This article is co-authored by Darragh Connell of Maitland Chambers who acted on behalf of Bitkub Online Co. Ltd (“Bitkub”) and successfully defended the claim brought by Fabrizio D’Aloia.
Following a five-day trial, the eagerly awaited judgment in D'Aloia was handed down on 12 September 2024. Richard Farnhill (sitting as a Deputy Judge of the Chancery Division) held that the digital stablecoin, USD Tether ("USDT"), although not a chose in possession nor a chose in action, did constitute property for the purposes of the law of England and Wales.
The judgment follows a string of cases in which the nature of digital assets such as crypto currency has been considered at an interlocutory stage, and which have led to the recognition of such assets as property through the incremental development of the common law. The judgment in D'Aloia is of particular interest because of the novel issues considered, and because it represents the first such decision resulting from a contested trial.
The decision
The Claimant, Mr D'Aloia, alleged that he was the victim of a fraud by which he was induced to hand over £2.5 million worth of USDT to the First Defendant which claimed to be part of a well-known American brokerage company, TD Finan. The cryptocurrency was then transferred through various ‘hops’ on the blockchain before it reached wallets said to be controlled by the Seventh Defendants.
The contested trial concerned only the Sixth Defendant, the well-known Thai cryptocurrency exchange, Bitkub, from whom Mr D'Aloia sought to recover a portion of his misappropriated USDT. The Claimant sought to persuade the court that the funds transferred to a wallet controlled by Bitkub known as the 82e6 wallet were the traceable proceeds of the fraud perpetrated on Mr D’Aloia and as such, certain USDT were purportedly held by Bitkub on constructive trust for Mr D’Aloia or that Bitkub were otherwise liable in unjust enrichment.
Mr D'Aloia was unsuccessful in showing that his cryptocurrency had, in fact, been transferred to the relevant the 82e6 wallet controlled by Bitkub. The following were key aspects of the decision:
- Tracing: Fatal to the claim was deficiencies in the Claimant's expert evidence, which failed to reliably demonstrate any flow of his misappropriated funds to the 82e6 wallet.
- Unjust Enrichment: Whilst Bitkub was enriched at the point of receipt of payment, this was not shown to be at the expense of the Claimant. As a matter of law, tracing the Claimant's USDT through mixed funds was not possible in support of his common law claim in unjust enrichment, and as a matter of fact, the Claimant failed to demonstrate that his funds could be traced to the 82e6 wallet.
- Constructive Trust: The obvious difficulty here was that the Claimant failed to show that Bitkub received any of his funds. In any event, Mr D’Aloia’s pleaded claim imposed a constructive trust on the unknown fraudsters upon their receipt of the funds. No constructive trust arose directly as against Bitkub and no claim in knowing receipt was advanced against Bitkub.
Ultimately, the Judge concluded at paragraph 382 of his judgment that "…Mr D'Aloia has failed to show on the balance of probabilities that any of his USDT ever arrived at the 82e6 wallet…Mr D'Aloia has no claim against Bitkub because it did not receive anything from him. It holds no trust funds; there is no normatively defective transaction as between Bitkub and Mr D'Aloisa to undo".
But what about property rights?
The Judge considered prior case law that has sought to pave the way for the recognition of digital assets as personal property under English Law, starting with AA v Persons Unknown.[1] In that case cryptoassets such as Bitcoin were acknowledged by Bryan J as being property for the purposes of an interim proprietary injunction, having met the four criteria for "property" as set out in National Provincial Bank Ltd v Ainsworth.[2] The position was further reinforced in Tulip Trading Ltd v Van der Laan,[3] where it was established that Bitcoin fulfilled the Ainsworth criteria: it was definable, identifiable by third parties, capable in its nature of assumption by third parties, and had some degree of permanence or stability.
D'Aloia reaffirms the status of digital assets as property under English law as set forth in prior case law, but crucially, the judgment represents the first time a decision on the nature of digital assets has been given following a contested trial, rather than at an interlocutory stage.
There are a number of practical implications arising from the D'Aloia judgment:
- While Mr D'Aloia was unable to show that his funds arrived at the wallet operated by Bitkub, the recognition of a digital asset as property opens the door to a range of powerful actions against fraudsters and potentially relevant third parties such as crypto exchanges. The judgment highlights that cryptocurrency, as a form of personal property, is capable of being the subject of tracing and can also constitute trust property (a constructive trust had arisen over the claimant's funds in the hands of the first defendant).
- One of the key issues that Mr D'Aloia faced was his inability to show that Bitkub had received his funds with reference to blockchain forensic evidence. The case highlights the importance of conducting a thorough investigative exercise to determine and demonstrate the flow of misappropriated digital assets across various hops on the blockchain with reference to a consistent and reliable methodology.
