The evolving legal landscape of crypto-assets under English law.
Introduction
In the 1980s and 90s, cash-rich Japanese companies bought up French Impressionist paintings as long- term investments. The rapid proliferation of crypto-assets, driven more recently by the ever higher price per token of crypto-currencies such as Bitcoin, give rise to similar opportunities to grow balance sheets in the medium to long term. Crypto-assets have undoubtedly disrupted the financial landscape, whether it be the boom and bust of the NFTs market in the early 2020s or the anonymous accumulation of huge amounts of wealth stored in legacy “mined” crypto-currency. Whatever you feel about them, good or ill, crypto-assets are here to stay.
As such, businesses are increasingly looking to engage with crypto-currency and blockchain technology, and understanding the legal implications surrounding these assets and their limitations is vital. From a lawyer’s perspective, a key feature to this is the recognition of property rights in crypto-assets under English law, which affects ownership, transferability, and legal remedies in cases of fraud or misappropriation.
Proprietary injunctions- court orders preventing the disposal of assets pending the resolution of legal proceedings- have emerged as critical tools in protecting interests in crypto-assets. This article explores recent and upcoming English case law relating to property rights in crypto-assets, providing businesses with insights into the evolving legal framework and its practical implications.
The legal status of crypto-assets as property
The treatment of crypto-assets as property under English law has been the subject of significant recent legal development. Traditional definitions of property encompass tangible items and certain intangible rights, but crypto-assets do not obviously fall into these categories due to their digital and decentralised nature.
The first authoritative treatment of crypto-assets came with the UK Jurisdiction Taskforce's (UKJT) "Legal Statement on Crypto-assets and Smart Contracts" (2019). The UKJT concluded that crypto-assets could be recognised as property under English law, meeting the criteria of being definable, identifiable by third parties, capable of assumption by third parties, and having some degree of permanence or stability.
In Bryan J’s judgment in AA v Persons Unknown [2019] EWHC 3556 (Comm), the High Court provided judicial endorsement of the UKJT's position. The case involved an insurance company seeking a proprietary injunction over Bitcoin paid as a ransom following a cyberattack on their insured client.
The judge held that crypto-assets like Bitcoin can be considered property under English law. He reasoned that despite older judgment requiring that intangible property by either a right in possession or a right in action which crytpo-assets are not, they otherwise have all the features of property rights.
Bryan J, Paragraph 55 “Prima facie there is a difficulty in treating Bitcoins and other crypto currencies as a form of property: they are neither chose in possession nor are they chose in action. They are not choses in possession because they are virtual, they are not tangible, they cannot be possessed. They are not choses in action because they do not embody any right capable of being enforced by action.”
This important judgment brought clarity to the legal status of digital assets, confirming that they could be subject to proprietary injunctions and other proprietary remedies, (in this case a freezing injunction). However, it is of limited value because it is a first instance decision that does not prevent litigants in other cases from arguing in the appellate courts that it is legally incorrect.
Developments
So, efforts are underway to provide a more satisfactory legal framework. The Law Commission's "Digital Assets: Consultation Paper" (2022) proposes reforms to accommodate the unique characteristics of crypto-assets, aiming to ensure that English law remains relevant and effective in the digital age.
The Commission’s recommendations haves resulted in the introduction of the short Property (Digital Assets etc.) Bill (“the Bill”) in the House of Lords. The Bill quite simply provides that “A thing (including a thing that is digital or electronic in nature) is not prevented from being the object of personal property rights merely because it is neither- (a) a thing in possession, nor (b) a thing in action).
At the time of this article the Bill is at the report stage in the House of Lords. It has not yet reached the House of Commons and it remains to be seen when legislative time can be found to pass it into law, (if at all).
