The High Court has once again grappled with novel issues raised by crypto asset-related disputes, this time in the context of a provisional request for information orders.^[1]

The claimant (“LMN”), a company incorporated in England and Wales and operator of a cryptocurrency exchange, allegedly lost millions of dollars worth of cryptocurrency during a hacker attack.

After conducting a comprehensive tracing exercise, LMN discovered that some funds had passed through wallets owned and operated by the defendant cryptocurrency exchanges. The consequence of this was twofold:

• Such addresses typically had pooled assets from numerous clients. Assets were only attributed to “off-chain” customers (ie in private internal databases). As such, once assets arrived at an exchange address, they could not be traced further without additional information from the relevant exchange.
• Each of the defendant exchanges was understood to apply regulatory due diligence to their clients, such that they knew the identity of the persons controlling the accounts receiving the relevant assets.

Having had little success going after suspected wrongdoers for over two years with the help of UK crime agencies, LMN brought a lawsuit in Commercial Court against the defendant exchanges seeking information warrants in order to initiate proceedings to the recovery of the alleged embezzled crypto assets. LMN also requested permission to serve the application on the out-of-jurisdiction defendants.

The English Court may make an order requiring third parties to disclose certain information on your behalf Norwich Pharmacal Y Bankers confidence jurisdictions Norwich Pharmacal the orders require disclosure by a third party who is allegedly innocently “involved” in the wrongful act and has information that would allow the plaintiff to identify the offender. Bankers confidence the orders require the disclosure of information by third parties (including confidential customer information) that may allow the claimant to establish the whereabouts of their misappropriated assets and/or prevent the disposition of such assets.

The case again highlights the willingness of the English Court to apply English procedural mechanisms (in this case, in relation to service and pre-action information collection) to novel situations raised by cryptocurrency fraud. In particular, it indicates that the decentralized and cross-border nature of cryptocurrencies and their misappropriation may justify the “exceptional” use of the Bankers confidence me Norwich Pharmacal jurisdictions to obtain information about the misappropriation of cryptocurrencies from foreign defendants to assist in the recovery of such assets. It also shows the utility of the recently introduced reporting portal in English Court Practice Direction 6B in overcoming jurisdictional issues that have historically been a barrier to seeking reporting orders against parties in other jurisdictions and/or unknown persons, who are common features. of cryptocurrency disputes.

Out of service

English courts exercise jurisdiction over parties who are properly served notice of proceedings, and therefore claimants must generally seek the court’s permission before bringing a claim to parties outside the UK (colloquially known as ” notification”). Considering LMN’s request for such a permit in this case, the Tribunal noted that LMN had to show that (a) there was a good contentious case on the merits, (b) the claim was within one of the “gates of jurisdictional entry” under Practice Direction 6B 3.1 and (c) England and Wales was the proper forum for the claim.

good debatable case

There was a good arguable case that the relevant assets were, at the time of the hack,
“located” in England and Wales, being the place where LMN resided and conducted business. That was the case despite the fact that the servers on which the assets were technically located were in Romania, something the court described as simply an “accidental circumstance”.

Thus, there was a moot good case that the alleged damage occurred within the jurisdiction, either because it was in England that the assets were taken or because LMN, as an English company, suffered loss and damage within England. Applying the Rome II Rules, the Court therefore proceeded on the basis that English law applied to the dispute.

Therefore, considering each of the relevant requirements for banker confidence reparation, the Court found, among other things, that:

• There were good reasons to conclude that the assets belonged to LMN;
• There was a real possibility that the information requested would lead to the location or preservation of said assets; Y
• LMN’s interests in obtaining the information were not outweighed by the possible harm to the defendants in complying with the order.

Regarding the first of these requirements in particular, there was a good debatable case that:

• Cryptocurrencies are a form of ownership, depending on the position taken in AA c. unknown people^[2] and the UK Jurisdiction Task Force Legal Statement.
• When cryptocurrency was obtained through fraud, equity placed constructive trust on the assets. This had been the case in relation to other forms of intangible property even though they were neither things in possession nor things in action.^[3]
• While there was an argument that each transfer of cryptocurrency on the blockchain created a new asset in the hands of the acquirer, this did not prevent cryptocurrencies from being tracked (on the basis that there was relevant substitution).

