Through the consideration of four recent cases, we provide an update as to the current state of play, and show how the courts have continued to assist victims of crypto asset fraud through the use of their powers.
Tulip Trading Limited v Van Der Laan and Others
Read the full judgment.
At the time of our last update, the High Court had recently handed down a decision in the ongoing case of Tulip Trading Limited (“TTL”).
In its claim, TTL alleges that it is the rightful owner of public addresses holding some $4 billion worth of Bitcoin, which is now inaccessible because of an alleged hack which it says led to the loss of the private keys associated with the relevant wallets. TTL’s case is that, because (it says – the contention is hotly disputed by the developers) the developers have undertaken to control the software of the relevant bitcoin networks, they exercise control over the Bitcoin, and this has the result in law that they owe fiduciary duties to the true owners of the Bitcoin. TTL therefore argued that the developers are obliged to introduce a software patch which would allow TTL to regain control of the disputed Bitcoin.
In the High Court, Mrs Justice Falk rejected TTL’s argument, finding that TTL had not shown that it had a realistic prospect of establishing that the Defendants (software developers who have worked on the Bitcoin project) owed fiduciary duties to the Claimant, and that those obligations had subsequently been breached.
The Court of Appeal overturned Falk J’s decision. In the leading judgment (with which Lewison and Popplewell LJJ agreed), Birss LJ considered that although the success of TTL’s case would involve a “significant development of the common law on fiduciary duty”, such a duty could not be rejected summarily.
In reaching this decision, Birss LJ – proceeding on the basis that the allegations made by TTL that the developers control the BTC software was true (which he was obliged to do given the issue arose in the context of a jurisdiction challenge) – found that the developers’ alleged role in “making discretionary decisions and exercising power for and on behalf of other people, in relation to property owned by those other people” could give rise to fiduciary obligations. His Lordship did not accept that such obligations, or the developers acting in accordance with them as the Claimant proposed, would necessarily be inconsistent with traditional features of fiduciary obligations, such as a duty of single-minded loyalty, pointing to arrangements where trustees may take decisions that favour individual beneficiaries over others, without any breach of their fiduciary obligations. Birss LJ therefore concluded that it was arguable that the developers owed fiduciary duties to Bitcoin users. These duties may include the duty to act in a positive manner in certain circumstances, notably by introducing the sought-after patch which would allow an owner’s Bitcoin to be transferred without use of private keys.
It should be noted that despite this being a novel decision, it is not a finding that a fiduciary duty exists in the circumstance alleged or at all, only that the case raises a serious issue to be tried which could not be dismissed summarily. Moreover, none of the factual contentions alleged by Tulip (including the highly contentious question of whether the BTC software was decentralised) was tested by the Court. The case will therefore proceed to trial, at which time the Court will determine the factual matters underlying the claim and, in that context, consider whether fiduciary duties of the kind alleged are owed. The question of tortious duties was also raised, with the Court finding that as these claims only arise if the developers owe a fiduciary duty, they should also be allowed to proceed on the same basis.
This decision will be of concern to open-source developers who will closely follow the consideration of this question at trial as it could mean developers have a duty of care, and consequently are at risk of liability for the code they create. It will also be of interest to the crypto community at large, not only because of those involved, but due to its potential to undermine a key feature of crypto assets, their immutability.
Osbourne v Persons Unknown
Read the full judgment.
Osbourne v Persons Unknown is the continuation of proceedings relating to two non-fungible tokens (“NFTs”) which were allegedly misappropriated by hackers in early 2022.
The Claimant, Ms Osbourne, has previously applied for and was granted an interim injunction to restrain Persons Unknown from dealing with or disposing of the NFTs. Subsequently, Ms Osbourne’s investigator uncovered evidence that the NFTs were transferred to a wallet linked to a South African email address, and that one of the NFTs was being advertised for auction. The email address was linked to an individual living in South Africa, in relation to whom Ms Osbourne sought: i) permission to add them to the claim form, pleading an equitable proprietary claim against them; ii) permission to serve them out of jurisdiction; iii) an interim injunction (effectively an extension of the injunction that was already in place); and iv) permission to serve them by alternative means, namely via NFT.
