Issues Surrounding Cryptocurrency

Cryptocurrency fraud: foreign cryptocurrency exchange ordered to convert cryptoassets into fiat currency and transfer the funds into the jurisdiction of the English courts

The rise of cryptocurrency

Recent years have seen a surge in the number of people seeking to invest in cryptocurrency. This is unsurprising given the peak trading prices achieved by the likes of Bitcoin and Ethereum in November 2021, which were then valued at £51,032.02 and £3,610.11 respectively. In June 2021, the Financial Conduct Authority (the ‘FCA’) reported that ownership of cryptoassets in the UK was believed to be in the region of 2.3m people, up from 1.9m in 2020. A 2022 report prepared by HM Revenue and Customs found that around 10% of UK adults – 5 million people – hold or have held cryptoassets, with cryptocurrencies being the most common. The number of different cryptocurrencies available to investors has also continued to grow. The FCA has reported that by early 2023, there were in excess of 20,000 cryptocurrencies, albeit a number were no longer being traded or were not expected to grow a significant market capitalisation.

What are the issues surrounding cryptocurrency?

Investment in cryptocurrencies remains a risky business. Not only do investors face market volatility, but there is also the risk of fraud. According to a report published by US blockchain analysis firm Chainalysis in February 2023, illicit transaction volumes continue to increase and are currently estimated at US$20.6 billion. It is therefore perhaps not surprising that the Treasury Committee recently concluded that cryptocurrencies pose a significant risk to consumers and has called on the UK Government to consider regulation.

Recent Court cases surrounding cryptocurrency

Despite a number of cases having come before the English courts arising out of fraudulent activity involving cryptocurrency, the law in this area continues to develop. The English courts have to date shown a remarkable willingness to grant remedies to assist the victims of fraud in seeking to recover their assets from the perpetrators of fraudulent activity. These remedies include the granting of worldwide freezing injunctions and what are known as ‘Bankers Trust’ orders against cryptocurrency exchanges requiring them to disclosure information, even where those exchanges are located out of the jurisdiction.

A case of foreign cryptocurrency exchange

One of the most recent examples is the case of Joseph Keen Shing Law v. Persons Unknown and Huobi Global Limited. This is a decision of the High Court of England and Wales. The claim arose out of an alleged fraud perpetrated against the Claimant relating to various cryptoassets. The Claimant commenced court proceedings and, in the absence of the fraudsters having responded to the claim, obtained default judgment. The Claimant also successfully obtained a worldwide freezing order in respect of the cryptoassets which had been traced into two wallets maintained by Huobi, a Seychelles-based cryptocurrency exchange. The Claimant then sought an order against Huobi requiring it to convert the cryptoassets into fiat currency (i.e. national currency made legal tender by the government) and transfer the funds into the jurisdiction of the English courts. The intention was that the monies would be paid into the Court Funds Office, which would then enable the Claimant to make an application under the Civil Procedure Rules for the release of the monies in satisfaction of the judgment debts obtained against the other defendants. An order in those terms was granted by the High Court.

This is a further example of the English courts being prepared to adopt a pro-claimant approach in instances of fraud involving cryptocurrency. However, it would be wrong to assume that the approach adopted in this case is evidence of a general trend towards granting a similar order in every case where there is a worldwide freezing injunction. Each case will necessarily need to be considered on its own merits.

Mr Justice Pelling KC confirmed that the circumstances in which the court will order that assets which are the subject of a worldwide freezing injunction be transferred into the jurisdiction remain limited and will not be made in every case. This is because it is assumed that where an order is made, the party subject to the order will comply with it. Huobi had co-operated with the Claimant by denying the other defendants access to the wallets, but there was no guarantee that state of affairs would continue and the English court had no control over the defendants as they were based outside of the jurisdiction. Huobi had been put on notice of the application but did not accede to it nor object. Those facts justified an order being made.

The future of the law surrounding cryptocurrencies

This case is a further example of the ability of the English courts to adapt to new technologies and adopt pragmatic solutions. However, the law in this area is far from settling. There is no question that there will be further developments as more cases come before the court, with the possibility of regulation on the horizon.

How can Morr & Co help

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