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UK courts combat rise in cryptocurrency fraud

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Chrysanthos Christoforou of Elias Neocleous discusses recent cases in which the UK courts have shown great flexibility and willingness to assist victims to trace and freeze their stolen crypto-assets

‘Cryptos’ are one of the hottest topics in the financial markets sector. At its simplest, cryptocurrency is any form of currency that exists digitally or virtually and uses cryptography (instead of the ordinary banking system) to secure transactions. Instead of being physical money carried around and exchanged in the real world, cryptocurrency payments exist purely as digital entries in an online database describing specific transactions.

It has been reported that cryptocurrency transactions exceeded $14 trillion in trading volume in 2021, which represents a 689% increase compared to 2020 trading volumes. The non-fungible token (NFT) market alone reached an estimated $22 billion last year. These figures and the rate of growth almost defy belief.

Nevertheless, there has been much debate about the level of security and safety of cryptocurrency transactions in recent years. The massive growth in cryptocurrency transactions in general has been accompanied by a significant growth in cryptocurrency-related fraud. In fact, the courts of various jurisdictions have been called upon to deal with urgent ‘cryptocurrency fraud’ cases. Cryptocurrency fraud comes in many forms, the most common being theft as a result of cyber hacking or the launching of fake cryptocurrency investment schemes.

In the UK, the Financial Conduct Authority (FCA) and the Police have warned of the prevalence of crypto scams and, in fact, there have been several instances in recent years where the English Courts have been called upon to freeze stolen crypto-assets.

The purpose of this article is to discuss very briefly some notable court cases involving cryptocurrency fraud, and to outline the available remedies and the role of the courts involved.

High Court of Justice: AA v. People Unknown [2019]

The significance of this case, EWHC 3556 (Comm), is that it was decided for the first time that cryptocurrency is a form of ‘property’ and hence amenable to injunctive relief.

In October 2019, cybercriminals hacked into the computer system of a Canadian insurance company and installed malware. The malware encrypted the system, preventing anyone but the hackers from accessing it. The hackers then offered decryption software to the insurance company in exchange for a ransom in Bitcoins of close to $1 million. The insurance company paid the ransom but was able to trace the Bitcoins using specialist software.

The judge in reaching his decision had to consider whether Bitcoin constitutes ‘property’ that could be the subject of a proprietary injunction. The judge adopted the analysis of the UK Jurisdictional Taskforce (UKJT) in its Legal Statement on Cryptoassets and Smart Contracts, and noted that, although Bitcoin and other cryptocurrencies are not tangible, they can still be treated as property and therefore granted the injunction. The same approach was taken by the UK court in Ion Science v. Persons Unknown [2020] and Wang v Darby [2021] and is reflected in the New Zealand High Court judgment in Ruscoe v. Cryptopia Ltd [2020].

High Court of Justice: NFTs / The Lavinia Deborah Osbourne case [2022]

The significance of this case, EWHC 1021 (Comm), is that NFTs were recognised for the first time as property that could be subject to injunctive relief, like any other category of crypto-assets. This case arose in early 2022 when Ms Osbourne discovered that two NFTs, representing digital artworks, had been taken from her digital wallet. Investigations led to Ms Osbourne applying to the UK courts for an urgent freezing injunction, as well as disclosure and tracing orders in order to identify the persons who controlled the wallets to which the NFTs had been transferred. As with almost all cryptocurrency fraud cases, Ms Osbourne had no knowledge of where the fraudsters were located.

The judge followed previous cases relating to other types of crypto-assets and held that NFTs should be treated as property and as located at the place where the owner is domiciled, which in this case was the UK. In granting the application, the judge ordered the respondent to disclose the name, address, email address and other contact details available for those in whose name the relevant wallets were held, or details of their ultimate beneficial owners.

Final thoughts

To this date, the UK courts have shown remarkable reflexes, and great willingness, in assisting victims to trace and freeze their stolen crypto-assets by granting freezing injunctions as well as tracing orders without notice. As regards the issue of jurisdiction, the courts seem to have taken the approach that jurisdiction lies in the territory where the owner of the crypto assets is situated (lex situs). This is of great importance given that the fraudsters could be located anywhere in the world.

Although the legal landscape of cryptocurrency disputes is evolving rapidly, it could be argued that the approach taken is that all types of claims and relief traditionally available under the law in the context of fraud and asset recovery are also available in cases involving cryptocurrency and digital assets.

There are currently no reported cases concerning cryptocurrency fraud in Cyprus, where Elias Neocleous & Co LLC is based, but a few cases have been filed and some may lead to judgments being issued soon. It is anticipated that the Cyprus courts will treat such cases in the exact same way as the UK courts have.

Despite the above, given that the fraudsters have the ability to implement quite sophisticated fraudulent schemes and are usually hiding behind fake profiles or stolen IDs, victims are advised to consult their legal advisors as soon as they find out that they have been defrauded. This will allow them to pursue their claims and seek urgent injunctive relief without delay from the competent courts in order to preserve the stolen assets and improve the prospects of recovering them.