Mr Justice Lavender allowed the addition of the South African defendant under his powers pursuant to CPR 19.2(2)(b) finding that i) there was an issue (whether the NFTs were held on constructive trust for the Claimant) which involved them; ii) it was connected to the matters in dispute; and iii) it was desirable to add the defendant to proceedings.
Lavender J, having considered the principles set out in American Cyanamid Co, followed on from the original conclusion of HHJ Pelling KC in granting the application for the injunction, having found no reason to depart.
Having quickly disposed of the questions as to whether there was a serious issue to be tried, and whether England and Wales is the most appropriate forum, Lavender J considered whether the claim would fall within one of the gateways found in Practice Direction 6B, sub paragraph 3.1. He showed clear concern as to the viability of service out under gateways 11 and 15(b), despite the decisions that have gone before, noting that the assets “may well have left the jurisdiction before any cause of action accrued”. He drew a considered analogy with a car that may originally have been in the jurisdiction, but which, having been obtained by fraudulent means by B, was transferred out of the jurisdiction and transferred by B to C, before C was sued by the victim. In these circumstances he considered that the car would not have been property within the jurisdiction when C acquired it, or when the victim sued C (see ). Regardless, Lavender J was content to allow service out under gateway 15(c), finding a strong arguable case that the claim is governed by the law of England and Wales.
Finally, Lavender J also allowed service via NFT on the basis that the Claimant had no other available method of service. This aspect of the decision follows in the footsteps of D’Aloia v Person Unknown and others, which was considered in detail in our earlier article.
This case continues to demonstrate the court’s sympathy for victims of crypto asset fraud to allow them to pursue their claims against fraudsters, particularly in circumstances where the traditional forms of service are unavailable.
Jones v Persons Unknown  EWHC 2543 (Comm)
Available through Westlaw.
In a case with facts that bear no small resemblance to those in the case of Ion Science and Duncan Johns v Persons Unknown and others (considered here), Mr Jones was a victim of a scam in which he was encouraged to purchase crypto assets through a fake crypto investment platform which promised high returns. Having been unable to withdraw his funds Mr Jones issued claims against the fraudsters (Persons Unknown) for deceit and unjust enrichment, and against Huobi Global Limited (“Huobi”) (a Seychelles based crypto exchange) as a constructive trustee, on the basis that investigators demonstrated that Huobi was associated with the wallet currently holding the Bitcoin.
In his application, Mr Jones sought an order against the defendants for summary judgment (including the delivery up of the Bitcoin), as neither Persons Unknown nor Huobi had made contact or filed a defence. Mr Jones also sought permission to serve the order out of jurisdiction and by alternative means, as well as a continuation of his proprietary and freezing injunctions post-judgment.
Mr Nigel Cooper QC (sitting as a Judge of the High Court), following a brief consideration of the principles set out by Lewison J in Easyair Ltd v. Opal Telecom Ltd  EWHC 339 (Ch), found no issue in granting summary judgment against the defendants. In relation to Huobi specifically, he was content to find that they were a constructive trustee in relation to the assets because they were in control of the wallet into which the assets were apparently paid, and no evidence had been adduced to demonstrate that they, or any other party, had a proprietary interest in the assets which could override the Mr Jones’s beneficial interest.
Mr Cooper QC also granted the continuation of the proprietary and freezing injunctions to “aid the process of execution” post judgment where there was a continuing risk of dissipation, while also releasing Mr Jones from his cross undertaking in damages.
In relation to service out of the jurisdiction, the judge followed HHJ Pelling QC (who had previously granted permission to serve the claim form out of jurisdiction) and found that Mr Jones had established and satisfied gateways 9 and 16 as relevant gateways under Practice Direction 6B in relation to Persons Unknown, and gateway 15 in relation to Huobi.
Finally, service by alternative means was granted to ensure that the court’s orders were enforced, particularly in circumstances where “[the assets] could be dissipated at any moment simply at the flick of a mouse”, and, with regards to Huobi registered in the Seychelles, where “service pursuant to the Hague Convention would be too slow”.
