Binance successfully challenges interim proprietary injunction over deposited cryptoassets
In Piroozzadeh v Persons Unknown and Others  EWHC 1024 (Ch), the cryptocurrency exchange Binance successfully applied to discharge an interim proprietary injunction obtained by a claimant whose misappropriated cryptoassets had been deposited at the exchange. This is the first recorded case of an exchange successfully having discharged such an injunction.
The focus of the judgment relates to whether a cryptocurrency exchange in receipt of misappropriated assets holds them as a constructive trustee. We have previously looked at this topic in an article considering D’Aloia v (1) Persons Unknown (2) Binance Holdings Limited & Others  EWHC 1723 (Ch) where it was considered at a without notice hearing that there was a good arguable case (a relatively low standard) that cryptocurrency exchanges owed constructive trustee duties to victims of misappropriated cryptoassets.
In October 2022, the claimant successfully obtained on a without notice basis an interim proprietary injunction in respect of approximately $900k of misappropriated USD Tether, restraining various defendants from dealing with it. This USD Tether was said to have been transferred to Binance and another cryptocurrency exchange, who were also required by the order to preserve its traceable proceeds.
The claimant submitted at the initial hearing that there was an arguable equitable property claim against the defendants, including Binance, as constructive trustees on the basis that when property is obtained as a result of a wrongdoing, equity imposes a constructive trust on the recipient by operation of law.
At a return date hearing Binance sought to discharge the injunction on various grounds including that the claimant had not discharged its duty of full and frank disclosure at the initial without notice hearing. The most significant omission identified was that the claimant had not explained a potential defence available to Binance that it was a bona fide purchaser of the relevant cryptoasset.
The bona fide purchaser defence and the mechanics of crypto deposits at Binance
To understand the bona fide purchaser defence, it is first necessary to set out in simple terms the way crypto deposits work at Binance. When a cryptoasset is deposited at Binance, it is 'swept' into one or more unsegregated wallet addresses where it is pooled with the deposits of other users and thereafter treated as part of Binance's general assets. The depositing user's Binance account (i.e. an account held with Binance independent of any blockchain wallet address) is credited with the amount of the cryptoasset deposited, and the user is permitted to draw against any credit balance in that account, as in a conventional banking arrangement.
On Binance's case, as a result of this mechanism, any cryptoasset deposited at Binance is purchased in exchange for an equivalent account credit. In such circumstances, where Binance is a bona fide purchaser without notice of any fraud, any proprietary rights which otherwise might be held by a beneficiary in a 'swept' cryptoasset would not survive.
Binance's criticism of the claimant's presentation of the case at the without notice hearing was that while the general mechanics set out above had been explained, the possible legal consequences had not been. The judge agreed that the bona fide purchaser defence should have been explained. The judge also considered that the claimant's additional contention that the relevant misappropriated cryptoassets were in Binance's control was "obviously incorrect" in light of the pooling mechanism.
Discharge of the order
On the basis that that there had been a failure on the part of the claimant to give full and frank disclosure at the initial hearing, the judge discharged the interim proprietary injunction against Binance. In addition to the failure to identify the bona fide purchaser defence, the judge also considered that there had been a failure to address (a) the adequacy of damages as a remedy for any claim against Binance and (b) how Binance was practically to comply with the order, i.e. to preserve the traceable proceeds of the misappropriated cryptoassets, in light of the pooling arrangements. The judge also noted that damages being an adequate remedy would in any event have been a basis for discharging the order even in the absence of the of full and frank disclosure omissions.
The decision represents a significant victory for Binance and crypto exchanges generally where the pooling of user deposits is common practice.
Although the specific full and frank disclosure omissions in this case are unlikely to be repeated in light of this judgment, the finding that damages would be an adequate remedy for any claim the claimant might have had against Binance is likely to deter claimants from seeking to injunct crypto exchanges in the future.
Having held it was inappropriate to injunct Binance, the judge explained that the claimant should have confined its injunction to the non-exchange defendants before then serving it on Binance as a non-respondent and seeking any relief against Binance subsequently. This is helpful guidance and provides a clear alternative path for a claimant in such circumstances.
The judgment notably leaves open the key question of whether a constructive trust could arise in circumstances where deposit pooling occurs. It was not necessary for the court to determine that issue in this case, although the judge clearly was deeply sceptical of the proposition. Therefore while crypto exchanges might find cause for optimism in light of the judgment, the possibility of ultimately being held liable to claimants whose misappropriated assets are deposited with them still remains.