Digital assets including cryptocurrencies are being purchased at an increasing rate but the regulatory and legal framework governing digital assets is not quite clear. The Law Commission of England and Wales has recognised the need for consultation and reform in this area as digital assets have become a means for payment of goods and services in some industries, however their project remains in its pre-consultation stage and the consultation paper is not expected until mid-2022. Other recent developments include the publication that the promotion of crypto-assets will soon be regulated by the Financial Conduct Authority (CFA) once parliamentary time allows for legislation to be passed.

The recent report published by the Law Society of England and Wales on Blockchain also recognised that there is no specific regulatory regime for crypto-assets, other than those relating to the anti-money laundering requirements of exchange platforms. Rather, crypto-assets are capable of being governed by the existing regulatory framework.

Recent case law has emerged in the English Courts providing an idea of how that framework might work when crypto-assets form the basis of a claim. It also provides an example of the remedies available to those who have been a victim of fraud or theft of their crypto-assets.

It was confirmed by the UK Jurisdictional Taskforce and the recent case of AA v Persons Unknown that, if crypto-assets possess the relevant characteristics, they should be treated as “property” and the normal rules apply when trying to reduce the risk of those assets being dissipated.

In ION Science Ltd v Persons Unknown and others, the Claimant believed it had been induced to make investments in cryptocurrency products with what it thought was a Swiss investment firm but following its investment, the Claimant came to realise that the Swiss firm was not necessarily domiciled in Switzerland and no records could be found of the same. The funds appeared to have been dissipated. Swiss Regulators were also aware of the investment firm operating without the necessary authorisations.

The Claimant made an urgent ex parte application seeking an order of the following in an attempt to recover the assets:

1. A worldwide freezing order (WFO) and proprietary injunction to stop the assets being dissipated; and
2. Disclosure by cryptocurrency exchanges in the form of Bankers Trust Orders.

The court also had to grapple with whether the English court did, in fact, have jurisdiction to make such an order whilst the First Respondent remained unknown to the Claimant at this stage. Therefore, permission was sought to serve the First Respondent outside of the jurisdiction on the basis that they may not be domiciled in England and Wales.

It was decided by the Judge that the English courts had jurisdiction to make such an order given that the claim was so serious in nature and the orders sought fell within the relevant gateway which would allow a claim to be heard in the English courts.

A proprietary injunction, WFO and disclosure orders were granted. The Judge believed there to be a real risk of dissipation of the assets given the nature of the underlying claim as a result of the conduct of the First Respondent, who was working under a pseudonym in order to access funds and fraudulently obtain the same.

The development of crypto related case law provides important decisions and information for those investing in cryptocurrencies. It provides clarity on the legal classification of crypto-assets and the steps which should be taken if a prospective claimant believes they have been a victim of crypto related fraud.

This is an emerging area in English Law and we shall be continuing to follow developments. If you have any questions about dispute resolution relating to digital assets and smart contracts, please get in touch on 0345 872 6666.