Round up of recent cases
In the meantime, the English courts continue to work around the legal issues thrown up by crypto-assets through the common law. The following are some of the more important reported cases but many more in the pipeline have yet to be decided:
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D’Aloia v Persons Unknown and Others [2022] EWHC 1723 (Ch)
Summary: Mr D’Aloia, an Italian engineer and founder of Microgame, was defrauded of significant amounts of cryptocurrency, including Tether (USDT) and USD Coin (USDC), (both “stable coins”), through a sophisticated scam involving fraudulent online platforms.
Key issues: the court considered whether it could grant a proprietary injunction and permit service of proceedings via unconventional means, such as through tokens imprinted in blockchain transactions to the wallets holding the misappropriated assets, (“air dropping”).
Court's decision: the High Court granted a proprietary injunction against persons unknown and allowed for service of court documents via non-fungible tokens (NFTs) airdropped into the digital wallets where the stolen assets were held. The court reaffirmed that crypto-assets are property under English law and can be the subject of legal remedies, but again this was a first instance decision that only binds the lower courts.
Implications: this case is significant as one of the first fully heard cases involving crypto-assets, moving beyond earlier cases that primarily addressed interim remedies. It demonstrates the common law’s adaptability in using innovative methods to address the challenges posed by the anonymous and decentralised nature of blockchain technology. For businesses, it underscores the importance of prompt legal action and the potential for recovery of misappropriated assets. A fast response is the most important factor in any technology-based fraud.
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Ion Science Ltd v Persons Unknown [2020] Commercial Court (unreported)
Summary: Ion Science Ltd and its director were victims of an initial coin offering (ICO) fraud, losing approximately £577,002 in value of Bitcoin and Ethereum. They were misled into investing in what they believed was a legitimate cryptocurrency venture.
Key issues: the claimants sought a proprietary injunction and a worldwide freezing order against unknown defendants. They also applied for Bankers Trust orders against cryptocurrency exchanges to obtain information to aid in the identification and recovery of the assets.
Court's decision: the Commercial Court granted the proprietary injunction, worldwide freezing order, and disclosure orders. The court recognised that crypto-assets are property and that it had jurisdiction to grant such orders against persons unknown and to serve them out of the jurisdiction.
Implications: the case highlights practical legal strategies for businesses victimised by crypto fraud. It emphasises the court's willingness to support victims through interim remedies and cross-border cooperation. For businesses, it again illustrates the importance of swift action and the potential to leverage court orders in asset recovery efforts. The targeting of crypto-currency exchanges for remedies arising out of fraud is a developing area of interest for litigators.
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Tulip Trading Ltd v Bitcoin Association for BSV & Others [2023] EWCA Civ 83
Summary: Tulip Trading Ltd, a Seychelles company associated with serial crypto-asset litigant Dr. Craig Wright, claimed loss of access to approximately 111,000 Bitcoin, (valued in 2021 at over $4 billion but substantially higher at today’s prices), due to a hack. The company argued that the developers of the Bitcoin network owed fiduciary and tortious duties to assist in regaining control of the assets.
Key issues: whether the developers of a decentralised blockchain network owe fiduciary duties or duties of care to owners of crypto-assets on that network.
Court's decision: the Court of Appeal overturned the High Court's dismissal of the case, allowing it to proceed to a full trial. The court recognised that there is a serious issue to be tried regarding the existence of fiduciary duties between developers and users.
Implications: this case is being closely watched as its outcome could significantly impact the responsibilities of blockchain developers. A ruling that developers owe fiduciary duties could alter the dynamics of blockchain governance and impose new obligations on those who maintain and update blockchain protocols. Such an outcome would likely push developers even further to keep their identities secret which will raise practical difficulties for any claimant. Businesses should monitor this case, as it may affect the legal recourse available in cases of lost or inaccessible crypto-assets.
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Piroozzadeh v Persons Unknown and Others [2023] EWHC 1024 (Ch)
Summary: Mr Piroozzadeh was defrauded of approximately 870,818 USDT through a murky cryptocurrency investment scheme which he was induced into by people he did not know, (and presumably could not identify). He sought a freezing injunction against Binance Holdings Ltd, (a well known exchange), alleging they held the stolen assets and were under a duty to prevent their dissipation.
