Courts at the forefront of innovation

Financial fraud is one of the most corrosive forms of corruption. Digital assets, and particularly cryptocurrency, are a ripe target for fraud. Frauds involving digital assets have grown significantly in recent years. In the UK, the value of reported crypto-fraud increased 41% between 2022/2023, reaching a record £306 million.

Recent developments in the English Courts have demonstrated a robust approach to assisting victims of digital assets fraud recover their assets, often creating innovative legal solutions. Here we look at some of the key precedents developed by the English Courts, and consider the future landscape in this constantly evolving legal environment.

One of the key issues faced by victims of digital assets fraud is that the perpetrator of that fraud is often anonymous. This presents a host of difficulties for a victim attempting to recover their property, including whether and how the perpetrators can be identified, whether and how freezing orders and judgments can be served on the perpetrators, and whether and how judgments can be enforced to enable recovery of the assets.

The English Courts have been proactive in adapting procedural tools and making orders which allow victims of digital assets fraud to pursue and recover against anonymous defendants, often taking into account the technological nuances of digital assets.

Persons Unknown

If the stolen assets are traceable, the first step in any recovery attempt is to obtain a freezing injunction in respect of those assets. Where the perpetrator of the fraud cannot be identified, the Court has the power to grant such an injunction against “persons unknown”. Over the last few years, freezing orders and, subsequently, summary and default judgments, have been granted by the English Courts against those “persons unknown” who are the perpetrators of digital assets fraud.

Alternative Service

Once a freezing injunction has been obtained, the next step is to serve that freezing order. In cases involving “persons unknown”, this can present significant difficulties: the traditional methods of personal service will not be possible. The Courts have therefore allowed increasingly creative methods of alternative service, including by email, Facebook messenger, WhatsApp and text message.

In a small number of digital asset fraud cases, the Courts have also permitted servive by non-fungible tokens (NFTs). Service by NFT involves a special-purpose service token being airdropped to the wallets into which the perpetrators have transferred the stolen digital assets. The service token contains a hyperlink to a copy of the order being served. This novel method of service embeds service in the blockchain, and there is a greater likelihood of those behind the fraud being put on notice of the proceedings against them. The willingness of the English Courts to permit service by this novel method, and to validate that service by granting summary judgment or default judgment on the basis of it, demonstrates their flexibility and adaptability in the face of new technologies.

Jurisdictional Gateways

In order to maximise their chances of recovery, a victim will want to take steps to identify the perpetrator of the fraud. This might involve applying for disclosure orders against various third parties (for example, the platforms through which the stolen assets have passed) for identifying information. In some cases, those third parties may not be located in England.

Historically, the English Courts have hesitated to extend relief in the form of third party disclosure orders (such as Norwich Pharmacal orders and Bankers Trust orders) outside of the jurisdiction. However, in October 2022, a new “jurisdictional gateway” was introduced to resolve some of the procedural and jurisdictional issues that victims of digital assets fraud face when bringing claims in England and Wales. The new gateway enabled applications for permission for service out of the jurisdiction of a claim for disclosure of information regarding (i) the true identity of a potential defendant or (ii) what has become of the claimant’s property, to support proceedings.

Judgment

In a number of recent digital assets cases, the perpetrator defendants have failed to acknowledge service or engage with the proceedings. In these circumstances, a claimant would generally apply for default judgment or summary judgment, with the hope of obtaining a judgment which could then be enforced against the identified assets.

The English Courts have grappled with the issue of whether summary judgment can be granted against “persons unknown”, and there have been conflicting decisions on this issue.

In Jones v Persons Unknown [2022] and Mannarino v Persons Unknown [2023] the Courts granted summary judgment against persons unknown, seemingly developing a precedent or status quo for this step in digital asset fraud cases. However, matters took a turn in Tippawan Boonyaem v Persons Unknown [2023], when the Court refused to grant summary judgment defendants who were “persons unknown” on grounds that such judgment would be unenforceable. The status quo was seemingly re-established in Mooij v Persons Unknown [2024] in which the Court granted granted summary judgment against all of the defendants, including the “persons unknown”. This decision is encouraging for victims of digital assets fraud seeking to obtain judgments against persons unknown, and hopefully demonstrates a return to the more established precedent following the outlier decision in Boonyaem.

Enforcement

Although digital assets cannot be seized in the same way as physical assets can, the English Courts have proved themselves willing to adopt innovative ways of preserving and returning those digital assets found to be fraudulently held.

In Jones, the Court concluded that an exchange controlling a wallet holding stolen Bitcoin was a constructive trustee of those assets. The Court ordered that the claimant was entitled to an order for delivery up of his Bitcoin, and extended the freezing and proprietary injunction post-judgment until the Bitcoin had been returned.

In the more recent UK case of Joseph Keen Shing Law v Persons Unknown & Huobi Global Limited [2023], a proprietary claim was not available. Nevertheless, the Court provided a personal remedy: satisfied that the cryptocurrency account held by the defendants (overseas) contained the proceeds of the fraud, the Court granted a default judgment. The Court considered that the account was plainly controlled by the defendants responsible for the fraud, and to enable the claimant to enforce the judgment, the Court ordered that the funds held in the account offshore be converted to fiat currency and transferred to the jurisdiction of England and Wales and paid into the Court Funds office.

Future developments

The English Courts are proving willing to adopt innovative ways of facilitating claims in a space where traditional methods would prove ineffective. In so doing, the Courts have embraced their role of ensuring effective justice and appear to acknowledge that it is only by developing the law and the tools at their disposal that the Courts can maintain the integrity of the legal system. We are likely to see this trend continuing with increased digital asset fraud claims.