Current Issues in Cryptocurrency Litigation

What you need to know

• Courts have struggled with whether cryptoassets can be classified as 'property' in the traditional legal sense, but generally appear to have accepted it is a form of property. This has ramifications for attempts to recover cryptoassets.
• Where cryptoassets are the subject of a dispute, there remains conjecture over which jurisdiction will be enlivened.  The courts are yet to reach a consensus on this point.
• Litigants have had mixed results trying to secure relief that might help recover lost cryptoassets.  That is especially so where the 'private key' remains unaccounted for. 

The current crypto-litigation landscape

Cryptoassets have morphed from an impractical way to buy pizza into a fully-fledged digital asset class.

But the assets' ubiquity has surpassed regulatory bodies' ability to corral them. Asset holders, desperate to secure possession of these volatile assets, do not have the luxury of waiting for regulation to arrive, particularly where they have suffered an overnight crypto theft. 

As a result, the courts have become the asset holder's refuge and in the process judges have had to try and incorporate this relatively nascent technology into existing legal concepts.

Three questions currently dominate the litigation landscape.  Firstly, whether cryptoassets are property, secondly, which jurisdiction applies to the cryptoasset, and thirdly, how does an asset holder go about recovering cryptoassets?

1. Are cryptoassets property?

The question of whether cryptoassets constitute property has proven a vexed one.

At its heart, the problem is that cryptoassets do not slot neatly into the two traditional classes of property, namely: 

• a thing (or 'chose') in possession - something that can be possessed; or 
• a thing (or 'chose') in action - something that can give rise to a legally enforceable right.

This question is of critical importance. If cryptoassets are not property, that limits how an asset-holder might be able to obtain effective remedies. For example -  a proprietary injunction aimed at freezing any movement of your crypto asset will not be granted by a Court if you can't establish that your crypto is in fact property.

But the courts have been willing to treat these assets as property. In AA v Persons Unknown¹,  the English High Court granted a proprietary injunction over Bitcoin. 

In that case, the High Court acknowledged that a cryptoasset did not meet the 'narrow definition' of property but considered it was still property because it met the four criteria in Lord Wilberforce's classic definition, specifically:²  

• it was definable;
• it was identifiable by third parties;
• it was capable in its nature of assumption by third parties; and
• it had some degree of permanence.

That decision has been followed in courts in the US, Singapore, New Zealand and South Korea. Most recently, the High Court of England & Wales and the Singapore High Court have also held that non-fungible tokens can be recognised as property capable of being 'frozen'.³ 

What remains unclear is the nature of that property. 

If the asset is plainly not a chose in possession (given it is not a tangible 'thing'), is it a chose in action? Or if it is not a chose in action, what is it? Does it constitute a third 'class' of property? Does it signal that the traditional classifications of property have outlived their usefulness? While the courts have been willing to determine that these assets can be property, they have been less inclined to determine their character. 

The UK Law Commission's recent consultation paper suggests these assets should occupy a third category – 'data objects' – and perhaps represents the path forward. It will be interesting to see whether the courts adopt that nomenclature.

In any event, until the nature of that property is rigidly defined, some uncertainty prevails.  For now it remains a positive for aggrieved asset-holders that the courts seem willing to accept cryptoassets as a form of property.

2. What's the relevant jurisdiction?

Perhaps less surprisingly, the question of where cryptoassets are located and, relatedly, where to commence legal proceedings has proven complex and remains without a definitive answer. 

Determining the most relevant jurisdiction is difficult when your crypto assets exist on a blockchain, can be moved at an instant, and can be controlled from virtually anywhere.  This can be further complicated when asset holders often apply to Court to seek relief against a (pseudonymous) individual who stole their assets and whom cannot be located, either in a geographical sense or even digitally.

These issues arose in the case of Ion Science⁴.  Ion Science commenced proceedings in the English Commercial Courts. The company lost its cryptoassets in a Ponzi scheme whereby it had been duped by a fake Swiss company called 'Neo Capital'.  Ion Science did not know where the people from 'Neo Capital' were located – they had only conversed with Neo Capital 'employees' over the phone. 

The Court held that England was the right location to commence the claim because:

• Ion Science's bank account, which funded the transfer, was an English bank account;
• Ion Science had granted Neo Capital remote access to its computer (from which the assets were 'taken'), which had been in England;
• The lex situs (i.e., the applicable law) of the cryptoasset was the place in which the person or company who owned it was domiciled. That place was England.

This last finding was critical. This held that the law to be applied to a cryptoasset will be the law in which the asset is domiciled. In other words, because Ion Science were 'domiciled' in England, English law was the applicable law.

That approach was followed in Fetch.ai Ltd and another v Persons Unknown Category A⁵.   However, in Tulip Trading Limited v Bitcoin Association for BSV⁶,  the Court preferred a test of residency to domicile.  Although the case was determined on other points, that distinction could have been of importance because whilst Tulip's residency was in England, it was actually incorporated or 'domiciled' in the Seychelles.

