Crypto Fraud: High Court Provides Legal Solutions

Daniel CalvoBlog

Bitcoin crypto fraud on a laptop

The Courts in England and Wales have long been renowned as stable, specialist institutions in which companies can litigate complex commercial matters. The recent cases of Jones v Persons Unknown [2022] EWHC 2543 (Comm) and LMN v Bitflyer Holdings Inc [2022] EWHC 2954 (Comm), illustrate that the Judiciary is alive to the need to provide legal remedies in crypto fraud cases, including in situations where the identity of the fraudsters are difficult or impossible to discover.

What is crypto fraud?

Crypto fraud is where criminals dishonestly trick people and/or companies into parting with their cryptocurrency and/or assets via fraudulent transactions. 

Examples of crypto fraud include:

  • Gaining access to a crypto wallet through phishing, smishing, and vishing. The cryptocurrency is then transferred to the fraudster’s account via several transactions, making it difficult to trace the funds and fraudsters.
  • Using social media platforms to advertise high-return investment or mining opportunities and asking for payment in cryptocurrency.
  • Targeting people who have been previously scammed and offering to find the funds in return for payment in cryptocurrency. The funds and the service provider then disappear.

Jones v Persons Unknown

In Jones v Persons Unknown, the Claimant had been fraudulently convinced to transfer the equivalent of £1.54 million in Bitcoin to a fake crypto-investment platform. The stolen Bitcoins were tracked to a wallet associated with the company Huobi, a Seychelles-based cryptocurrency exchange. 

The case of LMN v Bitflyer Holdings Inc saw hackers access and transfer millions of dollars of cryptocurrency from the Claimant’s computer systems. The cryptocurrency transfer was traced through 26 recipient exchange addresses. Investigations showed that these exchanges were all operated by one of the Defendants or companies belonging to the same group.

How do the decisions in Jones v Persons Unknown and LMN v Bitflyer Holdings Inc benefit victims of crypto fraud?

It is important to remember that cryptocurrency is almost completely unregulated in the UK and its legal status varies widely around the world. Furthermore, cryptocurrency cases involve technology that is constantly evolving, and the market is enormously volatile.

The High Court in Jones v Persons Unknown provided several case law ‘firsts’ when handing down its decision, including:

  • Creating a constructive trust between the cryptocurrency exchange to which the stolen Bitcoin was traced and the victim of the alleged crypto fraud. Although in the case of Wang v Darby [2021] EWHC 3054 (Comm) the court indicated that digital assets could, in principle, be held on trust but on the facts the Court ruled against one.
  • Making an order against the perpetrators of the fraud and the cryptocurrency exchange for the delivery up of Bitcoin.
  • Delivering the summary judgment by NFT airdrop directly into a crypto-wallet.

The decision to impose a constructive trust between the exchange and the Claimant followed the ruling in AA v Persons Unknown [2019] EWHC 3556 (Comm) where the Court held that crypto-assets are in fact “property” for relevant purposes. The Court followed Lord Wilberforce’s opinion in the House of Lords in National Provincial Bank Ltd v Ainsworth [1965] AC 1175 (HL) at 1247–1248, where he said: “Before a right or an interest can be admitted into the category of property, or of a right affecting property, it must be definable, identifiable by third parties, capable in its nature of assumption by third parties, and have some degree of permanence or stability.” 

Following this AA decision, the well-established legal principle that a Claimant’s proprietary interest can be enforced by way of the imposition of a constructive trust in cases where property or money stolen or obtained by fraud is traceable in equity could be applied to litigation involving crypto assets. Many other common law jurisdictions have followed a similar approach although there are exceptions: The Court of Appeal of Singapore has expressly not decided whether cryptocurrencies are a type of property see Quoine Pte Ltd v B2C2 Ltd [2020] SGCA(I) 02. 

In LMN v Bitflyer Holdings Inc the Claimant wanted the Court to allow it to have access to the Know Your Client data and other anti-money laundering information held by the 26 exchanges so it could resume its tracing of the misappropriated Bitcoin.

The Court granted information orders against foreign cryptocurrency exchanges requiring:

  1. the supply of information and documentation to help identify those who hold accounts into which stolen cryptocurrency was allegedly transferred, and 
  2. where the misappropriated funds had ended up.

These decisions assist victims of stolen cryptocurrency to trace the funds and, if a constructive trust can be established, be reimbursed by an exchange. These are incredibly powerful weapons in civil litigation involving crypto fraud as some cryptocurrencies such as Zcash and Monero provide anonymity for the sender, receiver, and holder of the funds. Bitcoin and Ether are pseudo-anonymous which is why an Information Order for disclosure of Know Your Client and anti-money laundering data is so powerful as it can reveal the identity of the people involved in the fraudulent transactions.

What are the plans to regulate cryptocurrency in the UK?

The Treasury is finalising plans to implement rules to regulate the crypto industry. These will include setting limits on foreign companies selling into the UK, provisions for how to deal with the collapse of companies, and restrictions on the advertising of products. The collapse of the cryptocurrency exchange FTX seems to have spurred Whitehall into urgency regarding this matter.

The powers will be part of the Financial Services and Markets Bill, which at the time of writing is passing through the House of Lords.

For victims of crypto fraud, the crucial step is to contact an experienced Solicitor who can advise on how to trace what has happened to the funds and apply to the Court for necessary Orders, Injunctions, and decisions to protect and restore the cryptocurrency to its rightful owner.

Note: The points in this article reflect the law in place at the time of writing, 05 January 2023. This article does not constitute legal advice. For further information, please contact us.

1. Since 2021 Ether transactions can be made anonymously – What is ether (ETH)? |

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