Navigating the Labyrinth: Cryptocurrency Enforcement
The hype surrounding cryptoassets has led to an explosion in cryptocurrency-related frauds. This new and fast-evolving frontier of fraud gives rise to various novel legal issues, due to the nature of cryptocurrencies.
This article will briefly explain how cryptocurrencies work, then discuss how courts have dealt with the novel issues posed by cryptocurrencies in fraud investigations and recovery, including the following:
- Is cryptocurrency property?
- Where are cryptoassets domiciled?
- Can interim injunctions be granted against persons unknown?
- How to identify the fraudsters?
- How to serve court documents against unknown fraudsters?
Cryptocurrencies are unregulated, anonymous, international and technically arcane. They also promise astronomical returns and enjoy significant hype. These factors have led to an explosion in cryptocurrency-related frauds. In the US alone in 2021, the Federal Trade Commission saw a sixty-fold increase in reported losses to cryptocurrency-related scams compared to 2018.1Reports show scammers cashing in on crypto craze, <https://www.ftc.gov/news-events/data-visualizations/data-spotlight/2022/06/reports-show-scammers-cashing-crypto-craze#crypto1> (accessed on 12 September 2022) This new and fast-evolving frontier of fraud gives rise to various novel legal issues, due to the nature of cryptocurrencies.
This article will briefly explain how cryptocurrencies work, then discuss how courts have dealt with the novel issues posed by cryptocurrencies in fraud investigations and recovery. These issues fall under the following heads:
- The legal nature of cryptocurrencies – Are they property?
- Cross-jurisdictional claims – Where is my crypto?
- Interim injunctions – Can they be granted against persons unknown?
- Unmasking the culprits – How to identify the fraudsters?
- Service – How to serve court documents against unknown fraudsters?
How Do Cryptocurrencies Work?
Cryptocurrency assets are based on blockchain technology. Briefly, a blockchain is a public ledger containing a list of transactions. These transactions are stored and shared on a distributed public network of computers, which also act as authenticators for transactions to prevent double spending of the currency. This ledger records every single authenticated transaction ever made on the network, which provides everyone with an accurate archive of transactions, no matter when they were made.2Bitcoin: A Peer-To-Peer Electronic Cash System, <https://bitcoin.org/bitcoin.pdf> (October 2008)
However, blockchains only store wallet addresses and the amounts transacted – they do not give any information on the owner of the wallet, or if the wallets can still even be accessed at all. Indeed, cryptocurrencies are “tailor-made to resist control by external authorities”.3Andrew W. Balthazor, “The Challenges of Cryptocurrency Asset Recovery” (2019) Volume 13(6) FIU Law Review at p 1208-1235 This anonymity makes cryptocurrencies much more attractive to fraudsters, compared to other electronic means of sending large amounts of money internationally (such as the SWIFT system). They also pose unique legal challenges.
The Legal Nature of Crypto Assets – Are They Property?
Many of the usual tools in a fraud litigator’s toolkit require that the subject matter of the action be considered “property”. These include causes of action (e.g. constructive trust), discovery processes (e.g. Bankers’ Trust Orders) and protective reliefs (e.g. proprietary injunctions). Proprietary claims also enjoy certain advantages, such as the ability to claim for gains in value of the property, and priority over other creditors of the defendant.
Given the way that cryptocurrencies work, can they be considered property?
Across common law jurisdictions, a growing consensus appears to be, “yes”. In the Hong Kong case of Nico Samara v Stive Dan4Nico Constantijn Antonius Samara v Stive Jean Paul Dan (2019) HKCFI 2718 and the Canadian case of Shair.Com v Arnold,5Shair.Com Global Digital Services Ltd. v. Arnold 2018 BCSC 1512 the courts implicitly recognised cryptoassets as property by granting proprietary injunctions (or the Canadian equivalent, preservation orders) over them. More substantially, in the landmark decision in Ruscoe v Cryptopia Limited,6Ruscoe v Cryptopia Ltd (in liq) (2020) 2 NZLR 809 the New Zealand High Court comprehensively considered the issue. It ruled that cryptocurrencies met the four Ainsworth7National Provincial Bank Ltd v Ainsworth (1965) AC 1175 criteria (definable, identifiable by third parties, capable of assumption by third parties, and has some degree of stability), and could be considered property.
In CLM v CLN,8CLM v CLN (2022) SGHC 46 the Singapore High Court adopted the reasoning in Ruscoe v Cryptopia Limited. As such, Singapore joins the growing list of jurisdictions which recognise cryptocurrency as property.
Cross-Jurisdictional Claims – Where is My Crypto?
