Recovery of digital assets in 2022

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Introduction

2021 has been a blockbuster year for cryptocurrency, helped in large part by the Covid-19 pandemic, which has seen markets and exchanges increase dramatically. Due to this growth, tracking cryptocurrency assets is no longer a niche legal sphere. It is increasingly visible in the English courts. In January 2022, Master of the Rolls Sir Geoffrey Vos highlighted the need for all commercial and dispute resolution lawyers to understand blockchains, smart legal contracts and crypto-assets.

From a business perspective, the growing value of cryptocurrency and the ability to conceal its ownership means that the field of crypto-asset tracing will continue to expand as part of commercial dispute resolution.

Commercial dispute resolution practitioners have seen a series of cases published in the English courts which deal with a range of issues including; securing information from exchanges, restricting subsequent transactions, and ancillary issues, including cost security.

Chris Recker, senior partner at Duane Morris, and Jonathan Bellamy, commercial lawyer at 39 Essex Chambers, identify key legal decisions and highlight some of the key challenges and practical steps to take. This article is gratefully supported by industry specialists in the form of Asset Reality, the world’s first dedicated asset manager for seized crypto assets, and CSI Tech Ltd, a global agency specializing in tracing the blockchain that wrote the first book on cryptocurrency investigation.

Recent cases

On the merits, in 2019, the commercial court confirmed that Bitcoin was likely to be a good; AA against people unknown & us [2019] EWHC 3556 (Comm), a decision consistent with the judgment of the Singapore Court of International Commerce in B2C2 Limited v Quione PTC Limited [2019] SGHC(I)03. Since then there has been judicial acceptance for injunctive purposes without notice that the lex situs cryptocurrency is the domicile of the owner; (Ion Science Ltd v Unknowns and Others (unpublished), December 21, 2020 (Commercial Court)).

With regard to the search for assets, the categories of strangers likely to be subject to a freezing and/or property injunction have been further developed; Fetch.AI Limited and others against unknown persons and others [2021] EWHC 2254 (Comm). Cases have highlighted the importance of using exclusive injunctions to restrain hijacked cryptocurrencies (see for example, Mr Dollar Bill Limited v. Unknown Persons and Others [2021] EWHC 2718 (Ch)) and work with specialist blockchain tracers to locate the cryptocurrency.

We have also seen disputes over whether cryptocurrency can be held in trust. In Wang vs. Darby [2021] EWHC 3054 (Comm), it was common ground that under English law crypto-assets are property that can be bought and sold as well as held in trust. However, based on the facts of the transaction in question, it was found that Tezos (XTZ) was not held as such because the “essential economic reciprocity” of the agreement between the parties precluded any trust. We expect this to be a matter that will be carefully considered in business going forward.

One of the most interesting recent developments in case law relates to requesting assistance from a centralized entity that controls a cryptocurrency. In Lubin Betancourt Reyes vs Unknowns [2021] EWHC 1938 (Comm) the plaintiff requested the assistance of the entity that controls the cryptocurrency called “USDT” (Tether) to cancel and reissue the hijacked cryptocurrency.

On related issues, the Court recently declined to order security for the charges in the form of a digital asset. Among other things, it should be noted that the Court held that granting security in this manner would expose a defendant to risk in the form of a decline in the value of Bitcoin which is not a risk in conventional forms of security – such as a first class bond or guarantee; Tulip Trading Ltd v Bitcoin Association for BSV [2022] EWHC 141 (Ch).

Emerging issues

The development of international orders for the production of information is an important emerging issue. Crypto-assets are often held on exchanges registered in offshore, and often “exotic” jurisdictions, chosen for their resistance to outside legal intervention. At present, there is some uncertainty over authorities as to whether an English court has jurisdiction to issue production orders to parties outside England and Wales and, in if so, based on which gateway. There is an unresolved tension between competent authorities; AB Bank Ltd v Abu Dhabi Commercial Bank PJSC [2016] EWHC 2082 (Comm), CMOC against unknown persons [2017] EWHC 3599 (Comm), AA against people unknown (above) and Lubin Betancourt Reyes & anr c Inconnus & golds [2021] EWHC 1938 (Comm).

