CFAAR hosts its first roundtable event as part of London Tech Week

In a broad sense, it was felt that lawyers and judges are still amid an education phase, adapting existing legal principles to a new asset class. The sense was that the English Courts are adapting and being pragmatic; judges are making bold decisions to help the victims of crypto frauds, such as the granting of Bankers Trust and Norwich Pharmacal orders against entities based outside of the jurisdiction, as well as freezing cryptoassets held by exchanges.

While there are difficulties in achieving cooperation with exchanges in remote jurisdictions, reputable exchanges have typically been helpful in cases of fraud and many have registered in jurisdictions with better banking and legal infrastructures to enhance their own operations, but also improve user confidence. However, there are a variety of exchanges with varying levels of sophistication and KYC quality, and some remain less than cooperative.

Discussion turned to the cases that have been heard by English courts, the majority of which involved elements of fraud where a victim is pursuing an unknown person. Looking ahead, what will be interesting to see is a fully argued case, potentially between two innocent parties, such as dispossessed owner of cryptocurrency and a good faith purchaser without any knowledge of the dispossession. Other potential types of disputes on the horizon could include class actions against exchanges, contractual issues involving suppliers to the crypto ecosystem and actions brought against developers for breach of fiduciary duties. Arbitration was also explored as a potential means of redress, although it is likely to be less favourable for victims of fraud given the difficulties round disclosure and bringing third parties into proceedings.

Of the many types of fraud in the crypto arena, from insider jobs and fake initial coin offerings (ICOs) to classic spoofing hacks, the process and tools for investigating crypto fraud do not differ greatly compared to those deployed in traditional off-chain fraud cases, such as identifying trading traits and looking for anomalies such as cryptoassets being sold for less than their market value. One consistent hurdle to overcome, however, is the high volume of low-value thefts. The system appears to be stacked against pursuing such cases that are expensive to run and time-consuming, with claims often unattractive to third-party funders or lawyers and experts acting on a contingent basis due to the lack of certainty around recoverability.

With such tensions around legal remedies for victims of crypto fraud, will the emphasis fall upon exchanges to hold a greater duty of care to their users? Reputable exchanges may have sensible standard terms, but questions may arise around what constitutes an ‘unusual transaction’ that raises suspicion; add to the mix the volatility of established cryptoassets and the  constant introduction of new types of cryptoassets, and it could be difficult to establish the threshold for what is ‘normal’? Could international conventions, then, be an answer to ease the burden on national laws grappling with the evolving world of crypto disputes?

Concluding, much progress has been made in the way crypto disputes are investigated and litigated. The key, said one participant, is dispelling the myth that cryptoassets are anonymous – “they are not, with the right tools”.