Having been involved in some of the most recent case law emanating from the English High Court on crypto-currency fraud claims, in Law v Persons Unknown, our Ashley Fairbrother and Fani Gamon take a closer look at the insights from HHJ Pelling KC.
Introduction
In a recent and insightful talk given by His Honour Judge Pelling KC, several interesting common law developments in crypto-currency fraud claims were highlighted. The discussion revolved around the incremental development of English law in response to the novel and evolving realm of crypto assets and commercial activities. This article will delve into the key points raised by HHJ Pelling KC, emphasizing his concluding remarks and the connection to the Law Commission’s proposal for a legal status for crypto assets.
The Development of English Law in Response to Crypto Fraud Claims
Judge Pelling KC commenced his talk by referencing two crucial publications in the field: the Legal Statement on Crypto Assets and Smart Contracts by the UK Jurisdiction Taskforce and Law Commission Paper No 401 on “Smart Legal Contracts – Advice to Government.” These publications served as fundamental references for understanding the fundamentals of smart contracts, blockchain, distributed ledgers, and crypto assets and currencies.
While Paper No 401 primarily focused on claims between parties to smart contracts, the Law Commission concluded that no legislative reform was necessary, and the common law was sufficient to support emerging technologies. Judge Pelling KC expressed the view that a similar approach would likely be taken concerning crypto fraud claims. However, he acknowledged the jurisdictional difficulties faced by victims seeking information from foreign-based exchanges and enforcement of judgments involving offshore jurisdictions.
Law Commission’s Proposal for Crypto Asset Regulation
The Law Commission, on 28 June published its final report titled “Digital Assets,” which serves as the third crucial publication in this field. The report supports the common law as the primary means of resolving crypto claims, acknowledging the relative certainty it offers. However, the report identifies areas of uncertainty that are highly nuanced and complex.
The Law Commission proposes two recommendations for statutory law reform. The first recommendation aims to address the difficulties posed by English law’s definition of property rights. It suggests declaring certain defined crypto assets as capable of giving rise to personal property rights. The second proposal focuses on regulation, supporting the creation of a statutory legal framework that facilitates certain crypto-token and crypto asset collateral arrangements. The Commission emphasizes that this proposal requires a multidisciplinary approach, involving government policy judgments.
Eliminating Uncertainty through Statutory Law
Judge Pelling KC highlighted the importance of statutory law proposals to eliminate the remaining uncertainties. He emphasized however that because of the speed of change that is likely, the common law’s ability to adapt and keep pace with the rapid changes in the crypto space is both unsurprising and realistic. However, he acknowledged the significant task it poses for the judiciary.
To address this challenge, the Law Commission proposes the creation of a panel consisting of industry-specific technical experts, legal practitioners, academics, and judges. This panel would provide non-binding guidance on complex factual and legal issues related to control over digital assets. The rationale behind this approach is to ensure consistent and informed decision-making in the evolving crypto landscape.
Developments
Judge Pelling KC summarised the developments in the last year following the Tulip v Van der Laan[1] decision in terms of service of the proceedings out of the jurisdiction and the residence test. For NFT’s he referred to Osbourne v PU where the key point to emerge was that it is at least realistically arguable that a Non Fungible Token should be treated as property as a matter of English law and that the most potent cause of action will be a proprietary claim as a result.
On whether an exchange can have any substantive liability for losses suffered by a victim of fraud, Piroozzadeh v PU[2] suggests that as predicted by the Commission the common law has responded to the requirement “in favour of the recognition and development of a common law special defence of good faith purchaser for value without notice applicable to crypto-tokens”[3]
And on service by alternative means (CPR r 6.15) it is now recognised that service by NFT will be authorised in appropriate circumstances[4].
Concluding Remarks
Judge Pelling KC concluded his talk by expressing confidence that most industry players will continue to engage with the English jurisdiction due to its fair, proportionate, and predictable responses. He emphasized that adopting the Law Commission’s statutory law proposals regarding the legal status of crypto assets would eliminate the remaining uncertainties.
The talk underscored the incremental development of English law in response to the unique challenges posed by crypto-currency fraud claims. By acknowledging the need for a comprehensive legal framework and embracing the expertise of industry specialists, judges, and legal practitioners, English law aims to provide effective remedies and ensure a fair and predictable environment for crypto-related disputes.
As the crypto space continues to evolve, the ongoing collaboration between legal experts, industry participants, and policymakers will play a vital role in shaping the legal landscape and facilitating the growth of this emerging sector.
Ashley Fairbrother and Fani Gamon
[1] [2023] EWCA Civ 83; [2023] 4 WLR 16
[2] [2023] EWHC 1024 (ch)
[3] 2.78 Law Commission Report: Digital Assets: Foma; report 27 June 2023
[4] D’Aloia v Persons Unknown [2022] EWHC 1723 (Ch) and Osbourne v PU (ibid)
