Navigating the Labyrinth: Cryptocurrency Enforcement

The hype surrounding cryptoassets has led to an explosion in cryptocurrency-related frauds. This new and fast-evolving frontier of fraud gives rise to various novel legal issues, due to the nature of cryptocurrencies.

This article will briefly explain how cryptocurrencies work, then discuss how courts have dealt with the novel issues posed by cryptocurrencies in fraud investigations and recovery, including the following:

1. Is cryptocurrency property?
2. Where are cryptoassets domiciled?
3. Can interim injunctions be granted against persons unknown?
4. How to identify the fraudsters?
5. How to serve court documents against unknown fraudsters?

Introduction

Cryptocurrencies are unregulated, anonymous, international and technically arcane. They also promise astronomical returns and enjoy significant hype. These factors have led to an explosion in cryptocurrency-related frauds. In the US alone in 2021, the Federal Trade Commission saw a sixty-fold increase in reported losses to cryptocurrency-related scams compared to 2018.¹ This new and fast-evolving frontier of fraud gives rise to various novel legal issues, due to the nature of cryptocurrencies.

This article will briefly explain how cryptocurrencies work, then discuss how courts have dealt with the novel issues posed by cryptocurrencies in fraud investigations and recovery. These issues fall under the following heads:

1. The legal nature of cryptocurrencies – Are they property?
2. Cross-jurisdictional claims – Where is my crypto?
3. Interim injunctions – Can they be granted against persons unknown?
4. Unmasking the culprits – How to identify the fraudsters?
5. Service – How to serve court documents against unknown fraudsters?

How Do Cryptocurrencies Work?

Cryptocurrency assets are based on blockchain technology. Briefly, a blockchain is a public ledger containing a list of transactions. These transactions are stored and shared on a distributed public network of computers, which also act as authenticators for transactions to prevent double spending of the currency. This ledger records every single authenticated transaction ever made on the network, which provides everyone with an accurate archive of transactions, no matter when they were made.²

However, blockchains only store wallet addresses and the amounts transacted – they do not give any information on the owner of the wallet, or if the wallets can still even be accessed at all. Indeed, cryptocurrencies are “tailor-made to resist control by external authorities”.³ This anonymity makes cryptocurrencies much more attractive to fraudsters, compared to other electronic means of sending large amounts of money internationally (such as the SWIFT system). They also pose unique legal challenges.

The Legal Nature of Crypto Assets – Are They Property?

Many of the usual tools in a fraud litigator’s toolkit require that the subject matter of the action be considered “property”. These include causes of action (e.g. constructive trust), discovery processes (e.g. Bankers’ Trust Orders) and protective reliefs (e.g. proprietary injunctions). Proprietary claims also enjoy certain advantages, such as the ability to claim for gains in value of the property, and priority over other creditors of the defendant.

Given the way that cryptocurrencies work, can they be considered property?

Across common law jurisdictions, a growing consensus appears to be, “yes”. In the Hong Kong case of Nico Samara v Stive Dan⁴ and the Canadian case of Shair.Com v Arnold,⁵ the courts implicitly recognised cryptoassets as property by granting proprietary injunctions (or the Canadian equivalent, preservation orders) over them. More substantially, in the landmark decision in Ruscoe v Cryptopia Limited,⁶ the New Zealand High Court comprehensively considered the issue. It ruled that cryptocurrencies met the four Ainsworth⁷ criteria (definable, identifiable by third parties, capable of assumption by third parties, and has some degree of stability), and could be considered property.

In CLM v CLN,⁸ the Singapore High Court adopted the reasoning in Ruscoe v Cryptopia Limited. As such, Singapore joins the growing list of jurisdictions which recognise cryptocurrency as property.

Cross-Jurisdictional Claims – Where is My Crypto?

Another issue concerns the location of cryptocurrency, which has implications on a court’s jurisdiction over cryptocurrency claims. After all, cryptocurrencies are not physically “stored” anywhere. The amount of cryptocurrency in one’s cryptocurrency wallet is stored as a balance on the blockchain, which is in turn a public ledger distributed across a network of computers around the world. And a cryptocurrency wallet is not a physical pouch of cash or store of value, but rather a set of cryptographic keys which allows one to receive and send tokens which are recorded on this public ledger.

Where then, is one’s cryptocurrency located in the eyes of the law?