As with Osbourne v Persons Unknown, this is another example of the English court assisting victims of crypto asset fraud where they can. While Mr Cooper QC evidently found this to be a straightforward case (particularly in circumstances where Huobi failed to engage in the proceedings and presented no evidence to rebut that of Mr Jones), the finding that an exchange held the misappropriated assets on constructive trust for Mr Jones and could consequently be ordered to deliver up the assets will undoubtedly be of concern to other platforms. While it may not lead to a wave of such cases, it is not unimaginable that most victims of crypto asset fraud may now seek remedy from a known exchange in circumstances where identifying the original fraudster is next to impossible. We have previously considered the implications of crypto exchanges being found to be constructive trustees of crypto assets following the claim brought by Mr D’Aloia last year.
LMN v BITFLYER HOLDINGS INC and Others
Read the full judgment.
LMN v Bitflyer Holdings Inc and others is a Part 8 claim brought by a cryptocurrency exchange against six other exchanges including Binance and Coinbase. Following a hack which led to the loss of millions of dollars-worth of cryptocurrency, LMN sought help from various regulatory and law enforcement agencies. When this did not result in the recovery of the funds, LMN pursued civil action. After instructing investigators to find the crypto assets, they were traced to exchange accounts held and operated directly by the Defendants. As a consequence, it was said that the tracing exercise could go no further.
Over the course of two hearings before Mr Justice Butcher, LMN sought information orders for the Defendants to deliver up any relevant ‘know your client’ information kept by the Defendants under the court’s Norwich Pharmacal or Bankers Trust jurisdictions. LMN also sought permission to serve the application out of jurisdiction and by alternative means. Notably, LMN was unable to identify which legal entity within the group of companies that operated each exchange was responsible for operating them and holding the relevant information sought, it therefore issued the application against the ‘topco’ for each exchange.
At the first hearing, held ex parte, Butcher J declined to hear the application for information orders without notice being given to the Defendants, considering it inappropriate where i) the alleged fraud was not recent; ii) the application was not made against the fraudsters; and iii) none of the Defendants were alleged to have been fraudulent. He did proceed to hear the two other applications.
In permitting the order for service out, Butcher J promptly disposed of two of the three limbs of the test. He found that England and Wales was the proper place for the claim to be brought, and that there was a good arguable case the claim fell under gateway 25 in Practice Direction 6B, the new gateway that has been recently been introduced specifically for situations such as this. In considering the third limb, whether there was a serious issue to be tried on the merits, he focused on the Bankers Trust jurisdiction. Butcher J found that there was a good arguable case that whoever holds the cryptocurrency does so as a constructive trustee for LMN and that the law of England and Wales was applicable. He was also satisfied in relation to the other principles. Although he only tested against the Bankers Trust principles, he noted that “there was a good arguable case that relief should be granted under the Norwich Pharmacal jurisdiction.”
Butcher J also permitted service by alternative means, finding there were good reasons to grant the order (and to the extent any defendant was situated in Hague Service Convention countries requiring exceptional circumstances) afforded by “the nature of the claim and the need for steps to be taken as soon as possible to seek to identify the relevant and defendants and to preserve property.”
At the second hearing, held on notice, Butcher J granted the orders for the provision of information having already considered the merits of a Bankers Trust application in the context of the service out application. He did, however, make note of an argument raised that, in making a Bankers Trust order against a foreign defendant, it could constitute an infringement of the sovereignty of a foreign jurisdiction and should only be made in exceptional circumstances. Unswayed, he commented that “the court is faced with the novel challenges of fraud in relation to cryptocurrency transactions, and an approach adopted in relation to banks in 1985 does not seem to me to be apposite.”
Again, the case is another example of the court exercising its broad powers to assist victims of crypto asset fraud, with Butcher J’s comment in relation to banks in 1985 particularly indicative of the flexible approach that the court may well be willing to take to assist. It is also a prime example of the intention, and use, of the new gateway 25 in allowing service out of jurisdiction in order to seek information that will disclose details of the true defendant in a claim sought to be commenced in England and Wales.