2021 was a blockbuster year for cryptocurrency, aided largely by the Covid-19 pandemic, which saw markets and trading vastly increase. As a result of such growth, cryptocurrency asset tracing is no longer a niche legal sphere. It is one increasingly visible within the English Courts. In January 2022, the Master of the Rolls Sir Geoffrey Vos emphasised the need for all commercial and dispute resolution lawyers to understand blockchains, smart legal contracts and cryptoassets.
From a commercial perspective, the rising value of cryptocurrency and the capacity to conceal its ownership means the area of cryptoasset tracing will continue to develop as part of commercial dispute resolution.
Commercial dispute resolution practitioners have seen a series of published cases coming before the English Courts which deal with a range of issues, including; securing information from exchanges, restraining onward transactions and ancillary issues including security for costs.
Chris Recker, a senior associate at Duane Morris, and Jonathan Bellamy, a commercial barrister at 39 Essex Chambers, identify the principal legal decisions and highlight some of the key challenges arising and practical steps to be taken. This article is gratefully supported by industry specialists in the form of Asset Reality, the world’s first dedicated asset manager for seized crypto assets, and CSI Tech Ltd, a specialist global blockchain tracing agency that wrote the first book on investigating cryptocurrencies.
On the basics, in 2019 the Commercial Court confirmed that Bitcoin was capable of being property; AA v Persons Unknown & ors  EWHC 3556 (Comm), a decision consistent with the judgment of the Singapore International Commercial Court in B2C2 Limited v Quione PTC Limited  SGHC (I) 03. Since then there has been judicial acceptance for the purpose of without-notice injunctive relief that the lex situs of cryptocurrency is the owner’s place of domicile; (Ion Science Ltd v Persons Unknown & ors (unreported), 21 December 2020 (Commercial Court)).
On asset tracing, there has been further development of the categories of persons unknown who may be subject to a freezing and/or proprietary injunction; Fetch.AI Limited & Others v Persons Unknown & Others  EWHC 2254 (Comm). Cases have highlighted the importance of using proprietary injunctions to restrain misappropriated cryptocurrency (see for example, Mr Dollar Bill Limited v Persons Unknown & Others  EWHC 2718 (Ch)) and of working with specialist blockchain tracers to locate cryptocurrency.
We have also seen disputes about whether cryptocurrency may be held on trust. In Wang v Darby  EWHC 3054 (Comm) it was common ground that in English law cryptoassets constitute property that is capable of being bought and sold as well as held on trust. However, on the facts of the transaction in question, Tezos (XTZ) was found not to be so held because the ‘essential economic reciprocity’ of the arrangement between the parties precluded any trust. We expect this point to be an issue that will be carefully considered in cases in the future.
One of the most interesting recent developments in the case law relates to seeking assistance from a centralised entity which controls a cryptocurrency. In Lubin Betancourt Reyes v Persons Unknown  EWHC 1938 (Comm) the Claimant sought the assistance of the entity that controls the cryptocurrency called ‘USDT’ (Tether) to cancel and re-issue misappropriated cryptocurrency.
On related matters, the Court has recently refused to order security for costs in the form of a digital asset. Amongst other things, it is of note that the Court considered that granting security in this manner would expose a defendant to a risk in the form of a fall in the value of Bitcoin which is not a risk in conventional forms of security – such as a payment into Court, or first class guarantee; Tulip Trading Ltd v Bitcoin Association for BSV  EWHC 141 (Ch).
The development of international information production orders is an important emerging issue. Cryptoassets are often held in exchanges registered in offshore, and often “exotic”, jurisdictions chosen for their resistance to outside legal intervention. At present there is some uncertainty on the authorities about whether an English Court has jurisdiction to issue information production orders addressed to parties outside England and Wales and, if so, on the basis of which gateway. There is an unresolved tension between relevant authorities; AB Bank Ltd v Abu Dhabi Commercial Bank PJSC  EWHC 2082 (Comm), CMOC v Persons Unknown  EWHC 3599 (Comm), AA v Persons Unknown (supra) and Lubin Betancourt Reyes & anr v Persons Unknown & ors  EWHC 1938 (Comm).
