Cryptoexchange ordered to reveal account holder information linked to multi-million cryptocurrency fraud

Written on 31 Aug 2021

Decision confirms English courts' willingness to assist victims of crypto-asset fraud in recovering their property

As further crypto-asset disputes come before the English High Court, it continues to deploy the legal tools available to assist claimants who have fallen victim to fraudulent misappropriation of their crypto-assets.

In (1) Fetch.Ai Limited (2) and Fetch.AI Foundation PTE Limited v Persons Unknown & Ors, Judge Pelling QC ordered worldwide freezing orders, proprietary injunctive relief and ancillary information disclosure against the unknown perpetrators of an alleged fraud.

The court also ordered a Bankers Trust Order against Binance Holdings Limited, despite it being based in the Cayman Islands and Norwich Phamacal relief against Binance Markets Limited (which is UK domiciled).

Alleged fraud

It is alleged that a fraud was carried out by "persons unknown" who gained access to the first claimant's account with Binance which held various cryptocurrencies. The alleged fraudsters then traded the crypto-assets significantly below the true market value, and transferred the assets to third-party accounts which were also suspected to be operated by the same fraudsters. As a result, the claimant suffered estimated losses of US$2.6m. The claimants issued proceedings under several heads of claim, including breach of confidence, unjust enrichment and an equitable proprietary claim based upon a constructive trust in respect of assets that were removed from it dishonestly and without its consent.

The claimants sought a proprietary order that would freeze the crypto-assets that had been removed from their accounts (to the extent that they remain identifiable) and to restrain third parties in possession of the traceable proceeds of the assets from dealing with them. A worldwide freezing order was also sought against those who had unknowingly become involved in the fraud in order to freeze their assets and to increase the prospects of successfully recovering them.

Departing from AA and applying Ion Science

Interestingly, in deciding that crypto-assets were property (and capable of being the subject of the freezing orders sought, the court departed from the approach taken in AA v Persons Unknown. In AA, the court had held that crypto-assets fell between the classic definitions of "chose in rem" (tangible) and "chose in action" (intangible) but were nonetheless property. In this case, the judge was content to find that cryptoassets were 'chose in action',

The court followed the decision of Ion Science Limited & Ors (which we discussed here) and confirmed that the location of a cryptocurrency is where its owner is based. The court therefore agreed that the crypto-assets were located in England prior to their misappropriation and, as the harm to the claimants was sustained there, it was the appropriate place to hear the dispute.

Applying the relevant legal tests, the court granted the proprietary injunction and the worldwide freezing order. However, the court first separated that broad group into three categories of persons unknown so as to protect those who had received the assets innocently, and with no reasonable grounds for thinking they had received the claimants' property from being unfairly in breach of the order.

The court granted a freezing order over the Binance accounts in question, because the company had indicated that it might not maintain such a freeze despite at least one account allegedly still holding some of the crypto-assets taken in the attack.

Following the approach taken in Ion Science, the court granted permission to serve a Bankers Trust Order – in essence, an order compelling the disclosure of certain information which could be used to identify account holders – on Binance Holdings, out of the jurisdiction.

The court considered that, applying the relevant criteria, a Bankers Trust Order was appropriate because:

  • There were good grounds to conclude that the information related to money or assets belonging to the claimant.
  • There was a real prospect that the information sought would lead to the location or preservation of such assets and the order sought was no wider than necessary to uncover those assets.
  • The balance of the interests of the claimants against the possible detriment to Binance fell in favour of the claimants, largely because of the very serious nature of the loss being caused by fraud and the fact that the claimants had undertaken to meet any costs (or losses) suffered by Binance from complying with the order.

Osborne Clarke comment

This decision adds to the increasing body of case law surrounding crypto-assets, which should bring comfort to victims of crypto-asset fraud that the English courts will assist them in seeking to recover their property (regardless of how it comes to the conclusion that it is property!)

The English court is willing to utilise the various powerful tools available to it in order to assist claimants who have been the victim of such frauds. It will therefore be of reassurance to the market and to holders of crypto-assets that the English court will not leave them without a remedy where appropriate.

It also provides guidance to crypto-assets exchanges on how they should respond when fraud is carried out through their platform.

The judge specifically noted that Binance had given "mixed messages" about how they would treat accounts on their platform which were frozen as a result of the court's order. It appears that in conducting his balancing exercise, the judge was motivated by the risk that Binance might remove any voluntary freezes on the accounts and potentially defeat the purpose of the legal proceedings.

Crypto-asset exchanges may well feel that they are "innocent bystanders" that are simply providing a service to facilitate peer-to-peer trading in crypto-assets, particularly in circumstances where (other than for anti-money laundering (AML) purposes) they are not regulated in the UK.

However, HM Treasury's recently proposed extending the so-called "travel rule" (which would require crypto-assets exchanges to keep detailed personal information on both the transferor and recipient of any transaction) as part of its AML/counter-terrorist financing efforts, although belatedly, following the Financial Action Task Force's 2019 recommendation. If implemented, this would place additional regulatory burdens on the exchanges, but would provide significant additional information to potential claimants needing trace their stolen property.

As the value of crypto-assets rise and fraudsters become more sophisticated, it is inevitable that we are going to see more and more cases like this one. Given the consistent approach of the English courts to such matters and the creep of additional regulation, crypto-asset exchanges need to ensure that their terms of use and their record-keeping allow them to respond to potential claimants in an appropriate manner that avoids the cost and disruption of contested court proceedings.

Osborne Clarke is a founding member of CFAAR – the Crypto Fraud and Asset Recovery network – a group of legal industry professionals comprising lawyers, barristers, forensic accountants, corporate intelligence and asset recovery experts, bringing together some of the world’s leading names in crypto disputes and advisory work with the purpose of developing and sharing best practice in this rapidly evolving sphere and placing the UK and common law jurisdictions at centre stage for global crypto dispute resolution.