Crypto-assets, including assets representing the fruits of hijacked fiat or cryptocurrency, may also be held at addresses outside of a centralized exchange. A property and/or blocking injunction may prevent further transactions and dispositions, but in the absence of a third party holder, how will the order be enforced? It is likely that courts will need to consider making search and seizure orders in such cases to promote enforcement. To maximize the chances of the cryptocurrency being seized and secured, a hybrid search and receivership order may be appropriate to locate and secure the private keys on an attacker’s computer or property. . We expect parties to invite the Court to develop creative legal solutions to help victims of fraud in such cases.

A key theme in litigation management is the international scope of litigation and claims involving digital assets. As international commercial lawyers, we are familiar with monitoring litigation across the globe and work with teams of lawyers and technical experts in multiple jurisdictions.

Aidan Larkin, CEO of Asset Reality, emphasizes the importance of selecting the right team and harnessing the benefits of blockchain technology:

“It’s easy when we hear the term ‘crypto’ to immediately think of the incredibly technical ecosystem in which it operates which often leads to a combination of misconceptions, panic and assumptions that get in the way of attempts to asset recovery for victims. The truth is that in an asset recovery context, crypto presents more opportunity for success than traditional cases. As a former criminal investigator, I have first-hand experience of the frustration felt when searching for assets internationally.However, blockchain analytics tools allow us to map fraudulent activity or trace digital assets in minutes and hours versus weeks and months that takes a similar activity in the fiat world.

A unique challenge in recovering crypto assets is the potential asset dissipation rate and mismanagement of seized digital assets. We have seen instances of litigation, successfully tracing and freezing crypto on a third-party exchange, for example, only to lose the asset through inexperience, negligence, or in rare cases internal theft and fraud.

Specifically, for the regulated industry and asset recovery practitioners, a significant risk comes in the form of IP’s inability to identify potential crypto assets that could be recovered for the benefit of the estate. If it later turns out that they missed out on potentially available assets, they could face action from disgruntled creditors.

Practical steps – how to react if you are a victim?

A recovery strategy is only as good as the legal and technical team that is assembled. Choosing a team that understands what’s possible and what isn’t, and who knows the questions to ask and investigate, is key. The sooner this team is put together, the better the chances of a positive recovery, including without notice and the temporary orders requested in the short term. Ultimately, each case must be considered on its own facts and merits.

Legal teams experienced in this area work with specialist blockchain tracing agencies that can interpret blockchain transactions. This is generally the first phase of proof. In some cases, such as those involving NFTs (non-fungible tokens), this can provide adequate proof of identification and location. In other cases, this probationary phase can make it possible to identify the entities (or stock exchanges) likely to be the subject of production of documents or blocking orders. When combined with open source specialist intelligence, it is also possible that other targets will be identified.

Nick Furneaux of CSI Tech highlights the extent of this risk:

“Having investigated crimes involving over $21 billion over the past 4 years, we have seen every scam under the sun. Knowledge is always the key to avoiding being defrauded and that includes related fraud to crypto-assets. If you are considering buying or investing in cryptocurrencies, you need to understand how your asset is protected. Cryptocurrencies are traditionally protected by a private key, this can be a long string of numbers and letters or more often a list of words, 12 or 24 words long This is a PRIVATE key and the clue is most certainly in the name!

Many attacks are games of social engineering to try to get your private key either simply by asking for it to “authenticate” you, or because they claim to need it to, say, invest your funds or otherwise. Keyword handover gives attackers access to all the cryptos in your wallet, it’s like giving someone your bank card and PIN.

Some keep their funds in an account at a cryptocurrency exchange and this will likely be protected primarily by usernames and passwords. If there is an option to configure multi-factor authentication, it is essential to use it. If multi-factor authentication isn’t available, don’t use the exchange, walk away.

Investment companies that promise to “make your crypto work harder” are almost always scams, support staff asking for your keywords are always thieves, and hackers look for easy targets with computers or other unprotected devices. Do your homework, understand the fundamentals of technology, and hopefully you won’t need my services to try and get your money back.

Summary

The risk to victims is real and growing and as a result crypto-asset litigation and related investigations will continue to increase in 2022. We expect courts in a variety of sophisticated jurisdictions, including England and the of Wales, will continue to adopt new solutions to these are complex disputes. This is a very emerging area of ​​law. In this respect, 2022 is really the beginning!

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