Another issue concerns the location of cryptocurrency, which has implications on a court’s jurisdiction over cryptocurrency claims. After all, cryptocurrencies are not physically “stored” anywhere. The amount of cryptocurrency in one’s cryptocurrency wallet is stored as a balance on the blockchain, which is in turn a public ledger distributed across a network of computers around the world. And a cryptocurrency wallet is not a physical pouch of cash or store of value, but rather a set of cryptographic keys which allows one to receive and send tokens which are recorded on this public ledger.
Where then, is one’s cryptocurrency located in the eyes of the law?
In the recent case of Ion Science Ltd v Persons Unknown,9Ion Science Ltd v Persons Unknown and others (unreported), 21 December 2020 (Commercial Court) the English High Court held that the lex situs of a cryptoasset is the place where the person or company who owned it is domiciled, thereby allowing the Court to hear, try and grant orders in that case.
There is much to commend in this approach to cutting the Gordian knot. Given the Singapore Courts’ forward-looking and pragmatic judgment in CLM v CLN, it would not be surprising if it takes a similar approach to the lex situs of a cryptoasset, should the issue come before our courts.
Interim Injunctions – Can They Be Granted Against Persons Unknown?
Another problem posed by cryptocurrencies in fraud is anonymity. Injunctions are typically binding on persons, and the remedy for breach of an injunction is committal proceedings against the contemnor. Can courts grant injunctions against a cryptocurrency fraudster, when all one knows is the fraudster’s cryptocurrency wallet address?
The UK first recognised the jurisdiction to grant orders against persons unknown in Bloomsbury Publishing v News Group10Bloomsbury Publishing Group Ltd and another v News Group Newspapers Ltd and others (2003) 1 WLR 1633, where the subjects of one of the injunctions granted were unknown individuals who sold unauthorised Harry Potter memorabilia in breach of the plaintiff’s proprietary right to sell authorised memorabilia. This jurisdiction to grant injunctions against persons unknown was applied in the cryptocurrency context against unknown fraudsters in the Malaysian case of Zschimmer v Persons Unknown.
Both of these cases were adopted by the Singapore High Court in CLM v CLN11CLM v CLN at (24) and (27), which held that it had jurisdiction to grant interim orders against persons unknown, as long as the description used was sufficiently certain as to identify both those who are included and those who are not.12CLM v CLN at (31) and (35) In that case, the persons unknown were described by their connection to the fraud.
Unmasking the Culprits – How to Identify the Fraudsters?
Although interim injunctions can be served against persons unknown, this is of limited utility if those assets have been dissipated. It would therefore be best if the fraudsters can be unmasked, so they may be pursued wherever they may be. How can these fraudsters be identified?
Traditionally, fraud litigators could seek a Norwich Pharmacal Order13Norwich Pharmacal Co. v. Customs and Excise Commissioners (1974) A.C. 133 against financial institutions or intermediaries which may be innocent, but which were “mixed up” in the wrongdoing, to disclose the assets in the account, the identity of those responsible for their disposal, and documents and correspondence related to such disposal. Alternatively, they could apply for the related but distinct Bankers Trust Order,14Bankers trust Co v. Shapiro (1980) 1 WLR 1275 which grants similar disclosure, but which is based instead on the right to trace and follow assets flowing from a proprietary claim.15Singapore, National university of Singapore, Centre for Banking & Finance Law, Faculty of Law, Banking Secrecy in Singapore and Its Impact on Pre-Action Asset Tracing (Working Paper , 29 December 2016) at footnote 56
The financial intermediary in question for most cryptocurrency frauds would be crypto exchanges, through which most cryptocurrency trades pass. The problem is that cryptocurrency exchanges are oftentimes overseas. It is accepted that, due to its juridical basis as an exercise of sovereign authority, Norwich Pharmacal Orders were historically not allowed to be served on entities outside of jurisdiction.16MacKinnon v Donaldson Lufkin and Jenrette Securities Corporation (1986) Ch 482 at p 498
And although the Court in MacKinnon v Donaldson, Lufkin17MacKinnon v Donaldson Lufkin and Jenrette Securities Corporation (1986) Ch 482 at p 498 stated in obiter that Bankers Trust Orders could, in principle, be served out jurisdiction in very exceptional circumstances, it was not clear whether cases of cryptocurrency fraud would meet this theoretical threshold.
In the UK, the answer came in the English High Court case of Ion Science Ltd v Persons Unknown.18Ion Science Ltd v Persons Unknown and others (unreported), 21 December 2020 (Commercial Court) Citing MacKinnon v Donaldson, Lufkin, the Court granted a free-standing Bankers Trust Order against a cryptocurrency exchange which was situated out of jurisdiction.
