The High Court has once again addressed new issues raised by cryptoasset litigation, this time in the context of a provisional application for information orders.
Claimant (“LMN”), a company incorporated in England and Wales and operator of a cryptocurrency exchange, allegedly lost millions of dollars worth of cryptocurrency in a hacker attack.
After conducting a comprehensive tracing exercise, LMN discovered that some funds had moved to or through wallets owned and operated by the agreed cryptocurrency exchanges. The consequences of this were twofold:
- Such addresses generally held pooled assets of many customers. Assets were only attributed to “off-chain” customers (i.e. on private internal databases). Thus, once the assets reached an exchange address, they could not be traced further without further information from the relevant exchange.
- Each of the defendant exchanges was believed to carry out regulatory due diligence on its clients, so as to know the identity of the persons monitoring the accounts receiving the assets in question.
Having had limited success in prosecuting the alleged offenders for over two years with the assistance of UK crime agencies, LMN appealed to the commercial court against the defendant exchanges requesting information orders in order to initiate proceedings for the recovery of the alleged stolen cryptoassets. LMN also requested permission to serve the demand on defendants outside the jurisdiction.
The English court can issue an order requiring third parties to disclose certain information under its so-called Norwich Pharmaceutical And Bankers’ trust jurisdictions. Norwich Pharmaceutical the orders require disclosure by a third party who is alleged to be innocently “confused” in wrongdoing and who has information that would allow the plaintiff to identify the perpetrator. Bankers’ trust the orders require the disclosure by a third party of information (including otherwise confidential customer information) that could enable the complainant to establish the location of his or her misappropriated assets and/or prevent the disposal of those assets.
The case once again highlights the willingness of the English Court to apply English procedural mechanisms (in this case, in relation to the service and the collection of pre-action information) to new situations raised by cryptocurrency fraud. In particular, it indicates that the decentralized and cross-border nature of cryptocurrencies and their misappropriation can justify the “exceptional” use of the Bankers’ trust and/or Norwich Pharmaceutical jurisdictions to obtain information on cryptocurrency misappropriated by foreign defendants to assist in the recovery of such assets. It also shows the utility of the information gateway recently introduced in the English Court’s Practice Direction 6B in overcoming jurisdictional issues which had historically been a barrier to making information orders against parties in other jurisdictions and/or unknown persons, both of which are features cryptocurrency dispute commons.
The English courts exercise jurisdiction over the parties against whom proceedings are properly served and therefore claimants generally need to seek permission from the Court before serving a claim on parties outside the UK (known colloquially as “service out “). Considering LMN’s request for such permission in this case, the Court noted that LMN had to show that (a) there was a good debatable case on its merits, (b) the request fell within one of the “judicial gateways” within the meaning of the Practice Direction 6B 3.1 and (c) England and Wales was the appropriate venue for the complaint.
Good questionable case
There was a good debatable argument that the resources in question were, at the time of the hack,
“situated” in England and Wales, being where LMN resided and carried on business. This was despite the fact that the servers on which the assets were technically located were located in Romania, which the court described as a mere “fortuitous circumstance”.
There was therefore a good arguable case that the alleged damage had occurred within the jurisdiction, either because it was in England that the assets had been seized or because LMN, as an English company, had suffered loss and damage within the jurisdiction. ‘England. Applying the Rome II Regulation, the Court then proceeded on the basis of the English law applicable to the dispute.
Therefore, considering each of the relevant requirements for Banker’s trust the Court noted, inter alia, that:
- There were good reasons to conclude that the assets belonged to LMN;
- There was a real prospect that the information requested would lead to the location or preservation of such assets; And
- LMN’s interest in obtaining the information was not counterbalanced by the possible prejudice caused to the defendants in complying with the order.
Regarding the first of these requirements in particular, there was a good debatable argument that:
- Cryptocurrencies are a form of ownership, depending on your position AA versus Unknowns and the legal statement from the UK Jurisdiction Task Force.
