The crypto asset sector, compared to the traditional financial services sector, is still relatively new and certainly at a nascent stage.

Recent case law demonstrates the efforts by the judiciary to embrace innovation and provide clarity on the legal status of crypto assets, for the purpose of determining appropriate remedies for crypto assets owners who have suffered losses.

Crypto assets are ‘property’

Following the ‘Legal Statement on Cryptoassets and Smart Contracts’ by the UK Jurisdiction Taskforce in 2019[i], several judicial decisions have supported the position that crypto assets are considered property.

In AA v Persons Unknown and Others, Re Bitcoin [2019] EWHC 3556 (Comm)[ii], Mr. Justice Bryan considered that crypto assets are property because they are "definable, identifiable by third parties, capable in their nature of assumption by third parties, and having some degree of permanence" and therefore met the four requirements of property as noted in National Provincial Bank v Ainsworth [1965] 1 AC 1175 at 1248. He observed that a similar interpretation was adopted by the Singapore courts in B2C2 Limited v Quoine PTC Limited [2019] SGHC (I) 03 [142][iii]. The court in B2C2 commented that crypto assets “have the fundamental characteristics of intangible property as being an identifiable thing of value”.

This view has since been confirmed in several subsequent judicial decisions[iv]. 

Lex Situs (Jurisdiction)

The UK courts have also taken the position that the lex situs of a crypto asset “is the place where the person or company who owns it is domiciled.” This was first accepted in Ion Sciences v Persons Unknown and Others (unreported) 21 December 2020 (Commercial Court), where Butcher J noted the analysis of Professor Andrew Dickinson in his book ‘Cryptocurrencies in Public and Private Law’ (at para.5.108)[v] and accepted this analysis as correct. 

The court in the subsequent cases of Fetch.ai Ltd and another v Persons Unknown Category A and others (July 2021) and D’Aloia v Persons Unknown, Binance Holdings Limited & Others [2022] EWHC 1723 (Ch) also adopted this position.

The decisions made on lex situs demonstrates how the courts have chosen to be innovative in applying legal parameters to be able to address crypto related grievances for a system that was intended to be decentralized, but still requires a solution for dispute resolution.

Constructive Trusts

In determining that crypto assets can be deemed as property for the purpose of addressing proprietary claims, the courts have also acknowledged that crypto assets can be the subject of a constructive trust.

In the New Zealand case, Ruscoe v Cryptopia Limited (in liquidation) [2020] NZHC 728 (8 April 2020), the court having concluded that cryptocurrencies were property within the definition in s 2 of the New Zealand Companies Act “and also probably more generally”, also held that digital assets (crypto assets), being property, are capable of forming the subject matter of a trust.

In Fetch et al, the court noted that “when property is obtained by fraud, equity imposes a constructive trust on the fraudulent recipient, with the result that the fraudulent recipient holds the legal title on constructive trust for the loser,” given that crypto assets were property, this equitable principle for a constructive trust would apply.

In D’Aloia v Persons Unknown, Binance Holdings Limited & Others [2022] EWHC 1723 (Ch), the court also applied a similar reasoning in determining that there was a good arguable case for the exchanges, who were responsible for access to crypto assets, to be deemed constructive trustees of the crypto assets held through their organization.

Service of court documents via NFT

In the US and UK, case law has further developed with precedent setting decisions for service of documents via non-fungible token (NFT).

In the US case, LCX AG v. John Doe Nos. 1-25, No. 154644/2022 (N.Y. Sup. Ct. June 2, 2022), the claimant, sought to freeze approximately $1.3 million (of $7.94 million) stolen digital assets that were traced to a USD Coin digital blockchain wallet address. The court agreed to grant service by way of a NFT since the identity of the defendant remained unknown and there appeared to be no other means by which service could be effected. The NFT was embedded with a hyperlink of the notice of an asset freeze (together with other documents upon which the court made its decision) and airdropped into the relevant wallet. 

In the UK case of D’Aloia, the court took a similar position when it granted a request of the claimant to serve proceedings by NFT, in addition to service by email. As with the US case noted above, the service by NFT involved air dropping the documents into certain known wallets of the defendants (persons unknown) and by this means embedding the service of documents on the blockchain. 

These two cases demonstrate the willingness of the judiciary to embrace the use of blockchain technology, where appropriate, including for the purpose of effecting service.

Duty of care

Case law developments have also brought some clarity on whether software developers owe a duty of care to crypto assets owners. In the UK case of Tulip Trading Limited v Bitcoin Association for BSV [2022] EWHC 2 (Ch) and [2022] EWHC 141 (Ch), the claimant alleged that the defendants, inter alia, failed to make changes to how the bitcoin networks work and were intended to work, to assist the Claimant in regaining access to private keys lost through a hack. The court held that open-source Bitcoin software developers did not owe fiduciary or tortious duties of care to bitcoin owners that use the code for trading or storage of crypto assets; and were not obligated to take steps to protect or recover lost/stolen keys. The court noted that it would be unrealistic to state bitcoin owners entrust their property to “a fluctuating, and unidentified, body of developers of the software.”

It should be noted that leave to appeal this matter was granted. If the appellants are successful, the position taken on software developers may change as this case unfolds.

Security for costs

The court in Tulip Trading also refused the Claimant's request for security for costs to be paid in bitcoin. The court considered the volatility of bitcoin and the risks that would be faced by the Defendants, in terms of the fall of value, when compared to the usual forms of security that is paid into court.

I remain curious as to whether the decision of the court would have been the same if the proposal were for stablecoins (backed by fiat and other assets) to be used for security for costs, instead of bitcoin.

Reliefs generally granted

A number of reliefs have been sought and granted in relation to fraud or the theft of crypto assets, including:

• Proprietary injunctions;
• Worldwide freezing orders;
• Bankers Trust orders;
• Third party debt orders; and
• Norwich Pharmacal orders.

Conclusion

The growth of the crypto sector will likely result in various novel disputes to be determined by the courts. 

Key legal principles and appropriate regulatory frameworks are important to steer the growth of this sector in the right direction, where consumer/investor confidence can be achieved. Knowing that there are appropriate safeguards in place and ways for disputes to be settled is likely to encourage further growth.

It is important to continue to monitor developments in the law and in particular the judiciary’s response to evolving challenges arising out of the crypto sector.

References

[i] The Chancellor of the High Court, Sir Geoffrey Vos, launches Legal Statement on the Status of Cryptoassets and Smart Contracts | Courts and Tribunals Judiciary.

[ii] AA v Persons Unknown & Ors, Re Bitcoin [2019] EWHC 3556 (Comm) (13 December 2019) (bailii.org)

[iii] www.sicc.gov.sg/docs/default-source/modules-document/judgments/b2c2-ltd-v-quoine-pte-ltd.pdf

[iv] Ruscoe v Cryptopia Limited (in liquidation) [2020] NZHC 728 (8 April 2020)^[iv], Ion Sciences v Persons Unknown and Others (unreported) 21 December 2020 (Commercial Court), Fetch.ai Ltd and another v Persons Unknown Category A and others (July 2021)^[iv], Wang v Darby [2021] EWHC 3054 (Comm), Director of Public Prosecutions v Briedis and Reskajs [2021] EWHC 3155 (Admin)^[iv]  and CLM v CLN and others [2022] SGHC 46.

[v] Of particular note is that “the proprietary effects outside the cryptocurrency system of a transaction relating to cryptocurrency shall in general be governed by the law of the country where the participant resides or carries on business at the relevant time or, if the participant resides or carries on business in more than one place at that time, by the law of the place of residence or business of the participant with which the participation that is the object of the transaction is most closely connected.”