Crypto Fraud: An Overview of Recourse and Remedies in Singapore

The dark side of the rise of cryptocurrency and blockchain-enabled transactions is fraud of a new kind, global in scope and emboldened by a veil of anonymity. One need only look to the headlines to see the impact. From the theft of hundreds of thousands of Bitcoin in the infamous Mt. Gox hack, to the horror story of a 53-year-old Singaporean businesswoman who lost $1.2 million of her life savings in an investment-based crypto scam despite having taken steps to ascertain the authenticity of the counterparty. For a victim of crypto fraud, what redress, if any, can the laws of Singapore provide? We review recent developments and share our thoughts.

How does the law treat cryptographic assets?

At the outset, cryptocurrency, non-fungible tokens (or “NFTs” as they are known) and other crypto-assets comprise a novel class of assets that require legal recognition. An owner of crypto-assets can only seek redress for the theft of said assets if the law recognises these assets as conferring rights of property upon their owner in the first place.

Courts in Singapore (and in many other jurisdictions) appear to take a proactive stance in righting crypto-related wrongs. It appears that the courts would lend their assistance to victims and not allow procedural difficulties to hinder a claim. The courts have also readily embraced technological advances and do not shy away from grappling with novel and difficult questions posed by this burgeoning area of law. It is therefore of no surprise to see the courts showing little hesitation in recognising that there are proprietary rights in crypto-assets: see for example CLM v CLN and others [2022] SGHC 46 at [46]), and Quoine Pte Ltd v B2C2 Ltd [2020] SGCA(I) 2 at [139] to [144]. These cases do not provide the last word on the issue and we can expect novel arguments to be raised in the near future as to why crypto-assets do not fall within the traditional notion of “property”. But given the prevailing approaches in numerous other jurisdictions, it is unlikely that the courts will hold otherwise.

Bringing a civil claim for crypto fraud

First and foremost, it bears mentioning that there is no specific legislation or regulation in Singapore dealing directly with crypto scams and frauds. This means that enforcement agencies, courts and lawyers will have to work within the existing framework of law, jurisprudence and legal principles.

A civil claim may involve causes of action including fraud, misrepresentation, breach of trust, the tort of deceit and even conspiracy to defraud if there are several wrongdoers. Because specific remedies are available only to certain causes of action, it is critical to identify the appropriate cause of action before commencing. If, for example, a claim is made for misrepresentation, the claimant might be awarded monetary compensation by way of damages, but cannot seek an order of court for the crypto-assets to be returned.

Often, victims seeking to recover stolen crypto-assets would seek various forms of urgent and interim relief from the court to protect the assets from being dissipated by the wrongdoer whilst the claim is being instituted. It bears highlighting that crypto-assets move in milliseconds and hesitation could well make a difference in the recovery of assets.

The case of CLM v CLN illustrates the types of interim relief that can be sought. In that case, the claimant’s cryptocurrency was stolen by unidentified persons through the physical theft (from the claimant’s safe) of “recovery seeds” that were purportedly used to access the claimant’s crypto wallets. The claimant sought the following orders from the Singapore High Court: (a) a proprietary injunction prohibiting the wrongdoers from dealing with, disposing of or diminishing the value of the stolen assets; (b) a worldwide freezing injunction (also known as a Mareva injunction) prohibiting the wrongdoers from dealing with, disposing of or diminishing the value of their other assets up to the value of the stolen assets, in order to satisfy the claim should the claimant succeed; and (c) ancillary disclosure orders against cryptocurrency exchanges who were controlling wallets to which portions of the stolen assets were tracked.

Proprietary injunctions are different from freezing injunctions. A proprietary injunction is an order made against the property itself. Such an order prevents any further dealings with the property, period. An example would be the recent injunction granted by the High Court against the Bored Ape Yacht Club (BAYC) 2162 NFT. In that case, the applicant had taken out a loan from an online lender and used the BAYC 2162 NFT as collateral. He claimed that it was agreed that even if he was unable to repay the loan on time, the lender, who goes by the moniker of “Chiefpierre”, would not foreclose the NFT and take it as his own. This is precisely what Chiefpierre did, and the High Court granted a worldwide proprietary injunction stopping or blocking the sale of the BAYC 2162 NFT. The proprietary injunction in this case is extremely effective because the NFT is highly identifiable – there is only one token that answers to its description. And we see third parties actually taking steps to give effect to this order. Opensea, an NFT marketplace, took steps to disable the trading of this NFT on its platform.

In contrast to the proprietary injunction, a Mareva injunction is directed at the defendant. A Mareva injunction will prohibit the defendant from dealing and/or disposing of his assets. It will make sense to obtain a Mareva injunction if the crypto-asset can be traced or the identity of the wrongdoer is known. Hence, for example, if it is established that that the crypto-asset in question is being held by wallets hosted in a crypto exchange, obtaining a Mareva injunction would be appropriate and notice of the injunction would be served on the exchange.

Once the crypto-asset is traced and frozen, the victim can then proceed with the main legal action to get the court to make certain proprietary declarations or vesting orders to declare that the crypto asset belongs to the victim and that it be returned.

The anonymity problem

Crypto transactions present a number of characteristics that appeal to scammers. One of the key traits is that parties can transact with each other without the need for a trusted middleman like a bank to validate the transaction. Another key trait of crypto is its anonymity or pseudonymity. An obvious problem arises in a crypto fraud claim – who is the wrongdoer and how do we sue them? Courts in common law jurisdictions around the world have taken a proactive and facilitative stance towards crypto fraud victims. We consider some examples.

