There is now a string of English case law that demonstrates the courts' willingness to assist victims of cryptoasset theft. The courts appear to appreciate though that obtaining information and documents from the relevant cryptocurrency exchanges is vital to discovering the identities of the perpetrators and, ultimately, recovering the stolen cryptoassets.
The case of LMN v Bitflyer Holdings Inc. and others [2022] EWHC 2954 (Comm) not only confirms a number of key legal principles in respect of cryptoassets, but for the first time applies the new jurisdictional 'gateway' under CPR PD 6B para 3.1, which facilitates a claimant's application for information orders against overseas cryptocurrency exchanges.
Background
The claimant (LMN) operates an English-based cryptocurrency exchange. Around two years ago, hackers gained access to LMN's systems and stole millions of dollars-worth of cryptocurrency.
The stolen cryptocurrency could only be traced so far on the relevant blockchains – LMN, via its expert, was led to 26 'exchange addresses' which were operated by various cryptocurrency exchanges (the defendants), but information was required from these exchanges to identify the individuals behind the transactions.
LMN therefore sought a 'Bankers Trust Order' against the defendant cryptocurrency exchanges requiring them to disclose:
1. The name the account(s) is held in;
2. All KYC information and documents in respect of the account(s);
3. Any other information and documents held relating to the account(s) which might identify the account holder(s);
4. An explanation as to where the Target Cryptocurrency has ended up; and
5. Details of any other onward account(s) that the Target Cryptocurrency has been transferred to.
Before dealing with LMN's application for such a disclosure order, an initial hearing was held ex parte on 28 October 2022 which considered LMN's applications for (a) permission to serve out of the jurisdiction and (b) permission to serve by alternative means upon the defendants. Consideration of the substantive relief (the information orders) was adjourned to a 'with notice' hearing on 11 November 2022 because the fraud was not a recent occurrence and because there was no allegation that the defendants had been fraudulent themselves. Both hearings were held in private to prevent the purpose of the orders being defeated by publicity.
Judgment
LMN was granted permission to serve the claim on the defendants (based in various locations overseas) outside of the jurisdiction.
The test for this is to show (i) there is a serious issue to be tried on the merits, (ii) there is a good arguable case that the claim falls within one of the 'gateways' under CPR PD 6B, para 3.1, and (iii) that England and Wales is the appropriate forum for the claim to be tried.
Serious issue to be tried on the merits
(i) Taking the first limb of this test, Butcher J, when considering the merits of the claim, confirmed that there was a good arguable case that cryptocurrencies may be treated as property, as per the UKJT Legal Statement referred to and adopted in AA v Persons Unknown (see more here). In addition, Butcher J followed existing case law and confirmed that the stolen cryptocurrency was held on constructive trust for the victim and is therefore traceable in equity.
The jurisdictional 'gateway'
(ii) As to the second aspect of the test, Butcher J applied the new 'gateway' under PD 6B para. 3.1(25):
3.1 The claimant may serve a claim form out of the jurisdiction with the permission of the court under rule 6.36 where –…
(25) A claim or application is made for disclosure in order to obtain information—
(a) regarding:
(i) the true identity of a defendant or a potential defendant; and/or
(ii) what has become of the property of a claimant or applicant; and
(b) the claim or application is made for the purpose of proceedings already commenced or which, subject to the content of the information received, are intended to be commenced either by service in England and Wales or pursuant to CPR rule 6.32, 6.33 or 6.36"
This is significant as it is the first time the English courts have used this new 'gateway', which was brought into force in October 2022 for the very purpose of assisting claimants in these circumstances to serve proceedings out of the jurisdiction to obtain disclosure orders. This is another example of the English legal system's willingness and propensity to assist victims of cryptoasset theft.
Is England and Wales the appropriate forum?
(iii) Finally, following the reasoning in Tulip Trading, Butcher J considered that England and Wales was the appropriate forum on the basis that this was where the situs of the stolen cryptocurrency was; in that LMN is resident and carries on its relevant business here, despite the fact that its servers are located in Romania.
Butcher J also granted an order for service via alternative means on the defendants (via email and in one case by posting a link to the documents on the online contact form on the relevant defendant's website). The judge was satisfied that there was a good reason to allow this (and, to the extent necessary, the circumstances were sufficiently exceptional) due to the "nature of the claim" and the need to take steps quickly to prevent further risk of dissipation of the stolen cryptocurrency.
Bankers' Trust Order
The jurisdiction for Bankers Trust Orders arises where there is strong evidence that the claimant's property has been misappropriated. If there is such evidence, then the court will make robust orders for the disclosure of relevant information and documents to ascertain the whereabouts of the property.
Butcher J decided that there was a good arguable case that a Bankers Trust Order should be granted here. Interestingly he also considered 'Norwich Pharmacal Orders' (a similar type of disclosure order, which can apply to those 'mixed up' in the fraud) in his judgment and determined that such relief would have also been available in this claim.
Additional 'Persons Unknown' Defendants
None of the defendants objected to providing the disclosure sought under the Bankers Trust relief, however issues were raised that the named defendants were not the correct entities that held or could access the information sought. Butcher J therefore added a number of additional defendants as 'Persons Unknown', allowing the information order to apply to (for example) companies or other entities that own and/or operate the defendant exchange. This was an innovative approach that provided greater flexibility and no doubt pre-empted and defeated future practical issues.
Conclusion
This case will naturally attract attention as the first time that the English courts have used the new 'gateway' under CPR PD 6B, para 3.1(25). But the judgment also underlines a number of key legal principles relating to the proprietary nature of cryptoassets and, whilst practical difficulties remain regarding recovery of stolen cryptocurrency, it is another reassuring message to investors and owners of cryptoassets in England and Wales that the courts are willing and proficient in using their broad powers to make information orders against overseas exchanges to assist recovery.
From the perspective of the cryptocurrency exchanges, as more of these cases arise, it reinforces the importance for them to retain accurate KYC information and documents in respect of account holders and ensure robust compliance systems are in place.
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