Cryptoasset Fraud

Cryptoasset Fraud

In 2023, cryptoasset fraud resulted in losses of £300 million. Innovative technology, including AI, is allowing this relatively new crime to thrive and for those who have had their funds stolen, or innocent parties caught up in criminal and civil recovery proceedings, life can become stressful extremely quickly. Fortunately, the Courts are moving swiftly to ensure the law can tackle cryptoasset fraud. Before we look at the latest cases, it is helpful to set out what cryptoassets actually are.

What are cryptoassets?

Section 417 of the Financial Services and Markets Act 2000 (FSMA) defines cryptoasset as meaning:

"… any cryptographically secured digital representation of value or contractual rights that (a) can be transferred, stored or traded electronically, and (b) that uses technology supporting the recording or storage of data (which may include distributed ledger technology)".

This definition is deliberately broad and technology neutral, so it catches all types of cryptoassets and is designed to future proof the definition in the FSMA, given the potential for future innovation in the digital assets space.

A crypto token is a representation of an asset or interest that has been tokenised on an existing cryptocurrency's blockchain. Although crypto tokens and cryptocurrencies share many similarities, they are different due to the fact that the latter are the native asset of a particular blockchain.

Cryptoasset tokens can be used as:

• A trading tool – enabling the buying and selling of goods and services, or to facilitate regulated payment services.

• Investments - firms and consumers can invest in cryptoassets by holding and trading tokens or by holding and trading financial instruments that reference particular tokens.

• Fund raisers - tokens can be used to raise capital or to create decentralised networks through initial coin offerings (ICOs) (that is, token sales). Once issued, these tokens can be traded on a secondary market.

Are cryptoassets regulated?

Currently there is little regulation covering cryptoassets. The Financial Conduct Authority (FCA) has some regulatory oversight over cryptoassets in that it:

• Supervises regulated cryptoasset tokens (that is, security and e-money tokens)

• Is the AML and CTF supervisor for registered cryptoassets entities under the MLRs

• Regulates financial promotions relating to cryptoasset business.

Activities related to security tokens and e-money tokens are also regulated by the FCA. In addition, the FCA has a remit to regulate the marketing and promotion of cryptoassets.

Section 69 of the Financial Services and Markets Act 2023 amended FSMA to allow for the future regulation of a broad range of cryptoassets. It also clarified that cryptoassets could be brought within the scope of the FSMA regulatory perimeter and restrictions on financial promotions.

Case law relating to cryptoasset fraud

In many instances, it has been left to the Courts to create legal parameters around cryptoassets, especially concerning fraudulent activities.

AA v Persons Unknown (AA) [2019] EWHC 3556 (Comm), [2020] 2 All ER (Comm) 704, was the first case to recognise cryptoassets as ‘property’. This position has been accepted in all subsequent cases. The Claimant in AA v Persons Unknown (AA), traced their stolen cryptoassets to a wallet account controlled by a crypto exchange. They successfully applied for an interim proprietary injunction. Following on, in Jones v Persons Unknown [2022] EWHC 2543 (Comm) the Court made decisions that resulted in:

• the creation of a constructive trust between a crypto exchange and a crypto fraud victim,

• an order for the delivery up of Bitcoin,

• the delivery of a summary judgment by NFT airdrop.

In LMN v Bitflyer Holdings Inc [2022] EWHC 2954 (Comm), information orders were granted against non-UK cryptocurrency exchanges for the provision of information and documentation to help identify:

a) those who held accounts into which stolen cryptocurrency was allegedly transferred, and

b) what had since become of the cryptocurrency.

One of the most challenging aspects of a cryptoasset fraud case are securing injunctions. Since 1802, the Courts have followed Lord Eldon’s dictum in Iveson v Harris (1802) 7 Ves 251, 32 ER 102, which affirmed the equitable principle that injunctions are orders in personam (against a person). However, the world of cryptoassets involves swathes of ‘persons unknown,’ in a context that Lord Eldon could not have foreseen 222 years ago.

In Wolverhampton City Council v London Gypsies and Travellers [2023] UKSC 47, [2024] 2 All ER 431, the Supreme Court moved away from the principle that an injunction must be granted against a particular person and allowed a local authority to obtain an injunction against anyone from setting up unlawful camps on government land. This type of injunction was called a ‘newcomer injunction’ and binds everyone who has been given notice of them.

Wolverhampton City Council v London Gypsies and Travellers provides an opportunity for injunctions to be applied more readily in cases of suspected Cryptoasset fraud. It deals with the problem of anonymity, which the internet provides for so well.

However, the course of new law never did run smooth. In Piroozzadeh v Persons Unknown Category A and others [2023] EWHC 1024 (Ch), Mr Justice Trower denied the Claimant’s injunction application, stating that the Defendant crypto exchange must be allowed to present its case, and also, as the exchange itself was an innocent third party, an injunction regarding disputed cryptoassets was unjustified. Mr Justice Trower also concluded that cryptoassets transferred to a crypto exchange’s central pool become part of the exchange’s general assets. This ended the original owner’s property rights, meaning the exchange could not hold the cryptoassets in constructive trust.

Where to now for cryptoasset fraud remedies?

It is now up to the Courts to align the different decisions in AA v Persons Unknown and Jones v Persons Unknown with the decision in Piroozzadeh v Persons Unknown Category A and others. The Supreme Court has provided a vehicle, in the form of a ‘newcomer injunction’ for freezing cryptoassets that may be subject to fraud in Wolverhampton City Council v London Gypsies and Travellers. Given the unique characteristics of cryptoassets and blockchain technology and the lack of enthusiasm for Government regulation, it seems as though the onus is on the Courts to provide a way for crypto fraud Claimants to protect their assets.

We can assist with cryptoasset fraud civil claims and provide a criminal defence if you have been accused of cryptoasset fraud. Please get in touch on 0300 3732424.