- When cryptocurrency was obtained through fraud, fairness imposed constructive trust on assets. This had been the case in relation to other forms of immaterial property even if they were neither things in possession nor things in action.
- While every transfer of cryptocurrency on the blockchain was claimed to create a new asset in the hands of the acquirer, this did not prevent cryptocurrencies from being tracked (on the basis that there was a relevant replacement).
The Court further held that, there being no doubt, the defendants were “involved” in the alleged fraud (although they themselves did not suspect actual wrongdoing) and, having satisfied the requirements for Bankers’ trust relief, there was also a good questionable case that Norwich Pharmaceutical relief should also be granted.
The Court found that the request “clearly” fell under the new gateway, (25) which applies to requests for disclosure of information concerning a defendant’s true identity and/or what has become of relevant property.
The gateway, introduced this year, only applies when information is required for the purposes of English proceedings which may be served in the jurisdiction or which the claimant may serve outside the jurisdiction. In this regard, however, the Court has accepted that there is a good arguable case that any subsequent claims against the hackers would fall within the gateways (11) (concerning property claims within the jurisdiction) and/or (15) ( regarding complaints about constructive trusts).
The Court concluded that England and Wales appeared to be the appropriate forum for action, listing a number of relevant factors, namely: LMN is an English company, there were good reasons to believe that the location of the assets was in England, the papers were in England and the law of England and Wales at least disputably governed the ownership claim of LMN.
The Court observed that there was an argument that information orders against foreign parties constituted a breach of the sovereignty of the relevant foreign jurisdiction and should therefore only be granted in exceptional circumstances. However, the Court questioned the force of this argument where the actual location of the relevant documents was unknown and (insofar as they were electronic), largely irrelevant. The complaint involved fraud and the pursuit of assets, so it was still “exceptional”.
Since the defendants have raised no other substantive objections to the order of Bankers’ trust compensation, and given that there was a questionable good claim for such compensation (in the off-duty context), the Court was satisfied that the applicant had a good claim for such compensation Bankers’ trust relief and granted the information orders requested by the appellant.
LMN vs Bitflyer indicates that English courts can generally take a sympathetic view of plaintiffs seeking to recover misappropriated cryptocurrencies, including through the granting of information orders.
It also suggests that courts are taking an increasingly consistent approach to certain issues arising from such assets. It reaffirms, for example, that cryptocurrencies are a form of property.
The powers of the Court to grant services outside the jurisdiction, even in respect of unknown persons, and orders requiring the pre-action disclosure of confidential information by third parties are particularly important tools in a cryptographic context, given the ability of the offender to go “off-chain” transferring assets through an exchange. The confidential nature of the goods in question also means that such exchanges may be one of the only means available to plaintiffs to identify those who have committed fraud. For these reasons, we can probably expect to see more use of this powerful remedy in similar cases in the future.
Interestingly, in determining the location of cryptoassets, the Court found the domicile of the owner of the assets to be much more significant than the location of the servers on which they were technically represented. This is consistent with other recent English cryptocurrency jurisprudence and may be significant in setting a trend for determining the lex situs of particular goods in future cases.
The Court left a number of questions open, including:
- If LMN were right that cryptocurrency exchanges held assets in their own name (rather than the trust of their customers) and simply had a personal obligation to repay relevant amounts to each customer (similar to bank deposits). This is a question that has much broader implications for practitioners in other contexts, such as insolvency, but the court did not address whether LMN’s position was correct.
- The basis on which he deemed the defendants “involved” in the fraud, pursuant to art Norwich Pharmaceutical significance (i.e. whether this was a consequence of their role as an exchange, operator of the related portfolios, or both). This may have implications for the circumstances in which Norwich Pharmaceutical And Bankers’ trust relief may be available to other entities operating in the cryptocurrency market in the future.
Finally, information orders have historically faced challenges when parties have had to seek permission to serve outside the jurisdiction. However, the decision shows the effectiveness of the new information gateway, which was introduced in October 2022, and should make it easier for alleged claimants to obtain orders against parties outside the UK and unknown parties, as is often necessary in cases of cryptocurrency.