Key issues: the court examined whether it had jurisdiction over Binance, a foreign entity, and whether a freezing injunction was appropriate in the circumstances.
Court's decision: the High Court discharged the freezing injunction against Binance. The court found that it lacked jurisdiction over the Cayman Islands-registered company and noted the challenges in establishing connections sufficient for English jurisdiction.
Implications: this case highlights jurisdictional hurdles in crypto-asset recovery, particularly when dealing with entities operating outside the UK, as many developers and exchanges are notionally based offshore. For businesses, it underscores the necessity of understanding the legal jurisdictions involved in cryptocurrency transactions and the importance of considering these factors when engaging with foreign exchanges. It is also a salutary lesson in not parting with valuable crypto-assets without doing your due diligence on the recipient.
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Mooij v Persons Unknown [2021] EWHC (unreported)
Summary: Mr Mooij was deceived into transferring around 20.34 Bitcoins and €330,000 to fraudulent entities posing as legitimate investment platforms. This was a summary judgment application against persons unknown.
Key issues: the court considered whether it could grant final relief against defendants who were not known to the claimant, a common scenario in crypto-asset fraud.
Court's decision: the High Court granted summary judgment and continued freezing orders against the unknown defendants as potential “newcomers” to the litigation at the point at which they identify themselves to recover their illicit gains.
Implications: the case demonstrates the court's application of injunctive relief developed in other settings to the more novel crypto space. For businesses, it indicates that English courts are willing to accommodate the unique challenges of pursuing legal action against anonymous parties.
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Joseph Keen Shing Law v Persons Unknown and Huobi Global Ltd [2023] Commercial Court (unreported)
Summary: Mr Law was defrauded of significant cryptocurrency amounts and sought remedy, including freezing orders against unknown defendants and enforcement actions involving Huobi Global Ltd, a major cryptocurrency exchange.
A summary judgment application regarding similar subject matter had failed in the case of Boonyaem v Persons Unknown and others [2023] EWHC 3180 (Comm) in part because the persons unknown might never become persons known.
Key issues: the enforcement of judgments against assets held by foreign entities and the extent of cooperation required from cryptocurrency exchanges. Another important issue was whether an exchange could be required to liquidate crypto-assets into fiat currency to make the claimant whole.
Court's decision: the court ordered Huobi to transfer the frozen assets into England and Wales to facilitate enforcement, highlighting the necessity of exchange compliance with court orders.
Implications: the case underscores the importance of cooperation from cryptocurrency exchanges in legal proceedings and the enforcement of judgments. For businesses, it emphasises the need to engage with reputable exchanges that are responsive to legal obligations and the potential complexities in recovering assets from foreign platforms. As one might expect, there is a developing reputational risk to exchanges who are not cooperative with national authorities.
Reflections
The evolving jurisprudence reflects the English courts' remarkably proactive stance in addressing the challenges posed by crypto-assets. Several key themes emerge from the recent case law:
- Recognition of crypto-assets as property
The High Court has consistently recognised crypto-assets as property, accepting the principles outlined in the UKJT's legal statement. This recognition, while limited in nature, is crucial for businesses as it allows for proprietary remedies and provides a legal foundation for asset recovery efforts. This state of affairs is not entirely certain without the passing of the Bill or a definitive judgment of the Court of Appeal or Supreme Court. It is increasingly unimaginable, however, that those courts would hand down a decision that would fundamentally disrupt this extremely valuable financial technology.
- Adaptation of legal procedures
Courts are adapting procedural rules to address the unique features of crypto-assets. Innovative methods of service, such as using blockchain transactions to serve court documents, demonstrate a willingness to embrace technology to ensure practical justice can be effectively administered.
- Jurisdictional challenges
The global and decentralised nature of crypto-assets presents jurisdictional complexities. Cases like Piroozzadeh illustrate the difficulties in asserting jurisdiction over foreign entities. Businesses must be cognisant of these challenges and consider jurisdictional risks when dealing with international counterparts.