In the recent case of Ion Science Ltd v Persons Unknown,⁹ the English High Court held that the lex situs of a cryptoasset is the place where the person or company who owned it is domiciled, thereby allowing the Court to hear, try and grant orders in that case.

There is much to commend in this approach to cutting the Gordian knot. Given the Singapore Courts’ forward-looking and pragmatic judgment in CLM v CLN, it would not be surprising if it takes a similar approach to the lex situs of a cryptoasset, should the issue come before our courts.

Interim Injunctions – Can They Be Granted Against Persons Unknown?

Another problem posed by cryptocurrencies in fraud is anonymity. Injunctions are typically binding on persons, and the remedy for breach of an injunction is committal proceedings against the contemnor. Can courts grant injunctions against a cryptocurrency fraudster, when all one knows is the fraudster’s cryptocurrency wallet address?

The UK first recognised the jurisdiction to grant orders against persons unknown in Bloomsbury Publishing v News Group¹⁰, where the subjects of one of the injunctions granted were unknown individuals who sold unauthorised Harry Potter memorabilia in breach of the plaintiff’s proprietary right to sell authorised memorabilia. This jurisdiction to grant injunctions against persons unknown was applied in the cryptocurrency context against unknown fraudsters in the Malaysian case of Zschimmer v Persons Unknown.

Both of these cases were adopted by the Singapore High Court in CLM v CLN¹¹, which held that it had jurisdiction to grant interim orders against persons unknown, as long as the description used was sufficiently certain as to identify both those who are included and those who are not.¹² In that case, the persons unknown were described by their connection to the fraud.

Unmasking the Culprits – How to Identify the Fraudsters?

Although interim injunctions can be served against persons unknown, this is of limited utility if those assets have been dissipated. It would therefore be best if the fraudsters can be unmasked, so they may be pursued wherever they may be. How can these fraudsters be identified?

Traditionally, fraud litigators could seek a Norwich Pharmacal Order¹³ against financial institutions or intermediaries which may be innocent, but which were “mixed up” in the wrongdoing, to disclose the assets in the account, the identity of those responsible for their disposal, and documents and correspondence related to such disposal. Alternatively, they could apply for the related but distinct Bankers Trust Order,¹⁴ which grants similar disclosure, but which is based instead on the right to trace and follow assets flowing from a proprietary claim.¹⁵

The financial intermediary in question for most cryptocurrency frauds would be crypto exchanges, through which most cryptocurrency trades pass. The problem is that cryptocurrency exchanges are oftentimes overseas. It is accepted that, due to its juridical basis as an exercise of sovereign authority, Norwich Pharmacal Orders were historically not allowed to be served on entities outside of jurisdiction.¹⁶

And although the Court in MacKinnon v Donaldson, Lufkin¹⁷ stated in obiter that Bankers Trust Orders could, in principle, be served out jurisdiction in very exceptional circumstances, it was not clear whether cases of cryptocurrency fraud would meet this theoretical threshold.

In the UK, the answer came in the English High Court case of Ion Science Ltd v Persons Unknown.¹⁸ Citing MacKinnon v Donaldson, Lufkin, the Court granted a free-standing Bankers Trust Order against a cryptocurrency exchange which was situated out of jurisdiction.

This was no fluke. In Lavinia Deborah Osbourne v Ozone,¹⁹ the English High Court similarly granted a Bankers Trust Order against a non-fungible token (NFT) marketplace located outside of jurisdiction. And in Fetch.ai Ltd v Persons Unknown Category A,²⁰ the English Commercial Court expressly cited Ion Science Ltd v Persons Unknown and granted a Bankers Trust Order against Binance Holdings Limited, an entity registered outside of jurisdiction in the Cayman Islands.

The courts in the UK will soon be going one step further- on 1 October 2022, an amendment to the Civil Procedure Rules will allow the UK courts to grant pre-action disclosure orders against entities outside the UK without even having to first commence proceedings against persons unknown. This was announced by His Honour Judge Pelling QC,²¹ who, incidentally, decided Fetch.ai Ltd v Persons Unknown Category A. Also, under the amended rules, such orders are no longer limited to cases involving proprietary claims (as is the case with Bankers Trust Orders).

The Malaysian court in Zschimmer v Persons Unknown²² took a different and equally novel approach. It granted a Spartacus Order against the unknown defendants. This required the persons unknown to identify themselves and to provide an address for service, or face committal proceedings.

Although Spartacus orders may be of limited practical…