (ii) Huobi, as constructive trustee of the misappropriated assets. The Claimant obtained an interim worldwide freezing injunction against “persons unknown” and a proprietary injunction against them and Huobi in an attempt to prevent the dissipation of the assets. The Defendants failed to engage with the proceedings and the Claimant sought summary judgment of his claims.

The Decision

The Judge awarded summary judgment, ruling that:

1. the exchange (Huobi) held the Bitcoin on constructive trust for the Claimant, as it was the controller of the wallet into which the Bitcoin was paid and in relation to which no other party had any proprietary interest to override the Claimant’s beneficial interest. A constructive trust was imposed despite a proportion of the Bitcoin having been dissipated from the Huobi wallet, in apparent contravention of the freezing order;³
2. the stolen Bitcoin should be “delivered up” (i.e. returned) to the Claimant;
3. the freezing and proprietary injunctions should be extended post-judgment until the Bitcoin had been returned. This would assist the execution of the judgment, given the continuing risk of dissipation of the assets; and
4. the Claimant had permission to serve the order for summary judgment by NFT airdrop into the exchange’s wallet. Given that the fraudsters’ location and identity were unknown, it was, along with service via WhatsApp (amongst others), the most likely means to bring the judgment to their attention quickly.⁴ Even though the location and identity of the crypto exchange was known, conventional service processes in the Seychelles were acknowledged as being “too slow”, such that service on the exchange via email and NFT was considered appropriate.

The Judge reiterated that Bitcoin is to be treated as property (in line with a number of previous interim decisions of the English Court) so that the victim of a crypto fraud can obtain a variety of proprietary remedies, such as those listed above, to prevent the disposal, and secure the return, of stolen cryptoassets.⁵

Conslusions

Whilst the claim was unopposed by the Defendants, this judgment is nonetheless important for crypto investors, showing that the English Court is willing to provide recourse and effective remedies against fraudsters and crypto exchanges holding stolen cryptoassets. This is particularly significant in circumstances where crypto fraudsters are often hard to identify and locate. In this case the Bitcoin was said to have been transferred “in whole or in segments” into the Huobi wallet, i.e. it was easily identifiable. An important feature of many cryptoassets is that an immutable record of all transactions is maintained on the blockchain in real time and in full public view. It is possible though that the Court could come to a different conclusion in cases involving cryptoassets that have been moved through so-called “mixers” in order to obscure their ownership history (e.g. Tornado Cash⁶) or fully dissipated, where it may be more reluctant to impose a constructive trust. As more crypto fraud cases move towards trial in the coming months and years, further guidance from the Court is likely.

For now, though, this decision further highlights the English Court’s continued pragmatic and commercial approach to fast-evolving crypto fraud cases, noting that “Bitcoin could be dissipated at any moment simply at the flick of a mouse”, making the UK a go-to jurisdiction for crypto dispute resolution.

The authors are grateful to Yan Shen Tan, Trainee Solicitor in London, for his valuable contribution to this OnPoint.

Footnotes:

1) Jones v Persons Unknown [2022] EWHC 2543 (Comm).

2) A constructive trust arises by operation of law such that a person holds legal title to assets on trust for another person where it would be unconscionable to deny that person’s beneficial interest in the assets.

3) This follows the English Court’s interim finding in D’Aloia v Persons Unknown and Others [2022] EWHC 1723 (Ch) on which we previously published an OnPoint where a constructive trust was imposed on both the exchanges and the unknown fraudsters. In that case, the Judge granted the relief on the basis of the existence of a ‘good arguable case’ that the cryptoassets could be held on constructive trust (the threshold in an application for interim relief), rather than making a finding on the higher threshold needed for summary judgment (i.e. ‘no real prospect of successfully defending the claim’). That said, the English Court stops short of conducting a mini trial of the issues in summary judgment applications.

4) Service via NFT was previously approved in D’Aloia on an application for interim relief.

5) See our OnPoint on AA v Persons Unknown [2019] EWHC 3556 (Comm), which held (for the first time) that cryptoassets are a form of property.

6) OnPoint.