This case, is particularly significant in terms of crypto-related fraud and asset recovery, for reasons which we explain further down.
While the judge made it clear that this judgement should not be considered authority - in line with the practice direction dealing with the status of judgements on ex parte applications – there is little doubt that this is a case that will have implications for future such cases.
Details of the Case
The applicants in this case had alleged that a fraud was perpetrated. They said the first respondent had persuaded the applicants to invest £577,002 (which amounted to 64.35 Bitcoin) in a number of cryptocurrency investment opportunities. The applicants were told that the investments had been a success. But they brought legal action because neither the funds they invested nor the profits were given to them.
In an attempt to recover what they believed they were owed, the applicants sought various forms of relief from the court on an urgent ex parte application.
These included:
On 22 December 2020, the judge granted the applicants’ application for, among other things, a worldwide freezing order, a proprietary injunction and a disclosure order against the first respondent (persons unknown) and disclosure orders against Binance Holdings Limited and Payward Limited.
The Case’s Significance
ICO Fraud
This is believed to be the first initial coin offering (ICO) fraud case heard before the Commercial Court. An ICO - which is similar to an initial public offering (IPO) - is a type of fundraising exercise relating to cryptocurrencies. As in this case, an ICO can be used to raise money to create and launch a new type of cryptocurrency. But, unlike IPO’s, which are strictly regulated, the lack of regulation of cryptocurrency has meant that ICO’s are popular with those looking to run cryptocurrency fraud schemes.
In this case, the applicants believed they were investing in real cryptocurrency products. They were told their initial investment had been a success and were persuaded to invest in ICO’s for two new cryptocurrencies, Uvexo and Oileum. But when they received none of the profits they were told they had made, they began an asset tracing and recovery exercise to recover their funds - which led to this being the first case concerning an ICO fraud to reach the UK’s Commercial Court.
Bankers Trust orders outside the jurisdiction
The case was also the first one where the court granted permission to serve a freestanding Bankers Trust order out of the jurisdiction against cryptocurrency exchanges. In the earlier case of AA v Persons Unknown it was doubted whether this could be done
A Bankers Trust order is an order made to a third party (for example, a bank) compelling it to disclose certain information to the applicant. Typically, it is only made against a legal entity within the UK (although there is an exception). In AA v Persons Unknown, a third-party disclosure order was granted, but it was not on a Bankers Trust basis. Yet in this case, the court considered it appropriate for there to be a Bankers Trust order in respect of the two exchanges outside the jurisdiction.
Lex situs of Bitcoin
The third issue of significance in this case was that it was the first time a court had considered the lex situs - the location - of Bitcoin. In considering whether the court had jurisdiction over the first respondent – while not knowing their location - and with the applicants seeking to serve out of the jurisdiction, the court had to consider whether England was the appropriate forum for the trial.
At the time this was being considered, there had been no decided case regarding the lex situs of a cryptoasset. The judgement in this case reflected Professor Andrew Dickinson’s analysis, in his book “Cryptocurrencies in Public and Private Law’’: that the lex situs of a cryptoasset is the place where the relevant participant in the Bitcoin system - in this case the person or company that owned the Bitcoin - is domiciled.
The facts of the case were judged to involve a fraud being committed in England relating to Bitcoin that was possessed by someone in England. The lex situs, therefore, was the UK. It is a decision that may prove to bring much-needed clarity to this issue.
Enforcement
In 2022, Ion Science become the first case where the High Court granted a third party debt order in relation to cryptocurrency. A third party debt order is generally a method of enforcement for judgements involving money, as opposed to cryptocurrencies. It allows for money owed to an applicant to be recovered when it is in the hands of a third party.
Under CPR 72, a court can make a third party debt order. The third party and the assets in question have to be within the jurisdiction of the court. In this case, the court’s granting of the third party debt order (coupled with its aforementioned decision that it had jurisdiction in this case) was of huge assistance to the applicants’ attempt to regain their assets. It is likely to be of value to many more applicants in the future.
Conclusion
The case addressed a number of issues that will have an impact on future cryptocurrency asset tracing and recovery cases. But it also showed the flexibility that the courts are prepared to exercise to assist victims of cryptocurrency fraud.
For many, the trial and subsequent conviction of Sam Bankman-Fried is all about the numbers. And that is understandable. The 32-year-old co-founder of crypto exchange FTX is now starting a 25-year jail sentence for fraud – a fraud that has seen his customers lose $8 billion.
A UK court has granted summary judgment to the victim of a fraudulent cryptocurrency scheme but stops short of making a final award.
