English Court Breaks Ground in Crypto Fraud Case | Dechert LLP

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In a recent judgment1, the English High Court has once again shown its ability to innovate to help victims of crypto fraud. By imposing constructive reliance2 on a crypto exchange and allowing for the service of summary judgment by airdrop NFT (both for the first time in a final judgment), the English Court continues to adapt existing law to new technologies.

Facts

The Claimant was the victim of large-scale fraud. A group of online criminals targeted individuals through a website called Extick Pro (EP). The scammers convinced the applicant to create an account with them and transfer the cryptocurrency to the fake trading platform. Between January 2019 and 2020, the plaintiff invested £480,206 in Bitcoin (worth approximately £1.536 million at the time of judgment) which was then transferred to the EP platform. EP pretended to transact on behalf of the plaintiff using remote desktop software and displayed fictitious profits generated in his account, when in fact none of the transactions requested by the plaintiff had taken place . Following the plaintiff’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 Seychelles-based Huobi Exchange (Huobi).

The Claimant sought to recover his Bitcoin (or its proceeds) by suing (i) the persons (whose identity was unknown) responsible for the fraud, deception and unjust enrichment; and (ii) Huobi, as the constructive trustee of the misappropriated assets. The plaintiff obtained an interim worldwide freezing injunction against “unknown persons” and a property injunction against them and Huobi in an effort to prevent the dissipation of the assets. The defendants did not engage in the proceeding and the plaintiff sought summary judgment of his claims.

decision

The judge granted summary judgment, holding that:

the exchange (Huobi) held the Bitcoin in constructive trust for the claimant, as it was the controller of the wallet into which the Bitcoin was deposited and in which no other party had any ownership interest to override the beneficial interest of the plaintiff. A constructive trust was imposed despite a portion of the Bitcoins being dissipated from the Huobi Wallet, in apparent violation of Freezing Order 3; the stolen Bitcoins must be “delivered” (i.e. returned) to the Requester; freezing and property injunctions should be extended after judgment until the Bitcoin has been returned. This would make it easier to execute the stop, given the continued risk of asset dissipation; and the plaintiff was authorized to serve the summary judgment order by airdrop of NFT in the portfolio of the exchange. Since the location and identity of the fraudsters were unknown, this was, along with service via WhatsApp (amongst other things), the most likely way to quickly bring judgment to their attention.4 Even if the location and identity of the crypto exchange were known, conventional service processes in the Seychelles were found to be “too slow”, so service on the exchange via email and NFT was deemed appropriate.

The judge reiterated that Bitcoin must be treated as property (in accordance with a number of previous interim decisions by the English court) so that the victim of crypto fraud can obtain a variety of exclusive remedies, such as those listed above , to prevent the destruction and secure return of stolen crypto-assets.5

Findings

Although the claim has not been contested by the defendants, this judgment is nevertheless important for crypto investors, showing that the English court is willing to provide effective remedies and remedies against fraudsters and crypto exchanges holding crypto assets. stolen. This is especially important in circumstances where crypto fraudsters are often difficult to identify and locate. In this case, the Bitcoin would have been transferred “in whole or in segments” to the Huobi Wallet, i.e. it was easily identifiable. An important feature of many crypto-assets is that an immutable record of all transactions is kept on the blockchain in real time and in public view. It is however possible that the Court will come to a different conclusion in cases involving crypto-assets that have been moved through so-called “mixers” in order to obscure their ownership history (e.g. Tornado Cash6) or completely dissipated, where he may be more reluctant to impose a constructive trust. As more crypto fraud cases head to trial in the months and years to come, further court directives are likely.

For now, however, the ruling further highlights the English court’s continued pragmatic and business-like approach to rapidly evolving crypto fraud cases, noting that “Bitcoin could be cleared at any time with the click of a mouse. “, making the UK a go-to jurisdiction for crypto dispute resolution.

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

Footnotes :

1) Jones vs. People Unknown [2022] EWHC 2543 (Comm).

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

3) This follows the provisional finding of the English court 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 exchanges and unknown fraudsters. In that case, the judge granted relief based on the existence of a “validly arguable argument” that the crypto-assets could be held on a constructive trust (the threshold in an interim relief application), rather than reaching a conclusion on the highest threshold value required 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 on the issues in the summary judgment claims.

4) Service via NFT has already been approved in D’Aloia on a request for interim relief.

5) See our OnPoint on AA against unknown persons [2019] EWHC 3556 (Comm), which argued (for the first time) that crypto-assets are a form of property.

6) SurPoint.

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