Digital assets continue to attract mainstream attention. A reader does not have to delve deep into specialist trade press or forums to find a story on one or more of the following:
• The market, i.e., the price of cryptocurrency moving up or down;
• Ransomware and payments being made in cryptocurrency;
• Non-fungible tokens, or NFTs, including the values at which they are being bought or sold; or
• The success or failure of certain projects, e.g., where a token has collapsed.
Organizations in a range of sectors are more likely than ever to come across digital assets in the running of their day-to-day businesses. The same can be said for lawyers, particularly those who focus on litigation or regulatory work.
Reflecting on a selection of cases that have come before the English courts in the last 12 months gives insight into what this means for 2022 and beyond in disputes of this nature.
Where Did It All Start?
It has been some time since the U.K. Jurisdiction Taskforce issued its consultation paper in 2019 on the legal status of crypto-assets, distributed ledger technology and smart contracts.
This was followed by AA v. Persons Unknown in 2019,[1] where the applicants sought, among other things, a proprietary injunction and associated disclosure orders to trace and secure a ransom payment made in bitcoin.
The decision referred to the task force's paper and clarified that bitcoin, and in principle other cryptocurrencies, could be considered property as a matter of English law, which was important for victims of fraud who may need to seek injunctive relief.
Since then, there have been several decisions concerning a variety of digital asset related issues. Four cases are considered below.
Fetch.AI Ltd v. Persons Unknown
In the 2021 case of Fetch.AI Ltd & Anor v. Persons Unknown Category A & Ors, fraudsters obtained access to the Binance trading account maintained by Fetch.ai Ltd., an English registered company, and emptied the account by entering into various trades at an undervalue resulting in losses in excess of $2.6 million.[2]
The claimants' application sought a proprietary injunction, worldwide freezing order and ancillary information disclosure.
The High Court of England and Wales granted these orders and in an ex tempore judgment commented that the relevant cryptocurrencies were 'choses in action' and could be regarded as property.
The court held that the lex situs of the crypto-assets was England on the basis that England is the place where the person or company who owns it is domiciled, given that the first claimant was a registered company in England.
Lavinia Deborah Osbourne v. (1) Persons Unknown (2) Ozone Networks Inc.
Lavinia Deborah Osbourne v. (1) Persons Unknown (2) Ozone Networks Inc. Trading as Opensea is a landmark decision of the High Court, made earlier this year, recognizing, for the first time, that NFTs are property as a matter of English law, which may be subject to a proprietary freezing injunction in the same manner as cryptocurrency.[3]
The stolen NFTs were various tokens representing digital works of art, which were unlawfully transferred away from the claimant's control.
The court held that the NFTs are to be treated as being held by the claimant in England on the basis that the lex situs of the crypto-asset is the place where the person who owns it is domiciled.
On this and other grounds, the court held that England had jurisdiction over the dispute and granted a proprietary freezing order restraining the dissipation of nonfungible assets alleged to have been stolen from a crypto-asset account maintained by the claimant.
Second, the court granted an order against Ozone requiring it to provide information enabling the claimant to trace or identify the persons who control the wallets to which the NFTs were transferred.
Wang v. Darby
This 2021 case was fundamentally a dispute between two individuals about two contracts entered into, whereby Zi Wang transferred 200,000 tezos — XTZ — tokens on two occasions to Graham Darby in return for 13 bitcoin and 17 bitcoin respectively, but subject to an arrangement that they would each transfer the same values back to each other after an agreed period of two years.
Wang and Darby disagreed about the true characterization of the XTZ transferred by Wang, and the nature of the transfer/sale back after the agreed period of time.
This decision is ultimately important because it addressed the issue of whether or not cryptocurrency, being classified as property, could be the subject of a trust and gave a helpful analysis of the relevant factual detail from the case.[4]
We expect that there will be other similar cases of this nature where the informality of the parties' dealings will need to be carefully considered.
Tulip Trading Ltd. v. Bitcoin Association
The case of Tulip Trading Limited v. Bitcoin Association for BSV and Others earlier this year is one of the largest digital asset-related cases that has recently come before the English courts.[5]
In brief, Tulip Trading Ltd. pursued a claim at circa $4.5 billion against the core developers and/or controllers of software of certain bitcoin networks.
