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Commercial Court uses its freezing injunction powers in the battle to identify crypto fraudsters

Published on 09 June 2021

Ion Science Ltd v Persons Unknown (Unreported, 21 December 2020)

The question

Can a court grant an injunction against unknown persons involved in crypto fraud, and where should the claim be brought?

Key takeaway

This is the first initial coin offering (ICO) fraud case to be heard before the English Commercial Court. It shows that the Court is prepared to treat cryptoassets as property within the common law definition and that the lex situs (ie the law of the place where the property is) for cryptoassets is the location where the owner is domiciled.

The background

Over several months, Ion Science Limited and its owner Duncan Johns transferred approximately £250,000 to his Coinbase account (a digital currency exchange) to invest ICOs, on the advice of several “advisers” claiming to be from a specialist investment company called Neo Capital (Neo). Mr Johns was then advised that his successful investment had made a US$15m profit, which could be released on receipt of commission payments. On each occasion, Mr Johns gave the “advisors” access to his computer to transfer money from his personal account via his Coinbase account to Bitcoin. Approximately £250,000 was transferred in Bitcoin to settle the commission debts, but Mr Johns never received his alleged profits.

He subsequently discovered that his contacts at Neo had used aliases which could not be traced, and that Neo was in fact listed on the Swiss regulator’s warning list and was not the registered entity that it had made itself out to be.

Further, a significant amount of Mr Johns’ Bitcoin had been dissipated through two cryptocurrency exchanges (Binance and Kraken). Ion Science and Mr Johns applied for a proprietary injunction and worldwide freezing order over the assets of the individuals connected to Neo to secure the Bitcoin (or proceeds) and to identify the advisor(s) that had appropriated the funds. Ion Science and Mr Johns also applied for an order for alternative service against the advisors.

The court’s decision

The Court confirmed that cryptoassets, such as Bitcoin, counted as property for the purposes of a proprietary injunction and was satisfied that it had the jurisdiction to grant the proprietary injunction and worldwide freezing order against persons unknown, as the description of the fraudsters was considered sufficiently clear to establish who was and was not included within the relevant group.

To try to find the recipients of the stolen bitcoin, the Court also granted a third- party disclosure order (referred to as a Bankers Trust order (BTO)) against the cryptocurrency exchanges, Binance and Kraken. The claimants required the Court’s permission to serve the BTO out of the jurisdiction and had to show that there were serious issues to be tried on the merits of the claims. The Court was satisfied that this was the case and, in granting permission, indicated that the lex situs of a cryptoasset is the place where its owner is domiciled.

The Court also considered that AB Bank Ltd v Abu Dhabi Commercial Bank (which had held that there was no gateway permitting service out of the jurisdiction against a third party for the purposes of a Norwich Pharmacal order) was distinguished as these were exceptional circumstances and this case involved a BTO as opposed to a Norwich Pharmacal order.

Why is this important?

This is the first ICO fraud case to come before the English Commercial Court and has been viewed as a possible blueprint for future claims, particularly given the increased prevalence of cryptocurrency fraud, alongside its increasing publicity and rapid rise in value.

The Court has demonstrated that it is prepared to treat cryptoassets as property and to grant proprietary injunctions where those assets are misappropriated, as well as third party disclosure orders to determine the identity of the fraudster(s).

Any practical tips?

Companies and individuals should ensure that appropriate policies are in place requiring enhanced due diligence for cryptoasset transactions and that staff are trained to spot the warning signs of crypto fraud. In particular, you should ensure that the party is legitimate; query whether the transfer can be made by other (more easily traceable) means and, if required, ensure that you have adequate information from the recipient for the purposes of identification (or, failing that, information regarding the recipient and the currency exchange that they use). If court action is required, the English courts are likely to be an appropriate forum to seek legal redress.