High Court considers where cryptocurrencies are located and compels disclosure of information by cryptocurrency exchanges outside the UK

On 22 December 2020, the High Court ruled on an ex parte interim application involving allegations of fraud in relation to a cryptocurrency initial coin offering (ICO). An ICO, similar to an initial public offering or IPO, is a fund-raising exercise but which seeks to raise finance through the creation of a cryptocurrency or cryptographic token: Ion Science Ltd v Persons Unknown (unreported, 21 December 2020).

The decision is the latest in a series of interim rulings from the English courts which suggest that cryptoassets can be treated as property within the common law definition of the term. The decision is also notable for considering the lex situs of cryptoassets – a point on which there appears to be no decided case. In the absence of prior case law, the judgment relies on academic commentary to conclude (to the standard of a serious issue to be tried) that the lex situs of a cryptoasset is the place where the person or company who owned the coin or token is domiciled.

Finally, the judgment is notable for finding that a free-standing Bankers Trust order could be made against cryptocurrency exchanges out of the jurisdiction, to compel the disclosure of information relating to the cryptoassets.

Background

A company registered in England and Wales, Ion Science Limited, and its sole director and sole shareholder, Duncan Johns (together the “Claimants”) alleged that they had been victims of an ICO fraud. In particular, the Claimants alleged that they were induced by unknown persons (who claimed to be connected to a supposed Swiss entity called Neo Capital) (the “Persons Unknown”) to invest significant sums in what they understood to be real cryptocurrency products, and to make commission payments for purported profits from those investments.

The investments and commission payments, amounting to a total of £577,002 in the form of approximately 64.35 bitcoin, had been made through a certain “Ms Black” (described as a senior associate at Neo Capital). Ms Black convinced Mr Johns to grant her remote access to his computer and executed the various transactions.

The Claimants alleged that Neo Capital was not a real company, it did not appear on the Swiss version of the Companies House register, it had received a warning from the Swiss financial services regulator regarding the provision of unauthorised services and it had no presence online except a website. Apart from £8,741 paid as transaction fees, the Claimant’s remaining funds had been transferred away. Based on expert testimony, it was determined that the funds or their traceable proceeds had ended up in accounts held by the Binance Cryptocurrency Exchange and Kraken Cryptocurrency Exchange (together the “Cryptocurrency Exchanges”).

Accordingly, the Claimants sought the following relief on an urgent ex parte application:

1. A proprietary injunction, a worldwide freezing order and an ancillary disclosure order against the Persons Unknown;
2. Disclosure orders pursuant to the Bankers Trust jurisdiction and/or CPR 25.1(g) against the Cryptocurrency Exchanges; and
3. Orders for alternative service pursuant to CPR 6.15 and 6.27.

Decision

The High Court (Butcher J) granted the orders sought on the ex parte application. The court first addressed two preliminary matters:

• First, it was satisfied that there is at least a serious issue to be tried that cryptoassets can be treated as property, as there have been several decisions on interim applications which have reached that view (no doubt including the High Court’s decision in AA v Persons Unknown [2019] EWHC 3556 (Comm), considered here), and which relied at least in part on the UK Jurisdiction Task Force statement on Cryptoassets and Smart Contracts. The court also referred to the New Zealand case of Ruscoe v Cryptopia Ltd (in liquidation) [2020] NZHC 782 which arrived at the same conclusion.
• Second, it noted that there have been a number of cases recognising that it is possible for the court to issue claims and make injunctions against persons unknown, so long as the description used is sufficiently certain to identify both who is or is not included.

1. Orders against Persons Unknown

The court first considered whether it had jurisdiction over the Persons Unknown and whether it could serve them out of the jurisdiction. It then addressed whether it should grant: first, a proprietary injunction; and, second, a worldwide freezing order and an ancillary disclosure order against the Persons Unknown. These issues are considered in turn below.

Jurisdiction over Persons Unknown

In order to establish jurisdiction over Persons Unknown and determine if they could be served out of jurisdiction, the court applied the usual three-limb test: first, whether there was a serious issue to be tried as to merits; second, whether there was a good arguable case falling within one of the gateways under CPR PD 6B; and third, whether England was the appropriate forum for the trial of the dispute.

Under the first limb, the court found that there was a serious issue to be tried for the claims in deceit, unlawful means conspiracy and by way of equitable proprietary claim. As regards governing law, there was at least a serious issue to be tried that English law applied because the damage occurred in England, as (among other things) that is where the relevant cryptoasset (the bitcoin) was located prior to transfer. In the absence of a decided case as to the lex situs of a cryptoasset (the law of the jurisdiction in which the property that is the subject of litigation is located), the court referred to the analysis by Professor Andrew Dickinson in his book (Cryptocurrencies in Public and Private Law) which suggests that the lex situs is the place where the person or company who owns the cryptocurrency is domiciled. The court was satisfied that there is at least a serious issue to be tried that that is the correct analysis.

