Cryptocurrencies – What are they? An Update

3rd February 2020 Corporate

Late last year I wrote a short blog on the UK Jurisdiction Taskforce’s view of what a cryptocurrency actually is. The UKJT concluded that they should be treated as property under English law, but as I noted at the time that conclusion wasn’t legally binding and the input of either the courts or legislation would be required to settle the position. The courts have now given the first indication of their view.

The case of AA v Persons Unknown an English insurer, who wished to remain anonymous, applied for an injunction against four defendants – (i) persons unknown who demanded Bitcoin on 10th and 11th October 2019; (ii) persons unknown who hold/control 96 Bitcoins held in a specified Bitfinex Bitcoin address; (iii) iFINEX Inc trading as Bitfinex; and (iv) BFXWW Inc also trading as Bitfinex.

The application related to the hacking of a Canadian insurance company and installation of malware which encrypted its computer systems. As is common, the hackers wished to blackmail the Canadian company for the payment of Bitcoin in return for a tool which would decrypt their system. The Canadian insurer was itself insured for relevant events by the English insurer which brought in its incident response company to help deal with the situation. Initially $1,200,000 was demanded by the blackmailers, but this was negotiated down to $950,000 which the English insurer decided to pay given the importance to its insured of getting its information back. Consequently 109.25 Bitcoins were transferred to a wallet address specified by the blackmailers, and a tool permitting decryption of the information was provided.

Following payment of the ransom, the insurer was able to track the Bitcoin paid. Some of them were converted into fiat currency, but 96 coins were tracked to a specific address linked to Bitfinex.

The court granted the requested proprietary injunction and also required that the Bitfinex entities disclose any information they hold as to the identity of the first and second defendants. Due to technical legal issues arising other injunctions which had been applied for, including a worldwide freezing injunction, were adjourned. 

Key to the granting of the injunction was whether or not the relevant Bitcoins are property at all. The judge determined that they are not choses in possession because they are virtual, they are not tangible and they cannot be possessed. They are not choses in action because they do not embody any right capable of being enforced by action. That produced a difficulty because English law traditionally views property as being of only two kinds, choses in possession and choses in action. On that analysis the Bitcoins could not be classified as a form of property, which would prevent them being the subject of the requested injunctions. However, he then considered the UKJT’s paper, which was in his view compelling, and ultimately he determined that it should be adopted by the court. On that basis, the Bitcoins were property, and he was satisfied that he could grant injunctions. 

This is the first consideration by the courts of the UKJT’s conclusions, and it is good to see that the court has agreed with them. It is also a salutary reminder that just because who owns a cryptocurrency wallet may not be known, the contents of that wallet are not beyond the reach of the law.

This article is for general guidance only and should not be used for any other purpose. It does not constitute and should not be relied upon as legal advice.

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John Young is a Partner located in Londonin our Corporate and Commercial department

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