This was no fluke. In Lavinia Deborah Osbourne v Ozone,19Lavinia Deborah Osbourne v (1) Persons Unknown (2) Ozone (2022) EWHC 1021 (Comm) the English High Court similarly granted a Bankers Trust Order against a non-fungible token (NFT) marketplace located outside of jurisdiction. And in Fetch.ai Ltd v Persons Unknown Category A,20Fetch.ai Ltd and another v Persons Unknown Category A and others (2021) EWHC 2254 (Comm) the English Commercial Court expressly cited Ion Science Ltd v Persons Unknown and granted a Bankers Trust Order against Binance Holdings Limited, an entity registered outside of jurisdiction in the Cayman Islands.
The courts in the UK will soon be going one step further- on 1 October 2022, an amendment to the Civil Procedure Rules will allow the UK courts to grant pre-action disclosure orders against entities outside the UK without even having to first commence proceedings against persons unknown. This was announced by His Honour Judge Pelling QC,21Mark Pelling QC, Judge in Charge, London Circuit Commercial Court, “Issues in Crypto Currency Fraud Claims”, speech at Crypto Disputes Conference on 29 June 2022 who, incidentally, decided Fetch.ai Ltd v Persons Unknown Category A. Also, under the amended rules, such orders are no longer limited to cases involving proprietary claims (as is the case with Bankers Trust Orders).
The Malaysian court in Zschimmer v Persons Unknown22Zschimmer & Schwarz GmbH & Co KG Chemische Fabirken v Persons Unknown & Anor (2021) 7 MLJ 178 took a different and equally novel approach. It granted a Spartacus Order against the unknown defendants. This required the persons unknown to identify themselves and to provide an address for service, or face committal proceedings.
Although Spartacus orders may be of limited practical utility if the fraudster chooses to simply ignore it, it does present one more arrow in a fraud litigator’s quiver, both for identifying a defendant and serving them.
However, the most straightforward approach of all may arguably be the Singapore case of CLM v CLN. In that case, ancillary disclosure orders were sought against two Cayman and Seychelles-incorporated exchanges, broadly in the terms of a Bankers Trust Order. Interestingly though, they had been named as nominal defendants in that Suit. The Court was invited to consider whether the ancillary disclosure orders were Bankers Trust Orders. The Court declined to do so.23CLM v CLN (2022) SGHC 46 at (59) Instead, it noted that the disclosure sought was from exchanges which were named as parties to the suit, and not non-parties (as is usually the case in a Bankers Trust Order). It therefore held that it was empowered by s 4(10) of the Civil Law Act (which allows the Court to grant interlocutory relief when “it appears to the court to be just or convenient”), and granted the ancillary disclosure orders sought.
It may thus be worthwhile for claimants in future cases to consider naming foreign cryptocurrency exchanges as nominal defendants in order to obtain information via ancillary disclosure orders, instead of going the traditional route of keeping them as a non-party and pursuing Bankers Trust Orders against them.
Service – How to Serve Court Documents Against Unknown Fraudsters?
Last but not least, service is a critical aspect of procedure, given that injunctions only take effect upon service. In Singapore, service is even more critical as the Court’s in personam jurisdiction to hear and try civil matters is founded entirely upon service of the originating process on the defendant, if the defendant does not submit to the jurisdiction of the Court24PT Gunung Madu Plantations v Muhammad Jimmy Goh Mashun (2018) 4 SLR 1420 at (15) and (16)..
In the case of CLM v CLN, the Singapore High Court allowed substituted service of a proprietary injunction, Mareva injunction, and ancillary disclosure orders via the fraudster’s e-mail address, which the claimants in that case had. However, in other cryptocurrency scams, the only thing that might be known of the fraudster could be their wallet address.
In such a case, how could service be effected?
One possible solution lies in the nature of cryptocurrency wallets themselves: As alluded to previously, cryptocurrency wallets enable access to public addresses (or keys) which allow anyone to transfer tokens into them, and a private key which allows only the owner of that wallet to make outgoing transfers from that wallet address. Like a conventional bank account, the owner’s consent is not required in order to make transfers into the wallet.
But unlike bank accounts, many cryptocurrency wallets are not limited to receiving cryptocurrency, depending on the blockchain technology used. The Ethereum blockchain natively supports NFTs, as do most cryptocurrency wallets. NFTs can be practically anything digital, including videos, images, and importantly, documents.
These fundamental properties have been used in the crypto world for marketing campaigns. Known as “airdrops”, one method involves crypto startups making free and unsolicited deliveries of their new coins or tokens into the wallets of cryptocurrency traders in order to promote awareness or build hype for these products.
In D’Aloia v. Persons Unknown,25D’Aloia v. Persons Unknown & Others (2022) EWHC 1723 (Ch) the victim of a cryptoasset scam brought a claim against persons unknown in the English High Court. His Honour Judge Pelling QC allowed service of injunctions via email and separately, via an airdrop of an NFT containing the court papers into the wallets of these persons unknown.