First, in CLM v CLN, the Singapore High Court held that it had jurisdiction to grant interim orders against defendants of unknown identity, as long as the description used by the claimant is sufficiently certain as to identify those who are included in the description and those who are not (citation: at [31] to [32]). For instance, in CLM v CLN, the claimant sought interim orders against “any person or entity who carried out, participated in or assisted in the theft of the Plaintiff’s Cryptocurrency Assets on or around 8 January 2021, save for the provision of cryptocurrency hosting or trading facilities”. The High Court found this to be sufficiently certain.

Secondly, the High Court may make self-identification orders against person unknown, also known as a Spartacus Order. This was ordered by the Malaysian High Court in 2021 in the matter of Zschimmer & Schwarz v Persons Unknown (Citation: [57] to [63] of the unreported judgment). A Spartacus Order would be advertised in the newspapers and alert the persons unknown to self-identify and provide an address for service, within a specified time. Failure to comply with the order would constitute contempt of court, which is a criminal offence. Third parties who are aware of the wrongdoer’s identity may also be charged with abetting or facilitating the wrongdoer’s breach of the Spartacus Order.

Thirdly, in the recent decision of D’Aloia v Person Unknown (citation: [2022] EWHC 1723 (Ch)), the UK High Court allowed for service of court process via an NFT into an identifiable wallet at the other end of the transaction, causing a permanent mark on the ledger. This matter involved misappropriation of cryptocurrency and the wallets specified were the same wallets purportedly used to facilitate the wrongdoing. The High Court opined that this mode of service would likely lead to a greater prospect of the unknown defendants being put on notice of the court order (citation: at [39]).

The above developments are both welcome and positive in this legal space. They demonstrate that the courts are prepared to embrace technological advances and will not allow technical and practical difficulties to impede the administration of justice. Outside of costly court applications, what redress is available for the man on the street? We now look to the criminal law.

Crypto fraud under criminal law

The criminal law proscribes illicit activity. It also seeks to punish wrongdoers and deter future offenders. As noted above, Singapore’s Legislature has yet to establish a specific legislation or regulation that deals directly with crypto fraud. Law enforcement is confined to the existing laws. Crypto-related crimes have thus far been dealt with under various Penal Code offences such as cheating (Section 415), misappropriation of property (Section 403), theft (Section 378) and criminal breach of trust (Section 405), or under the Computer Misuse and Cybersecurity Act. Interestingly, these offences are “property offences”. That crypto-assets can give rise to property offences is an implicit acknowledgment by the courts that crypto-assets constitute property. The courts have come too far to retreat on this academic discourse on whether crypto-assets can constitute property.

The criminal sphere provides an avenue of redress for fraud victims. Section 35 of the Criminal Procedure Code empowers the police to seize property when an offence is suspected to have been committed.

The seized crypto-assets are then returned to their rightful owner(s) once investigations have concluded or the wrongdoer is convicted, and there is no further need to hold on to the seized assets. The forum at which the seized assets are returned is known as a disposal inquiry (see Section 370 of the Criminal Procedure Code). The wide-ranging power to seize assets provides an effective alternative to the civil law’s injunction. First, not everyone has the financial wherewithal to engage lawyers to take out injunctions. Second, the requirements for successfully obtaining a freezing injunction can be demanding and onerous. Thus, advising clients who are victims of crypto scams and frauds to quickly lodge a police report should be done as a matter of priority. The police have the power to seize crypto-assets. Whether the police have the capabilities and the resources to act quickly is a separate question.

Practical challenges abound. Seizing crypto-assets poses technical difficulties that seizing physical assets (e.g. a car) do not. Forensics experts would have to trace the stolen assets to a crypto wallet, and then there is the difficulty of obtaining the corresponding private key. A “private key” is represented by 64 numbers and letters and is virtually impossible to guess – there are more than a billion permutations. Another downside is that disposal inquiries may be convened long after the asset has been seized, by which time the asset would have lost its value. As we all know, a cryptocurrency can be gold one day and just meaningless values on a blockchain the next.

In February 2022, the UK’s HM Revenue and Customs tax authority seized three NFTs as part of investigations into suspected value-added tax fraud. While there are no reported instances of such seizures in Singapore, the infrastructure does exist, notwithstanding the practical difficulties which law enforcement might face.

Ultimately, enforcement and recovery of crypto-assets is still a developing area of law. It may well be the case that legislative intervention is required to address the lacunae and other practical difficulties that are beyond any curial maneuvering. We just have to watch the space.

For More Information

If you have any questions about this article, please contact Clement J. Tan Tze Ming and Colin Tan or the attorney in the firm with whom you are regularly in contact.

About Duane Morris & Selvam LLP

Duane Morris & Selvam LLP (DMS) is a joint law venture between international firm Duane Morris LLP (DM) and Singapore-based firm Selvam LLC. DMS runs a unique Latin American-Asian practice out of Singapore, with a team of international lawyers qualified in multiple jurisdictions including Singapore, the US, the UK, Canada, Mexico and Colombia, with substantial experience in international transactions and disputes. DMS also has a wide cooperation network with some of the best Latin American and Asian law firms.

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