- Duties of developers and exchanges
The potential for developers to owe fiduciary duties, as suggested in Tulip Trading, could have significant implications for the sector. The developers are often the only people who can implement an order of the court for restitution of crypto-assets by amending the blockchain, (potentially causing a “fork” in the blockchain). Exchanges' roles are also under scrutiny, with courts expecting cooperation in preventing fraud and facilitating asset recovery. The latter are the most promising target for litigation by victims of fraud identifiable and well-resourced and are emerging as the equivalent of banks, (keen to maintain a good public reputation), in the crypto-space. Businesses should be aware of the evolving expectations and legal obligations of these key intermediaries.
- Enforcement and recovery efforts
Recovering misappropriated crypto-assets remains challenging due to anonymity and the speed of transactions. The cases of MooiJ and Boonyaem demonstrate a degree of fact sensitivity to the prospect of obtaining relief. Courts are providing remedies, but the effectiveness often depends on swift action and the ability to trace assets, underscoring the importance of robust security measures and immediate legal intervention when incidents occur. The Huobi Global judgment demonstrates that the fact you cannot trace the fraudsters does not mean you cannot go after the stolen crypto-assets themselves. However, it is notable that exchanges are increasingly including mandatory confidential arbitration clauses in their terms and conditions of business to avoid precedent setting litigation. The degree to which these terms interact with urgency injunction relief applications is yet to be tested.[1]
Conclusion
The legal landscape for crypto-assets in England is rapidly maturing, with courts and legislators striving to provide clarity and protection in a domain characterised by innovation and complexity. The passing of the Bill will render the first instance decisions in legal concrete. For businesses, staying abreast of these developments is essential to navigate risks and capitalise on opportunities presented by crypto-assets.
The recognition of crypto-assets as property under English law provides a vital tool for asset protection and recovery. However, challenges such as jurisdictional issues and enforcement against anonymous or foreign entities persist. Anticipated judgments, particularly in cases like Tulip Trading, may further define the responsibilities of developers and could reshape aspects of the crypto industry.
A recent report by law firm CMS identified 118 High Court claims involving crypo-assets of which 50% related to frauds[2]. We can expect dozens of decisions in the next 12 months which will no doubt continue to grapple with the unique legal challenges these remarkably valuable new assets throw up.
Businesses are advised to:
- Stay informed: monitor legal developments and adjust strategies accordingly to mitigate risks associated with the dynamic legal environment
- Implement robust compliance measures: ensure adherence to legal obligations and adopt best practices in handling crypto-assets and rapid response to fraud
Engage with reputable entities: there are a lot of bad actors out there. Partner with exchanges and service providers that demonstrate compliance with legal standards and responsiveness to legal processes. Be wary of one-sided terms of service and jurisdiction clauses that force you to sue in unfavourable courts.
[1] See for instance Chechetkin v Payward [EWHC] 3057 (Ch) which overruled a San Francisco arbitration agreement. [2] “Cryptoasset disputes on the rise – what to expect in 2024” – CMS
References
- UK Jurisdiction Taskforce. "Legal Statement on Crypto-assets and Smart Contracts." (2019).
- Law Commission. "Digital Assets: Consultation Paper." (2022).
- AA v Persons Unknown [2019] EWHC 3556 (Comm).
- Ion Science Ltd v Persons Unknown [2020] (Unreported).
- ’Aloia v Persons Unknown and Others [2022] EWHC 1723 (Ch).
- Tulip Trading Ltd v Bitcoin Association for BSV & Others [2023] EWCA Civ 83.
- Piroozzadeh v Persons Unknown and Others [2023] EWHC 1024 (Ch).
- Boonyaem v Persons Unknown and Others [2023] EWHC 3180 (Comm).
- Mooij v Persons Unknown [2021] EWHC (unreported).
- Joseph Keen Shing Law v Persons Unknown and Huobi Global Ltd (unreported).
For expert advice on the law surrounding crypto-assets contact our financial services solicitors.