Under the second limb, the court found the existence of a good arguable case through Gateway 9 for the tort claims (ie damage sustained within the jurisdiction, or resulting from acts committed within the jurisdiction) and through Gateway 15 for the equitable property claim (ie a claim made against the defendant as constructive trustee, or as trustee of a resulting trust, where the claim arises out of acts committed or events occurring within the jurisdiction or relates to assets within the jurisdiction). In the latter case, the court once again relied on its conclusion regarding the lex situs of the cryptoassets.

Under the third limb, the court concluded that England and Wales was the appropriate forum based on various factors, namely that the Claimants were domiciled in England and Wales, the relevant funds were transferred from England and Wales, the bitcoin was located in England and Wales, the documents were in English and the witnesses were based in England, at least on the claimants’ side.

Proprietary injunction against Persons Unknown

The court decided to grant the proprietary injunction because: first, there was a serious issue to tried; second, the balance of convenience favoured granting the injunction in light of the prima facie case of wrongdoing and absence of evidence that a monetary judgment would be satisfied; and third, it was just and convenient to do so, as it appeared the Claimants were victims of an extensive cyber fraud.

Worldwide freezing order and ancillary disclosure order against Persons Unknown

In addition to finding that it had jurisdiction, there was a good arguable case on the merits and it was just and convenient to do so, the court also determined that there was a real risk of dissipation in light of the nature of underlying claim, the defendants’ conduct in (allegedly) using aliases and apparently false documents, and the nature of Neo Capital which is not a registered entity and is on a regulator’s warning list.

The mere absence of evidence of assets that could be caught by the order did not prevent a freezing order from being granted: that was a typical feature of  a case against persons unknown. Therefore, the court granted both a worldwide freezing order and an ancillary disclosure order against the Persons Unknown.

2. Orders against Cryptocurrency Exchanges

The Claimants sought disclosure orders pursuant to the Bankers Trust jurisdiction and/or CPR 25.1(g) against the Cryptocurrency Exchanges, in order to determine the true identity of individuals involved in the alleged fraud. The peculiarity in this case was that such orders were sought against entities outside the UK on a free-standing basis, ie there was no positive remedy sought from the Cryptocurrency Exchanges apart from information.

The court addressed whether: first,  it could permit service out of the jurisdiction of the claim for a Bankers Trust order; and second, whether the test for granting such an order is satisfied in this case.

Jurisdictional question

The court was satisfied that there was a good arguable case that jurisdiction could be established against the Cryptocurrency Exchanges through Gateway 3, which applies where the person to be served is a necessary or proper party to the anchor claim.

Whether the Cryptocurrency Exchanges were necessary or proper parties depended on whether they would be proper parties to the action if they had been within the jurisdiction. CPR 7.3 permits the commencement of more than one claim in a claim form if they can be conveniently disposed of in the same proceedings, and the court was satisfied that the claim for a Bankers Trust order can be conveniently disposed of in the instant proceedings.

The court distinguished prior case law on Norwich Pharmacal orders, relying on MacKinnon v Donaldson, Lufkin and Jenrette Securities Corporation [1986] Ch 482 for the proposition that a Bankers Trust order can be served out of the jurisdiction in exceptional circumstances (including cases of hot pursuit).

Test for relief

The court granted this relief because: first, there were good grounds for concluding that the cryptoassets were the Claimants’ property; second, there was a real prospect that the information sought would lead to the location and preservation of the property as well as identification of the recipients of such property; and third, the benefits to the Claimants outweighed the detriment to the Cryptocurrency Exchanges. As part of the third limb, the court also stated that the Claimants should provide undertakings only to use the documents for the purpose specified, to pay the Cryptocurrency Exchanges’ expenses of compliance, and to compensate the Cryptocurrency Exchanges for loss if the interim order later proved to have been wrongly made.

3. Orders for alternative service

Finally, the court granted orders for alternative service pursuant to CPR 6.15 and 6.27 against all the respondents in light of exceptional circumstances such as the urgency of the injunctions, the risk of dissipation of the bitcoin, the ability to move bitcoin at the click of a button and the importance of preserving proprietary rights. The court further bolstered its reasoning by observing that these circumstances were essentially the same as those considered in AA v Persons Unknown [2019] EWHC 3556 (Comm), referred to above.