Cryptoasset fraud: innovations in digital asset recovery

The precipitous increase in ransomware attacks and other forms of cryptoasset fraud perpetrated against individuals and businesses has led to an increasingly innovative approach by those victims seeking redress before the English courts. In Law v Persons Unknown & Others, the High Court granted ancillary relief in support of a post-judgment freezing order to enable digital assets to be converted to fiat currency and transferred to the Court Funds Office (CFO) (London Circuit Commercial Court, 26 January 2023, recently made available).

Law represents a further example of the English courts’ flexible approach to developing its legal remedies to assist victims of cryptoasset fraud. It will be of interest to individuals and businesses who seek to enforce English judgments obtained in respect of misappropriated digital assets.

Emerging case law

Under English law, there is an emerging body of case law concerning digital assets, albeit the relevant principles have developed primarily as a result of interim applications rather than in judgments following contested trials.

Nevertheless, since AA v Persons Unknown, where the High Court found that there was a good arguable case that cryptoassets constitute “property” for the purposes of English law, victims of cryptoasset fraud have been able to seek to preserve their proprietary rights in misappropriated digital assets by means of proprietary injunctions and worldwide freezing orders in appropriate circumstances ([2019] EWHC 3556 (Comm)).

It is not uncommon for victims of cryptoasset fraud to subsequently obtain judgments against the unknown fraudsters with appropriate post-judgment relief. There are, however, inherent difficulties in enforcing these English court judgments in respect of digital assets, particularly where those assets are distributed internationally and may have been deposited with crypto exchanges and other third parties.

The nature of the fraud

The claimant, Mr Law, was the victim of an elaborate fraud whereby he was induced by various unknown individuals who claimed to be employees of a non-existent crypto trading company, Crypto-Dock, to transfer significant digital assets which were then unlawfully misappropriated. It was represented to Mr Law that Crypto-Dock was authorised and regulated by the Financial Conduct Authority, which transpired to be false.

The fraud was discovered when Mr Law attempted to withdraw the alleged profits that he had made on the Crypto-Dock platform and he was met by the now familiar response of fraudsters in such circumstances, that the withdrawal could not take place until further payments were made. Mr Law’s suspicions grew and he instructed solicitors, which led to the scam being exposed.

Investigation and interim applications

Following the discovery of the scam, an investigation was undertaken while the broader fraud appeared to still be ongoing. This presented an opportunity to potentially freeze accounts immediately credited with the proceeds of the fraud under the control of the perpetrators.

With the assistance of forensic blockchain expertise, the traceable proceeds of Mr Law’s 3.54 Bitcoin were traced to deposit addresses on the public Bitcoin blockchain that corresponded to various global cryptocurrency exchanges. In addition, it was possible to identify further transfers from the cluster of blockchain addresses associated with the Crypto-Dock fraudsters that were linked to the same deposit addresses.

On 18 March 2022, Mr Law obtained interim relief, including a proprietary injunction and a worldwide freezing order against various categories of persons unknown. In addition, he sought and obtained Bankers Trust orders requiring various cryptocurrency exchanges to provide information on the identities of wallet holders where some of his traceable misappropriated assets had been credited. The relevant wallet holders were subsequently made subject to the same interim relief, which was continued by court order on 13 April 2022.

Importantly, and unlike other recent cases such as D’Aloia v Persons Unknown, Mr Law did not bring any substantive causes of action against the cryptocurrency exchanges where the traceable proceeds of the fraud had been deposited ([2022] EWHC 1723 (Ch); The relevant exchanges complied with the court orders and provided the requisite information and assistance throughout.

On 17 June 2022, Mr Law obtained judgment against two of the identified wallet holders where the traceable proceeds of his misappropriated assets had been credited. At the same time, he obtained a post-judgment freezing order. However, despite repeated efforts, the judgment remained unsatisfied.

Accordingly, on 18 January 2023, Mr Law issued an application against the two relevant judgment debtors to aid enforcement by seeking an order to require the delivery up of cryptoassets that were subject to the proprietary injunction, relying on Jones v Persons Unknown ([2022] EWHC 2543; Mr Law also sought ancillary relief to require other cryptoassets, which represented misappropriated funds mixed with his misappropriated traceable assets, that were subject to the post-judgment freezing order to be transferred to the CFO to enable a subsequent application to be made under Civil Procedure Rule (CPR) 72.10 (see box “CPR 72.10”).

Order for delivery up

The court ordered the delivery up of certain cryptoassets that were subject to the proprietary injunction and also granted the ancillary relief requiring the conversion of the other specified cryptoassets into fiat sterling currency and its subsequent transfer to the CFO. Citing commentary in Gee on Commercial Injunctions (7th Edition, Chapter 23, section 5) and CBS UK Ltd v Lambert, the court considered its broad powers to grant ancillary relief under section 37 of the Senior Courts Act 1981 in respect of interim and post-judgment freezing orders ([1983] Ch 37).

Ultimately, the court was satisfied that the order proposed was the appropriate one in the circumstances, requiring the cryptocurrency held in the relevant account be converted to fiat currency by one of two routes and then for the converted currency in sterling to be paid to the CFO, which was less complex than ordering the funds to be held in escrow by Mr Law’s solicitors.

In granting the relief, the court specifically emphasised the strong public policy of English law to enforce judgments entered by the courts in favour of claimants. Appropriate undertakings were also provided to the court.

As an alternative to the relief granted, the court considered appointing a receiver. However, this was rejected because the effect would simply be to further erode the sums available for execution of the judgments obtained by Mr Law, due to the receiver’s professional fees.

The conversion of the digital assets to sterling and their transfer to the CFO under the order meant that Mr Law was able to make a subsequent successful application under CPR 72.10 for the court to release the funds to him to satisfy the judgment he had obtained against the fraudsters.

The key takeaways

The implications of this judgment are significant because it represents a further example of the willingness of the English courts to adapt existing legal remedies to address the unique challenges posed digital assets in the context of enforcement. Specifically, the ancillary relief granted in support of the post-judgment freezing order facilitated reliance on CPR 72.10 to assist enforcement of the judgment. An application under this provision provides a mechanism by which substantial judgments obtained against cryptoasset fraudsters can, in certain circumstances, be more readily satisfied than was previously thought.

Ashley Fairbrother is a partner at Edmonds Marshall McMahon Solicitors, and Darragh Connell is a barrister at Maitland Chambers. Edmonds Marshall McMahon and Darragh Connell acted for the claimant.

CPR 72.10

Civil Procedure Rule 72.10 provides that:

(1) If money is standing to the credit of the judgment debtor in court:

(a) the judgment creditor may not apply for a third party debt order in respect of that money; but

(b) he may apply for an order that the money in court, or so much of it as is sufficient to satisfy the judgment or order and the costs of the application, be paid to him.

This article first appeared in the June 2023 issue of PLC Magazine and can be accessed via the following link: