As part of London International Disputes Week, we hosted a panel discussion in conjunction with Kroll and Maitland Chambers, which explored why cryptoassets are so prevalent in fraud cases and the options available to help victims recover their stolen cryptoassets.
Chaired by Joel Leigh (Partner, Commercial Dispute Resolution at Howard Kennedy), we were joined by:
- Haydn Jones – Managing Director and Global Head of Blockchain and Cryptocurrency Solutions at Kroll Advisory
- Rob Armstrong – Managing director in the restructuring practice at Kroll Advisory
- Darragh Connell – Barrister at Maitland Chambers
- Rebecca Hume – Partner, Commercial Dispute Resolution at Howard Kennedy
Read our 5 takeaways from the session below.
1.Instruct a specialist tracing expert on day one.
Often victims wait months before taking steps to recover their stolen cryptoassets. The advantage of blockchain technology is that there is a digital immutable record of every transaction whereby the path of stolen cryptoassets can be traced. However, this is a difficult and technical task, and fraudsters are highly sophisticated, so it's advisable to involve an expert early on to produce a tracing report that can later be produced to the court when pursuing your recovery strategy.
2. The ease and speed of dissipation, and lack of understanding of cryptoassets, make cryptoassets attractive targets for fraudsters.
All the old-fashioned scams are still in existence, but cryptoassets are now the chosen currency. For example, paying for a service or product that does not exist and investment scams such as Ponzi and 'pump and dump' schemes. Here fraudsters will often exploit the victim's lack of knowledge of cryptoassets to enable them to make off with their money.
However, it's more efficient and quicker for fraudsters to commit cyber fraud such as through hacking, phishing, and ransomware attacks, where the ransom will be demanded in cryptocurrency. Fraudsters are able to exploit mixers, so as to co-mingle a victim's stolen cryptoassets with other cryptoassets to make them more difficult to identify and trace. Fortunately, a good expert is often still able to trace the stolen cryptoassets.
3. Cryptoassets are treated as property by the English courts, so the existing toolbox available to make recoveries from fraudsters can be used (with some tweaks of course).
Generally, cryptoassets are treated like any other asset class, so a fraud involving cryptoassets should be approached in the same way as any other fraud. Freezing and receivership orders (either standalone in aid of foreign proceedings or in aid of proceedings in England & Wales) are available and can be applied for against persons unknown because the identity of the fraudster will typically be unknown in the early stages of recovery.
In order to assist tracing both the stolen cryptoassets and the fraudster, applications for disclosure and information orders (such as Norwich Pharmacal / Bankers Trust Orders) should be made against the relevant exchanges, who will hold key information not only relating to the location of the stolen cryptoassets but the identity of the end wallet holder.
4. Identify the jurisdictions that might be in play both in terms of targets and potential assets for recovery.
Cryptoassets know no jurisdictional boundaries so it's important to identify the location of potential targets and assets for recovery as soon as possible, including where useful information about the identity of the fraudster may be held. Depending on the facts, it might be worth considering civil code jurisdictions and how regulators can assist. For example, exchanges are required to keep KYC and AML information and documents relating to the wallet holder which may be capable of being obtained quicker through filing a civil complaint Non-compliance with AML laws is a strict liability criminal offence in some civil code jurisdictions meaning that failure to properly comply with AML laws and regulations may expose a financial institution or service provider to liability for the victim's losses. This means a potential "deep pocket" for recovery.
5. Make use of the extensive range of statutory powers of insolvency practitioners.
Crypto frauds often cause business distress. One only has to look at Sam Bankman Fried's rapid fall from grace! Office holders in bankruptcies are often entitled to a large amount of information and documents held by parties that relate to the affairs of the insolvent individual or entity. For example, section 236 of the UK Insolvency Act 1986 enables an office holder to compel individuals to attend interviews or be summoned before the court to be examined. Whilst ultimately a collective remedy, the investigative powers of office holders is still a huge advantage in such cases.
Receivership is another very effective tool. In some circumstances receivers can be appointed over specific cryptoassets, rights, licences and even exchanges. The receiver must act in accordance with the powers given to them by the court. Since receivership is not a collective proceeding, the receiver is only concerned with preserving assets/rights for the victim pending judgment. However, you should also bear in mind that some jurisdictions will not recognise receivership orders.
Want to hear more from us? 
