Thought Leadership

Cryptocurrency fraud: The High Court strikes back

Kerman & Co. website
March 5, 2020 Advisory

Introduction

Bitcoin, one of the buzzwords of the last few years, is a decentralised digital currency which facilitates peer-to-peer payments without the need for intermediaries such as banks. It is underpinned by blockchain technology which provides uncorruptible, secure and auditable records of transactions. Cryptocurrency prides itself on offering an alternative to conventional means of banking. Conversely, cryptocurrencies have been seen as facilitating a new wave of criminal activity through the launch of anonymous ransomware attacks on large national or multi-national companies, as we have recently seen with the attack on Travelex.

However, until very recently the legal status of Bitcoin and other cryptocurrencies was uncertain. In a recent decision of the High Court in London this uncertainty has been resolved in favour of a treating cryptocurrencies as property. The result of this decision is that those involved in ransomware attacks involving cryptocurrencies can now be in little doubt that they can be restrained (and potentially unmasked) by proprietary injunctions or freezing injunctions, some of the most powerful weapons in the litigation armoury.

The Facts

In AA v Persons Unknown & Others [2019] EWHC 3556 (Comm) a ransomware hack was launched against a Canadian company. The attackers demanded payment in Bitcoin to recover the company’s systems – in effect the payment of a Bitcoin ransom.

The claimant in the court proceedings, which was the insurer of the Canadian company, purchased $950,000 worth of Bitcoin, equal to 96 Bitcoins, which were paid to an account nominated by the attackers. Investigations by the claimant tracked the Bitcoin to an address linked to Bitfinex, a British Virgin Islands-registered cryptocurrency exchange, although the claimant was unable to identify the persons behind the Bitcoin address.

The Proprietary Injunction

The key question before the court in this case was whether Bitcoin and other cryptocurrencies are ‘property’ and can therefore be subject to a proprietary injunction or a freezing injunction. These powerful court orders prevent a person from dealing in assets in which the applicant has a proprietary interest. They will typically also require the person who is subject to the injunction to provide information about the location of assets, where monies have moved to and (in an appropriate case) who is behind an account – so cutting through the perceived anonymity offered by Bitcoin.

The Judge accepted that there is a difficulty in treating Bitcoin and other cryptocurrencies as a form of property because they are neither a ‘thing in possession’ (because they are virtual not tangible and cannot be possessed) or a ‘thing in action’ (because they do not embody any right capable of being enforced), historically the only two kinds of property recognised under English law.

However, in reaching his conclusion that cryptocurrencies are a form of property the Judge relied on the analysis published in November 2019 by the UK Jurisdiction Task Force on crypto assets and smart contracts. This had pointed to the flexibility of English law in stretching “traditional definitions and concepts to adapt to new business practices”, and concluded that while a crypto asset might not be a ‘thing in action’ on the narrow definition of that term, that did not in itself mean that it cannot be treated as property. The Judge also referred to two previous cases in which the judges in those cases had treated cryptocurrencies as property and had granted, respectively, a worldwide freezing order in respect of a substantial quantity of Bitcoin and Ethereum (Vorotyntseva v Money-4 Ltd (t/a Nebeus.com) and an asset preservation order over cryptocurrencies (Liam David Robertson).

Having determined that Bitcoin could be a form of property, the Judge granted the interim proprietary injunction sought by the claimant preventing Bitfinex from dealing with or dissipating the Bitcoin it was holding. The Judge also ordered Bitfinex to provide identity information about the accounts, so potentially revealing who was behind the ransomware attack

Conclusion

This is an important decision which clarifies the legal status of cryptocurrencies as property. In consequence it provides far greater certainty to victims of fraud where cryptocurrencies are involved that the English courts will be able to assist them in their recovery actions.

Originally published at Kermanco.com prior to the firm’s combination with Armstrong Teasdale in early 2021.

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