High Court orders delivery up of stolen Bitcoin against crypto exchange

The High Court held, on an uncontested summary judgment application, that the crypto exchange controlling the wallet into which the claimant's stolen bitcoin was transferred sat in a position of constructive trustee as against the claimant. It ordered delivery up of the bitcoin as against the fraudsters as well as the exchange: Jones v Persons Unknown [2022] EWHC 2543 (Comm).

The court's finding that the defendant crypto exchange should be treated as a constructive trustee in relation to the wallet containing stolen bitcoin is of interest not only for those investing in cryptoassets, but also for crypto exchanges and custodians that may control wallets operated by fraudsters.

The court also gave permission to serve the orders on the defendants out of the jurisdiction, and for alternative service including by means of a non-fungible token (NFT) air drop to bring the order to the defendants' attention expeditiously. It is worth noting that, as a result of rule changes that came into force at the beginning of October, the court's permission is no longer needed to serve an order (or other court document) out of the jurisdiction where the claim form was served on the defendant out of the jurisdiction with permission, or the court's permission was not required for service.

Background

The claimant was a victim of a cyber fraud, in which criminals located abroad targeted individuals through a fake online crypto investment company and convinced their 'clients' to set up accounts with and transfer cryptocurrency to them. Between January 2019 and January 2020, the claimant bought and transferred to the fake trading platform roughly 89.6 bitcoin, which on the date of the judgment was valued at approximately £1.5 million. The persons operating the trading platform eventually took control of and dissipated the claimant's bitcoin. The claimant made only a minimal recovery and a report from a cyber investigation firm identified a wallet connected to the fraud, which was associated with Huobi Global Limited (Huobi), a company registered in Seychelles.

The defendants to the claim were three categories of "persons unknown" and Huobi.  The first defendants (persons unknown) were those who obtained access to the claimant's accounts and transferred the funds to other accounts. The second defendants (persons unknown) were the entities who own or control the accounts into which the claimant's assets were transferred, and the third defendants (persons unknown) were the 'innocent receivers' with no reasonable grounds to believe that the assets appearing in their accounts belonged to the claimant.

The claimant had previously obtained without notice worldwide freezing injunctions against the first and second defendants and a proprietary injunction against the first and second defendants and Huobi. The original orders and a statement of case were served by email and first class post on the fourth defendant, and on the first to third defendants by filing at court via the CE-file system. None of the defendants had sought to make contact or engage with the litigation, and the time for filing a defence had passed.

The claimant sought: (i) summary judgment against the first and second defendants and Huobi and a delivery up order against Huobi; (ii) permission to serve the order on them out of the jurisdiction; (iii) an order for alternative service by means of an air drop into the deposit address of the wallet at Huobi connected with the fraud; and (iv) continuation of the interim proprietary and non-proprietary injunctions on a final basis.

Decision

Summary judgment and continuation of injunction

Mr Nigel Cooper QC (sitting as a Judge of the High Court) considered the well-known test that summary judgment can be given against a defendant on the whole of a claim or on a particular issue if the court considers that the defendant has no real prospect of successfully defending the claim or issue (CPR Part 24, Rule 2(a)(ii)), and there is no other compelling reason why the case or issue should be disposed of at trial.

Noting that the defendants had not put forward any evidence, the judge found that the claimant's evidence was compelling and sufficient to establish his entitlement to a judgment against the first and second defendants for deceit and unjust enrichment. The bitcoin transferred to the first defendant (or its equivalent) was ordered to be returned to the claimant. The court ruled that Huobi was in the position of a constructive trustee as against the claimant, as it controlled the wallet into which the bitcoin had been paid. No evidence had been put forward that anyone other than the claimant had a proprietary interest in this bitcoin which would override the claimant's beneficial interest, and so the court granted the order for delivery up against Huobi as a constructive trustee.

On the question of the proprietary injunction, the judge said that while this is still a contentious issue, there is sufficient authority under English case law (including AA v Persons Unknown [2019] EWHC 3556 (Comm), considered here) that bitcoin is to be treated as property. The claimant had made good his case that he is the owner of the property in the bitcoin, and property obtained by fraud is traceable in equity and can be enforced by the imposition of a constructive trust. The court therefore made an order for a proprietary injunction against the first and second defendants and Huobi. The interim freezing injunction was also continued on a final basis to aid the execution of the judgment, with the claimant released from his cross-undertaking in damages.

Service of the order out of the jurisdiction

To the extent it was necessary for the claimant to establish that he came within the jurisdictional gateways for service out, the court was satisfied that the case against the first and second defendants fell within both Gateway 9 (tort) and Gateway 16 (unjust enrichment), and the case against Huobi fell within Gateway 15 (constructive trusts).

In relation to Gateway 9, damage would be sustained in the jurisdiction as the claimant is domiciled within the jurisdiction. In this regard, the Court relied on Ion Science v Persons Unknown [2020] EWHC (QB) (considered here), which had held, in the context of a serious issue to be tried on the merits as a limb of the test for service out, that the lex situs of a cryptoasset is the place where the person or company who owned the coin or token is domiciled. In relation to Gateway 16, the claim for restitution arose out of acts committed within the jurisdiction.

Gateway 15 was satisfied as to Huobi, as the claim against it as a constructive trustee arose out of acts committed or events occurring within the jurisdiction, or relating to assets within the jurisdiction (since the claimant, as owner of the bitcoin, was domiciled within the jurisdiction).

Alternative service

The court noted that the first and second defendants were likely to be outside the jurisdiction, and the fourth defendant was registered in the Seychelles.

The court considered that no traditional means of service were likely to be effective in relation to the first and second defendants. This was an exceptional case, similar to AA v Persons Unknown, where the identity, location or domicile of these defendants were not known. Service by email and service of the claim form by the alternative method of filing it at the court, or by WhatsApp, or by way of NFT were found to be the means most likely to bring the proceedings and the order to the first and second defendants' attention.

As against Huobi, in these exceptional circumstances, service pursuant to the Hague Convention would be too slow. Service by email and NFT was held to be appropriate because it was important to bring the order to Huobi's attention quickly in view of the fact that the claimant's bitcoin could easily be dissipated at any time.