The Court further considered that, as there was no doubt that the defendants were “confounded” in the alleged fraud (although they were not themselves suspected of wrongdoing) and, having met the requirements for Bankers confidence relief, there was also a good moot case that Norwich Pharmacal relief must also be granted.

relevant gateway

The Court held that the claim “clearly” fell within the new gateway (25), which applies to claims for disclosure of information about a defendant’s true identity and/or what has become of relevant assets.

The portal, introduced this year, only applies where information is requested for the purposes of English proceedings that may be brought in the jurisdiction or that the claimant might bring outside the jurisdiction. In this regard, however, the Court accepted that there was a moot good case that any subsequent claims against the hackers would fall within the gateways (11) (regarding claims to property within the jurisdiction) and/or ( regarding claims on constructive trusts) (15). ).

suitable forum

The Court concluded that England and Wales appeared to be the appropriate forum for action, listing a number of relevant factors, namely: LMN is an English company, there were good reasons to believe that the location of the assets was in England, relevant documents they were in England and the law of England and Wales could at least be said to govern LMN’s claim of ownership.

information requests

The Court noted that there was an argument that information orders against foreign parties constituted a violation of the sovereignty of the relevant foreign jurisdiction and therefore should be granted only in exceptional circumstances. However, the Court questioned the force of this argument when the actual location of the relevant documents was unknown and (to the extent that they were electronic), largely irrelevant. The lawsuit concerned fraud and pursuit of property, so it was “exceptional” in any case.

Since the defendants did not raise any other substantive objections to the order of Bankers confidence and since there was a good arguable claim for such relief (in the context of the notice), the Tribunal was satisfied that the Claimant had a good claim for relief. Bankers confidence and granted the information orders requested by the Claimant.

Comment

LMN vs. Bitflyer indicates that, in general, English courts can take a sympathetic view of claimants seeking to recover misappropriated crypto assets, including through the granting of information orders.

It also suggests that courts are taking an increasingly consistent approach to certain issues that arise from such assets. It reaffirms, for example, that cryptocurrencies are a form of property.

Court powers to award services outside of jurisdiction, including to unknown persons, and orders requiring pre-action disclosure of confidential information by third parties are particularly important tools in a cryptographic context, given the ability of the criminal to going off-chain when transferring assets through an exchange. The confidential nature of the assets in question also means that such exchanges may be one of the only means available to claimants to identify those who committed fraud. For these reasons, we can probably expect to see more use of this powerful remedy in similar cases in the future.

It should be noted that, when determining the location of the crypto assets, the Court considered that the domicile of the owner of the assets was much more important than the location of the servers on which they were technically represented. This is consistent with other recent English case law on crypto assets and may be important in establishing a trend in determining the lex situs of particular assets in future cases.

The Court left open a series of questions, among them:

• If LMN was correct that cryptocurrency exchanges held assets in their own name (rather than trusts for their clients) and simply had a personal obligation to refund relevant amounts to each client (analogous to bank deposits). This is a question that has much broader implications for practitioners in other contexts, such as insolvency, but the court did not address whether LMN’s position was correct.
• The basis on which it considered that the defendants were “confounded” in the fraud, for the purposes of Norwich Pharmacal relief (that is, whether this was a consequence of their role as exchanges, as operators of the relevant wallets, or both). This may have implications for the circumstances in which Norwich Pharmacal Y Bankers confidence relief may be available against other entities operating in the cryptocurrency market in the future.

Finally, information orders have historically faced challenges when parties need to request permission to serve out of jurisdiction. However, the decision shows the effectiveness of the new information portal, which was introduced in October 2022, and should make it easier for alleged claimants to obtain orders against parties outside the UK and unknown parties, as is often necessary in cryptocurrency cases.

Footnotes

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