As a result, the question of where one is best placed to commence proceedings remains a live issue.

3. How do I actually recover my cryptoassets?

This issue has proven a thorn in the courts' side, and understandably so. 

It is a positive for litigants that courts will take their assets to be property and that they would have at least a cogent idea of where the relevant jurisdiction might be. 

But then what? How can the courts grant relief that might help the person recover their assets?  This issue, which is really a question of the utility of obtaining an enforceable court order, underpins almost all crypto disputes.

The courts have perhaps achieved mixed results in formulating meaningful relief for litigants.

For example, in Ion Science, the company was able to determine that their stolen cryptoassets were located in two cryptocurrency exchange platforms (Binance and Kraken). The company subsequently sought a proprietary injunction, freezing orders and a Bankers Trust order.

The Bankers Trust orders sought were crucial.  Those orders were sought against Binance and Kraken, and if made would force those platforms to disclose the true identities of the owners of the stolen crypto. 

The Court made the orders, accepting that they were necessary because there was a real prospect that the information would lead to the location or preservation of those assets. 

But this case exposes some glaring limitations of the courts: 

• The Court was ultimately entirely reliant on the ability of a third party to locate the assets (which will not always be possible). 
• It relied on third parties (Binance and Kraken) complying with the orders. 
• It presupposed that the individuals who had the assets (whoever they were) would not move the crypto and would accept Binance and Kraken (as applicable) freezing their account.  

It might be said that Ion Science, even after receiving the orders it sought from the Court, would have had doubts that it would see those assets again.

A further example which highlights the unique issues that arise with crypto assets comes in the Australian case Chen v Blockchain Global & Ors⁷.  In that case, Mr Chen sued Blockchain Global, claiming that the company  owed him approximately $10 million worth of Bitcoin. The Bitcoin was located on a crypto wallet that only Mr Chen and one of the directors of Blockchain Global, Mr Guo, could access.  Both needed to decrypt the wallet using their private keys to access the Bitcoin (a multi-sig wallet).

Mr Chen had access to his private key. But Mr Guo did not and claimed that he needed his 'seed phrase', which he had written down on a piece of paper and had stored in a confidential location in China, in order to transact with the disputed crypto. Mr Guo said he could not remember his seed phrase, and he could not guarantee that the seed phrase was still in the same place.  However, Mr Guo said he did 'not anticipate any difficulty' retrieving the seed phrase the next time he visited China.

Mr Chen was not satisfied by this, probably fearing that if Mr Guo was allowed to leave for China, he would likely never see him – or the Bitcoin –again.

The Court determined to make the following orders:

1. Mr Chen and Mr Guo should each copy their seed phrase into a document (Mr Guo could have another person take a photo of the seed phrase from China and send it to him).
2. Mr Chen and Mr Guo would then provide those documents to their solicitors, and the solicitors would place the documents in envelopes to be stored 'in a safe place' by their solicitors.
3. Mr Chen and Mr Guo would have the opportunity to explain any non-compliance with the orders.

The solution proposed by the court presents a number of foreseeable problems:

• Mr Guo might not wish to entrust another person with taking a photo of his seed phrase – a seed phrase that was effectively worth $10 million.
• The Court was placing a large onus on the parties' solicitors, namely to store the seed phrases 'in a safe place' (whatever that meant).
• If Mr Guo was intent on not providing the seed phrase, it was conceivable that he could fashion an explanation for his non-compliance - such as "I couldn't find it".  It was then unclear what recourse Mr Chen or any other party would have against him or how the Court would deal with this.

This case exposes limitations of the court process.  Ultimately, the courts and litigants still find themselves wrestling with a singular problem on this point – how do you secure relief if you can't secure access to the private key?

What next?

Courts' early attempts to grapple with digital assets are interesting and the case law is developing quickly.  Though as things stand, litigants involved in crypto disputes will arrive at the courthouse with more questions than answers, particularly where it comes to appropriate relief and the ability to secure that relief. 

Authors: Matthew Blycha, Partner; and Julian Pipolo, Lawyer.

_{1. [2019] EWHC 3556 (Comm)}

_{2. National Provincial Bank v Ainsworth [1965] AC 1175}

_{3. Lavinia Deborah Osbourne v Persons Unknown and Ozone Networks Inc trading as OpenSea [2022] EWHC 1021 (Comm); Jnesh S/O Rajkumar v Unknown Person ("Chefpierre") HC/OC 41/2022}

_{4. Ion Science v Persons Unknown and others (unreported, 21 December 2020)}

_{5. [2021] EWHC 2254 (Comm)}

_{6. [2022] EWHC 667 (Ch)}

_{7. [2022] VSC 92}