Cryptocurrency fraud

Joanna Bailey, CILEX Lawyer and head of banking and financial services in the London office of European law firm Giambrone & Partners, looks at the fight against rising cryptocurrency fraud and the approach of the courts when victims seek redress

Swift advances in technology impact all aspects of our lives. One such development has been the rise of cryptocurrency which, went it emerged 15 years ago, was rapidly accepted, its decentralised status appealing to an assortment of investors despite its self-evident volatility. This was not without controversy, with differing opinions across the banking and finance sector as to whether cryptocurrency would prove a beneficial or detrimental development. 

Unlike other financial and investment activities, regulation of cryptocurrency was slow in coming and often light touch. It quickly became apparent that the aspects of cryptocurrency that most appealed to investors – decentralisation, online presence and encryption – were the same aspects that made it an excellent vehicle for financial fraud. 

Fraudsters wasted no time in recognising how this radically new development in the investment market could be exploited and cryptocurrency fraud began to spiral globally.

The court’s innovative approach

To combat this rise in fraud, innovative crypto technology solutions have come into play. In 2022, we saw the courts of England and Wales taking a progressive and pioneering decision with the potential to help victims of cryptocurrency fraud.

“The case opened the door to the recovery of the funds that novice crypto investors lost in scams across the globe and has given hope to the victims of fraud” 

In D'Aloia v Person Unknown & Ors [2022] EWHC 1723 (Ch), my own firm’s crypto litigation team persuaded the court to permit a worldwide freezing order to be minted as a non-fungible token (NFT) and to be served through blockchain into a cryptocurrency blockchain wallet to persons unknown. This was the first case in Europe to take this groundbreaking step.

It was the first instance of an English court allowing service by means of distributed ledger technology and paved the way for victims of crypto-asset fraud to use novel technology to bring claims against persons unknown. 

Had it not been for the court’s willingness to adopt such a stance, then it would have been impossible to notify the fraudsters of the claims made against them, as the only means of identification of the account holders was the recipient wallet address. The case opened the door to the recovery of the funds that novice crypto investors lost in scams across the globe and has given hope to the victims of fraud who can now potentially use this strategy to assist them in recovering the considerable sums that many of them have lost. 

The position of exchange platforms

This approach has been met with opposition from cryptocurrency exchange platforms which have argued that cryptocurrency that has entered a ‘pooled wallet’ belonging to the exchange, has been subjected to mixing and is therefore impossible to identify and recover. 

In Piroozzadeh v Persons Unknown Category A & Ors [2023] EWHC 1024 (Ch), the court held, based on the evidence available, that once the cryptocurrency had been swept from the user accounts into a pool, the users were granted a credit which would then constitute the exchange to be “a purchaser and no longer susceptible to any remedy at the suit of the claimant so long as it acted bona fide”.

The decision, however, is fact sensitive as it relates to an application against the cryptocurrency exchange platform, which could arguably be a good-faith purchaser for value without notice, as opposed to a claim made solely against the fraudster.

Overseas victims and jurisdiction

In Tippawan Boonyaem v Persons Unknown Category A & Ors [2023] EWHC 3180 (Comm), the High Court granted the first UK summary judgment to an overseas victim against fraudsters in a multi-jurisdictional cryptocurrency investment scam.

This case was distinguished from Piroozzadeh as the claim was against the fraudsters only who could not be good-faith purchasers. There was no claim against the exchange platforms. Further, any traceable USDT (a type of crypto currency) which was held in a pooled exchange associated wallet did not defeat the claimant’s non-proprietary claims. This is because they were recognised in the worldwide freezing injunction order where the definition of ‘assets’ included all of the assets that were held or controlled by a third party (such as an exchange) on behalf of the fraudsters. 

In an earlier case Mannarino v Person Unknown & Ors [2023] EWHC 1376 (Ch), the High Court granted the first default judgment in a claim relating to cryptocurrency fraud on behalf of a foreign claimant, demonstrating that the English courts will act to protect foreign victims of fraud where there is sufficient connection to England and Wales. 

Global regulation

Crypto is a developing area of law and the courts are often called upon to apply traditional principles to new blockchain concepts. At the same time, the anonymity of fraudsters requires the courts to adopt innovations enabled by technology to assist victims of cryptocurrency investment scams.

While this approach means we might now have an effective strategy for recovering funds lost to cryptocurrency fraud on behalf of the victims, what we really need to see are new regulations governing cryptocurrency implemented worldwide, alongside more robust compliance with existing regulations.