Cryptocurrency fraud: key legal moves on asset tracing

In a recent dispute relating to crypto assets, Ion Sciences Ltd and its director, Duncan Johns, were the target of initial coin offering (ICO) fraud; this case took important first steps towards asset tracing, location of cryptocurrencies and its definition as property.

An ICO is a capital-raising activity in the cryptocurrency industry and virtual equivalent to an initial public offering (IPO). ICOs are scarcely regulated in comparison to IPOs making them susceptible to fraudulent schemes. This particular case was the first ICO fraud case heard before the UK Commercial Court.

Ion Science Ltd and Duncan Johns v Persons Unknown, Binance Holdings Limited and Payward Limited

The applicants were induced by persons unknown to transfer £577,002 (equating to 64.35 bitcoin) into several cryptocurrency investment opportunities. The first respondent not only convinced the applicants that the investments had been successful but persuaded them to invest in further cryptocurrency products. Their investment sums and profits were not returned.

The applicants sought to recover the misappropriated sums via an asset tracing and recovery exercise. Their investigations found the funds had been deposited in accounts held by cryptocurrency exchanges, namely Binance and Kraken. In order to recover their proceeds, the applicants applied for and were granted:

• a worldwide freezing order, a proprietary injunction, and an ancillary disclosure order to preserve the funds and to uncover the fraudsters’ identities
• disclosure orders against cryptocurrency exchanges Binance Holdings Limited and Payward Limited in the form of a Bankers Trust Order and an order under CPR 25.1(g) to trace the transferred funds.

As a result of the disclosure order, Payward Ltd disclosed that limited partnership Mirriam Corp LP held the account used to facilitate the fraud. The account itself was found to contain both cash and cryptocurrency. As Mirriam Corp LP failed to respond to the claim, the applicants obtained judgment for £2,935,204.30.

Further, Payward Ltd owed money to its customer, Mirriam Corp LP. The High Court decided that the outstanding funds could be used to repay the sum owed to the applicants and therefore made an interim third-party debt order. This order allowed Miriam Corp LP to recover the sums owed by Payward Ltd. Whilst Mirriam Corp LP did not respond to the application, the judge was satisfied that a debt was payable from Payward Ltd to Mirriam Corp LP. The judge finalised the interim order so that the applicants could recover the lost sums they were entitled to.

Ground-breaking developments

The case is particularly noteworthy for the following reasons:

• The judge’s decision provided an answer to a key legal question when determining that Bitcoin and other crypto assets constitute property under English common law.
• For the first time the court considered the location of Bitcoin to establish jurisdiction. In his judgment, the judge stated that a crypto asset is situated in “the place where the person or company who owns it is domiciled.”
• This was the first time a court granted permission to serve a free-standing Bankers Trust Order against cryptocurrency exchanges beyond the UK (in this case). Such an order compels a third party (here, a cryptocurrency exchange) to disclose certain information to the applicant. As a general rule, the order cannot be made against entities outside the UK. This was the case in AA v Persons Unknown which suggested that a Bankers Trust Order could not be done for exchanges outside the jurisdiction. However, the decision in Ion Science changed the position. This is particularly beneficial to any victims of crypto fraud who seek to trace and recover cryptoassets.

Conclusion

The decision in this case has developed key areas relating to cryptoasset fraud and asset recovery. By successfully using the third-party debt order this case has demonstrated that cyber fraud is not without repercussions and that cryptoassets can be traced and recovered.

The legal developments bring the UK financial system a step closer to better regulating the cryptocurrency industry and offering investor protection from fraud and money laundering schemes.

This demonstrates how the body of cyber legislation is constantly growing and adapting to the cyber challenges society is now facing. The recent decision gives a good indication of how courts will treat such challenges going forward.