Cryptoassets, including assets representing the fruits of misappropriated fiat or cryptocurrency, may also be held at addresses outside a centralized exchange. A proprietary and/or freezing injunction may restrain further transactions and dispositions, but in the absence of a third party holder, how will the order be enforced? It is likely that the courts will have to consider development of search and seizure orders in such cases to promote enforcement. It may be the case that, to maximise the prospects that the cryptocurrency is seized and secured, a hybrid search order and receivership order is appropriate to locate and secure private keys on a wrongdoer’s computer or in their property. We expect parties to invite the Court to develop creative legal solutions to assist victims of fraud in such cases.
A key theme in litigation management is the sheer international scale of disputes and claims involving digital assets. As international commercial lawyers, we are familiar with the quarterbacking of litigation across the globe and working with teams of lawyers and technical experts in multiple jurisdictions.
Aidan Larkin, CEO at Asset Reality, highlights the importance of selecting the right team and harnessing the benefits of blockchain technology:
“It’s easy when we hear the term “crypto” to immediately think of the incredibly technical ecosystem it operates in and that often leads to a combination of misconceptions, panic, and assumptions that hinder asset recovery attempts for victims. The truth is, in an asset recovery context, crypto presents more opportunities for success than traditional cases. As a former criminal investigator, I have first-hand experience of the frustration felt when tracing assets internationally. However, blockchain analysis tools allow us to map out fraudulent activity or trace digital assets in minutes and hours compared to weeks and months similar activity takes in the fiat world.
A unique challenge in crypto asset recovery is the speed of potential dissipation of assets and mismanagement of seized digital assets. We’ve seen litigation cases, successfully trace and freeze crypto at a third party exchange, for example, only to lose the asset through inexperience, negligence or in some rare cases, theft and internal fraud.
Specifically, for the regulated sector and asset recovery practitioners, a significant risk comes in the form of IP’s failing to identify potential crypto assets that could be recovered for the benefit of the estate. If it is later proved that they missed potentially available assets they could find themselves facing action from disgruntled creditors.”
Practical Steps – how do you respond if you are victim?
A recovery strategy is only as good as the legal and technical team that is put together. Picking a team that understands what is and is not possible, and that knows the questions to ask and investigate, is key. The faster that team is put together, the better the chance of a positive recovery including without notice and interim orders sought at short notice. Ultimately, each case needs to be considered on its own facts and merits.
Legal teams experienced in this area work with specialist blockchain tracing agencies which are able to interpret blockchain transactions. This is usually the first evidential phase. In some cases, such as those involving NFTs (non-fungible tokens) this may provide adequate evidence of identification and location. In other cases, this evidential phase may identify the entities (or exchanges) which may form the target of document production or freezing orders. When combined with specialist open source intelligence, it is also possible that other targets may be identified.
Nick Furneaux of CSI Tech highlights the extent of this risk:
“Having investigated crimes involving over $21 billion dollars in the past 4 years, we have seen every scam under the sun. Knowledge is always the key to avoiding being a victim of fraud and this includes fraud related to cryptoassets. If you are going to purchase or otherwise invest in cryptocurrencies you need to understand how your asset is protected. Cryptocurrencies are traditionally protected by a private key, this can be a long string of numbers and letters or more often a list of words, 12 or 24 words long. This is a PRIVATE key and the clue is most definitely in the name!
Many attacks are social engineering plays to try and obtain your private key either by just asking for it to ‘authenticate’ you or because they pretend to need it to, so-say, invest your funds or otherwise. Handing over seed words gives attackers access to all the crypto in your wallet, it is akin to giving someone your bank card and pin.
Some keep their funds in an account at a cryptocurrency exchange and this will likely be protected primarily by usernames and passwords. If there is an option to set up multi-factor authentication it is vital to use it. If multi-factor authentication is not available, don’t use the exchange, walk away.
Investment companies that promise to ‘make your crypto work harder’ are almost always scams, support personnel that ask for your seed words are always thieves and hackers are looking for easy targets with unprotected computers or other devices. Do your homework, understand the fundamentals of the technology and hopefully you will not need my services to try and recover your money.”
The risk to victims is a real and increasing one and, therefore, cryptoasset disputes and related investigations will continue to increase in 2022. We expect that Courts in a variety of sophisticated jurisdictions, including England and Wales, will continue to embrace new solutions to what are complex disputes. This is very much emerging area of law. In that regard, 2022 is very much the start!