This novel and crypto-specific method of service was also allowed in the New York case of LCX AG v John Doe Nos. 1-25.26LCX AG vs. John Doe Nos. 1-25 (Dkt.No.,154644/2022) (N.Y. Supreme, Ct., NY County) In that case, the Court also required that the service NFT include a mechanism to track when a person clicked on the service hyperlink, although it pointedly did not require the link to be clicked in order for service to be effected (i.e. service was effected upon airdropping the NFT).
Given the wide wording of the substituted service provision in the new Rules of Court 2021,27Order 7, rule 7 of the Rules of Court 2021 it would not be surprising if the Singapore Courts decide to follow suit, and allow substituted service via NFT airdrop in cryptocurrency fraud cases.
It is clear from the above that cryptocurrencies have posed many novel and interesting issues for the law, and the explosive growth of cryptocurrency fraud has encouraged courts around the world to confront many of these issues head-on.
It is therefore heartening to see that first-instance courts in various jurisdictions, including Singapore, have risen to the occasion. They have taken a creative and pragmatic approach to quickly provide relief and facilitate recovery for claimants, rather than let technicalities stand in the way. While this area of law is clearly in its infancy, and none of these novel issues have been settled at the appellate level, victims of cryptocurrency fraud have reason to hold out at least some hope for recovery through the courts.
Assisted by interns Forbis Fong and George Grover
|↑1||Reports show scammers cashing in on crypto craze, <https://www.ftc.gov/news-events/data-visualizations/data-spotlight/2022/06/reports-show-scammers-cashing-crypto-craze#crypto1> (accessed on 12 September 2022)|
|↑2||Bitcoin: A Peer-To-Peer Electronic Cash System, <https://bitcoin.org/bitcoin.pdf> (October 2008)|
|↑3||Andrew W. Balthazor, “The Challenges of Cryptocurrency Asset Recovery” (2019) Volume 13(6) FIU Law Review at p 1208-1235|
|↑4||Nico Constantijn Antonius Samara v Stive Jean Paul Dan (2019) HKCFI 2718|
|↑5||Shair.Com Global Digital Services Ltd. v. Arnold 2018 BCSC 1512|
|↑6||Ruscoe v Cryptopia Ltd (in liq) (2020) 2 NZLR 809|
|↑7||National Provincial Bank Ltd v Ainsworth (1965) AC 1175|
|↑8||CLM v CLN (2022) SGHC 46|
|↑9||Ion Science Ltd v Persons Unknown and others (unreported), 21 December 2020 (Commercial Court)|
|↑10||Bloomsbury Publishing Group Ltd and another v News Group Newspapers Ltd and others (2003) 1 WLR 1633|
|↑11||CLM v CLN at (24) and (27)|
|↑12||CLM v CLN at (31) and (35)|
|↑13||Norwich Pharmacal Co. v. Customs and Excise Commissioners (1974) A.C. 133|
|↑14||Bankers trust Co v. Shapiro (1980) 1 WLR 1275|
|↑15||Singapore, National university of Singapore, Centre for Banking & Finance Law, Faculty of Law, Banking Secrecy in Singapore and Its Impact on Pre-Action Asset Tracing (Working Paper , 29 December 2016) at footnote 56|
|↑16||MacKinnon v Donaldson Lufkin and Jenrette Securities Corporation (1986) Ch 482 at p 498|
|↑17||MacKinnon v Donaldson Lufkin and Jenrette Securities Corporation (1986) Ch 482 at p 498|
|↑18||Ion Science Ltd v Persons Unknown and others (unreported), 21 December 2020 (Commercial Court)|
|↑19||Lavinia Deborah Osbourne v (1) Persons Unknown (2) Ozone (2022) EWHC 1021 (Comm)|
|↑20||Fetch.ai Ltd and another v Persons Unknown Category A and others (2021) EWHC 2254 (Comm)|
|↑21||Mark Pelling QC, Judge in Charge, London Circuit Commercial Court, “Issues in Crypto Currency Fraud Claims”, speech at Crypto Disputes Conference on 29 June 2022|
|↑22||Zschimmer & Schwarz GmbH & Co KG Chemische Fabirken v Persons Unknown & Anor (2021) 7 MLJ 178|
|↑23||CLM v CLN (2022) SGHC 46 at (59)|
|↑24||PT Gunung Madu Plantations v Muhammad Jimmy Goh Mashun (2018) 4 SLR 1420 at (15) and (16).|
|↑25||D’Aloia v. Persons Unknown & Others (2022) EWHC 1723 (Ch)|
|↑26||LCX AG vs. John Doe Nos. 1-25 (Dkt.No.,154644/2022) (N.Y. Supreme, Ct., NY County)|
|↑27||Order 7, rule 7 of the Rules of Court 2021|