Tulip contended that it was the victim of a hack that resulted in the removal of private keys that allowed it to control a substantial amount of cryptocurrencies. Tulip considered that the developers essentially controlled the digital asset networks and could assist Tulip's recovery of the misappropriated assets.
There are two important strands to this case and the judgments determined so far: (1) security for costs and (2) jurisdiction.
Tulip offered, by way of security for costs, to transfer to the defendants' solicitors the value of security ordered plus a 10% buffer in digital assets.
The court determined that security in this form would not give genuine protection to the defendants in the form of a payment into court or a bank guarantee, and would:
Expose them to a risk to which they would not be exposed with the usual forms of security: namely of a fall in the value of bitcoin, which could result in their security being effectively valueless.
It seems likely that the court has shut the door on digital assets being utilized as a form of security. In that regard, it would have to be, in our view, a very specific scenario where appropriate safeguards were wrapped around that kind of offer to remove the risk to the defendants.
In addition, several of the defendants challenged the English court's jurisdiction to hear the claim. The defendants maintained that the requisite thresholds for obtaining permission to serve proceedings out of the jurisdiction were not met.
The defendants contested the merits of the claim, and whether there was a good, arguable case that the claim fell into one of the relevant gateways for service out.
The case raised very interesting questions about the extent to which the defendants, as developers of the digital asset networks, could owe, for example, fiduciary duties or otherwise to not just Tulip but a wider class of holders of digital assets.
What Does All of This Mean?
The law is developing in this jurisdiction and others, and the paths to freeze, trace and recover digital assets are becoming well-trodden. This does not just benefit victims of fraud, who are the obvious beneficiaries of these decisions, but also organizations that deal with digital assets more generally.
Not all disputes involving digital assets stem from fraud; some will relate purely to other causes of action not founded in fraud — such as breach of contract or negligence, or the digital asset aspect will be indirect.
It is important, therefore, to reflect on what the above cases mean for digital asset disputes:
The use of expert evidence in the form of blockchain tracing reports has increased considerably and there are recognized paths and strategies to follow;
• The courts will continue to assess in detail the precise contractual and noncontractual dealings between the parties in the context of a digital asset claim, however informal, which tends to be a theme in matters of this nature;
• The courts are willing to assist victims with the securing of disclosure of information from exchanges and third parties out of the jurisdiction; and
• There is some certainty around the governing law and jurisdiction for claims brought before the English court and that involve the theft of digital assets.
We are of course mindful that some of the decisions in this area are first instance decisions and/or in the course of injunctive proceedings. However, our view is that this should not detract from the weight that can be placed on them and the judicial consideration which has been given so far.
Closing Thoughts — What Next?
The area continues to develop, and we expect that there will be more innovation from legal advisers and the courts to address new and emerging disputes, e.g., those around complex decentralized finance projects. We expect the following themes to become more apparent in over the next year and beyond:
• Claims arising out of the financing of litigation through token offerings, in what is known as an initial litigation offering;
• Claims against exchanges arising out of the extent of anti-money laundering or know-your-customer checks on the accounts that they operate — whether in negligence, breach of contract, dishonest assistance or otherwise;
• Claims against exchanges or brokers arising out of the execution of leveraged or derivative trades;
• Claims between a victim of fraud and bona fide purchaser of misappropriated cryptocurrency;
• Claims between business owners, directors or partners arising from the storage or control of private keys; and
• Large group claims following the collapse of tokens or digital asset projects;
It is clear that what we have seen is an important step in the right direction, but there is still more to come.
This is very much the start, and we expect that a reflection on the position in a year's time will identify even more areas for consideration.
References
[1] [2019] EWHC 2254 (Comm).
[2] [2021] EWHC 2254 (Comm) (15 July 2021).
[3] Unreported, 10 March 2022.
[4] [2021] EWHC 3054 (Comm).
[5] [2022] EWHC 141 (Ch) and [2022] EWHC 667 (Ch).
Reprinted with permission of Law360.