- From the perspective of crypto exchanges, the court was critical of the manner by which Bitkub’s customer was permitted to exceed daily withdrawal limits notwithstanding its finding that Mr D’Aloia’s claim was dismissed in its entirety. Given the proliferation of fraud in respect of digital assets, the courts will increasingly expect crypto exchanges to have effective fraud prevention processes in place and demonstrate consistent adherence to such processes.
Property (Digital Assets etc) Bill
The landmark judgment in D'Aloia was handed down the day after the Property (Digital Assets etc) Bill was introduced to the House of Lords on 11 September 2024. The Bill, which follows on from the Law Commission’s final report on digital assets published in June 2023, is designed to provide statutory confirmation that a thing will not be deprived of legal status as an object of personal property rights merely by reason of the fact that it is neither a thing in action nor a thing in possession. In other words, the Bill facilitates the common law recognition of a category of property other than choses in possession and choses in action.
The purpose of the Bill is to provide greater certainty as to the proprietary nature of digital assets. If passed, the legislation will necessarily expand the definition of property contained in other primary pieces of legislation. Most notably, section 436 of the Insolvency Act 1986 contains an expansive definition of property including “money, goods, things in action, land and every description of property wherever situated and also obligations and every description of interest, whether present or future or vested or contingent, arising out of, or incidental to, property.”
So, what's next for digital assets from a legal perspective?
There are two important features of the D’Aloia judgment which evince the likely further development of the common law in respect of digital assets.
The recognition of other digital assets as property
First, whilst the recognition of USDT as a form of property for the purposes of English law is unsurprising given prior interim decisions, it does open the door to many other digital assets being similarly recognised by the courts concordant with the Property (Digital Assets etc) Bill. Recognition of any asset as property is, however, necessarily dependent on the nature of the asset in question. In that respect, the judgment in D’Aloia recognised the difficulties for judges in determining such matters at [172]:
“172. … The Law Commission's draft Property (Digital Assets etc) Bill does not seek to say whether crypto-assets, or certain classes of them, are property. It simply clarifies that something can be property that is neither a chose in action nor a chose in possession. Assuming that Bill became law, it is not clear what the judge would be expected to do, given that Parliament would have spoken but would not have resolved the types of concerns that Professor Grower and Professor Stevens raise.”
In due course the common law will necessarily need to consider which digital or electronic assets do, in fact, constitute property. In D’Aloia, it was noted that the starting point for the recognition of an asset as property is the test in National and Provincial Bank v Ainsworth [1965] 1 AC 1175 and that will also, often, be the end point. Certainty, exclusivity, control and assignability have also been identified in case law as characteristic of property rights. Although possession of those characteristics may not always be sufficient, and they are not themselves capable of precise definition, a number of cases have treated them as important indicia of property.
The development of new tracing methodologies
Secondly, the D’Aloia judgment recognised that the common law is not limited to the tracing methods identified in Charity Commission for England and Wales v Framjee [2014] EWHC 2507 (Ch). That is to say that the courts are not limited to applying existing tracing methodologies such as first in first out (“FIFO”), pari passu distribution and the rolling charge method. Accordingly, other methods, if methodologically sound and reliably evidenced, are available to a party seeking to trace assets, at least in the context of claims arising out of fraud.
Fatal to Mr D’Aloia’s claim was the failure of his appointed forensic blockchain expert to adhere to the methodology identified in his expert report as having been used namely, FIFO. It transpired that the expert had not used the FIFO methodology cited in his report and no alternative methodology was properly evidenced to the court for the conclusions reached contrary to the requirements of Practice Direction 35. This failure not only resulted in the claim against Bitkub being dismissed but it also sounded in an order for the assessment of 75% of Bitkub’s costs on the indemnity basis at a consequentials hearing that took place on 19 and 29 November 2024.
In future cases, blockchain forensic experts will need to clearly identify what methodology they have relied upon to evidence the flow of digital assets and why that methodology should be deemed reliable. This is not a straightforward task since blockchain forensic analysis is often dependent upon third party software and the flow of funds may necessarily involve mixing services.
Accordingly, it appears evident that in due course the courts will be required to grapple with the question as to the appropriate method or methods open to a party seeking to evidence the tracing of digital assets across various transactions on the blockchain. In light of the judgment in D’Aloia, the common law may well be developed further to expand beyond the existing methodologies to reliably address the vagaries of digital asset flows.
[1] [2019] EWHC 3556 (Comm)
[2] [1965] A.C. 1175, [1965] 5 WLUK 32
[3] [2023] EWCA Civ 83
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