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On Wednesday, 28 September 2022 I was a panelist alongside my
Brown Rudnick colleagues Jane Colston and Jessica Lee (London) and
Stephen D. Palley (Washington DC) discussing recent developments in
crypto fraud. The session was recorded and is available
here, but some of the key points of the discussion and areas of
comparison between the US and the UK included:
Is the “crypto winter” and falling price of
cryptocurrencies resulting in less fraud in the
- Unfortunately, we don’t think it does – there is
still significant activity in the crypto market and while consumers
are more aware of crypto scams, bad actors continue to
- We have seen a significant move to fraudsters and hackers
targeting DeFi platforms and cross-chain bridges – which is
exactly what happened to Binance last week when a hacker targeted a
cross-chain bridge and made off with c.$100m of crypto.
Victims of crypto fraud do have a chance of recovery as
transactions can be traced even where the perpetrators of the fraud
- The blockchain is pseudonymous and not anonymous. All
transactions are recorded on the blockchain including wallet
addresses making it possible to trace the movement of crypto and
identify wallets which have received stolen crypto assets.
- Following the Legal Statement on Cryptoassets and Smart
Contracts of 2019, the English courts have been willing to treat
crypto assets as property and grant injunctions (including
worldwide freezing orders) to recover stolen crypto. Non-fungible
tokens (NFTs) have also been held to fall within this category.
Note – the Law Commission is currently considering establishing a
new third category of personal property called “data
objects” that would cover digital assets including
cryptocurrencies which would firmly establish crypto as capable of
- If the identify of potential defendant is not known, the
persons unknown jurisdiction in the UK and many other common law
jurisdictions (the equivalent in the US being the John/Jane Doe
jurisdiction) enables claimants to seek interim relief against a
defined categories of persons unknown such as owners of the wallets
that received the stolen funds.
- In both the US and the UK, service of court orders and
proceedings has been effected by using the blockchain and
airdropping an NFT into a known wallet address despite the wallet
holder being unknown. In a recent US crypto case, service was also
made via a help chat box on a website.
Orders can be obtained to enable the discovery of the
identity of the fraudster, though there can be some difficulties
- The English courts have stepped in by granting Norwich
Pharmacal Orders (NPOs) and Bankers Trust Orders (BTOs) against
third parties (e.g. crypto exchanges) to obtain disclosure of
information to identify unknown wallet holders who have received
- However, the level of information held by exchanges varies
hugely and so disclosure orders may not always be effective in
practice but incoming international regulation in this area will
likely make a difference.
- In particular, a new civil procedure gateway was
introduced in CPR PD 6B Para 3.1(25) on 1 October 2022 which will
facilitate a more cost efficient process to enable information
orders to be obtained against parties outside of the jurisdiction
seeking disclosure of (a) the identity of a defendant; and (b) what
has become of the claimant’s property, without having to
first issue costly court proceedings.
Incoming regulation will hopefully improve the prospects of
recovery in crypto fraud cases
- There is also a provisional agreement on the EU level to extend
anti-money laundering regulations to the transfer of crypto assets
and bring crypto assets and related entities under a regulatory
framework aimed at enhancing consumer and investor protection known
as the Regulation on Markets in Crypto Assets (MiCA).
- The FCA held CryptoSprint events in 2022 to discuss areas for
reform including on-going disclosure of information regarding
crypto assets to buyers, identifying when regulation should apply
and the need for custody regulatory framework, with a view to
protecting consumers. This is in addition to Money Laundering
Regulations that crypto asset businesses have to comply with (and
which will enhance the KYC information available in instances of
crypto fraud) and the financial promotion of crypto assets to the
Other interesting developments to watch in this space
- Questions over whether there can be other technological routes
to recovery. Panelists discussed whether developers on a network
could be subject to fiduciary or other duties of care to users to
reroute stolen crypto back to users. This is currently the subject
of an ongoing dispute in the Tulip Trading case
which is pending before the English Court of Appeal.
- Liability of decentralised autonomous organisations (DAOs).
Recently, the US Commodity Futures Trading Commission (CFTC) has
charged the individual members of a DAO, treating the DAO as an
unincorporated association. How DAOs will be treated more generally
in the UK and the US is yet to be determined and gives rise to a
number of potential issues including their legal status and who is
liable for a DAO’s actions.
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