The rapid development of the digital assets space and Web 3.0 ecosystem in the past 10 years has meant that courts in the British Virgin Islands (BVI) have been facing an increasing number of disputes in this space.
Crypto assets as property
Edmond Fung
Senior Associate
Loeb Smith Attorneys
Hong Kong
Digital assets are neither tangible property (which can be possessed) nor assets that give rise to enforceable rights. Notwithstanding this, the English High Court, in AA v Persons Unknown and Others, provided much needed clarity on the legal status of Bitcoin and other cryptocurrencies. Justice Bryan held that, “I am satisfied … that cryptocurrencies are a form of property capable of being the subject of a proprietary injunction”. This finding is significant because it includes cryptocurrencies as a whole, and not just Bitcoin.
English law is a highly persuasive authority in the BVI. The above-mentioned AA case was cited in the BVI case of Philip Smith and Jason Kardachi v Torque Group Holdings Limited (in liquidation). Justice Wallbank stated that, “it is a reasonable conclusion that crypto assets are to be considered as assets for the purposes of liquidation”.
Remedies
Defining crypto assets is of practical importance, not least because if crypto assets are seen as property in the eyes of the court (which they are), then the remedies available will be based on established proprietary rights.
Worldwide freezing order. The BVI case of ChainSwap Limited v Persons Unknown reaffirmed that cryptocurrencies are a form of property. The claimant sought, among other things, a worldwide freezing order against persons unknown (those allegedly responsible for cybercrime consisting of the theft of digital assets). Justice Jack had no difficulty in granting a freezing order as there was “an obvious risk of dissipation if no freezing order is granted”.
Proprietary injunction. The English case of Fetch.AI v Persons Unknown saw the court order, among other things, a proprietary injunction and a worldwide freezing order. Hackers had obtained access to accounts that were maintained by the first claimant (first applicant) with Binance, within which were held various cryptocurrencies (including Tether).
The assets were then fraudulently transferred into third-party accounts at a massive undervalue, which incurred losses of more than USD2.6 million. Judge Pelling QC, in granting the orders sought, stated that, “I am satisfied that the assets credited to the first applicant’s accounts on the Binance Exchange are to be regarded as property. They are … a chose in action, and a chose in action … is generally regarded as property.”
Norwich Pharmacal order (NPO). The BVI court’s jurisdiction to grant an NPO is well established – they “are an everyday feature of the legal and corporate service landscape in the BVI”.
Bankers Trust order. There is some overlap between an NPO and a Bankers Trust order, although the two remain distinct from each other. Many recent cases have seen both NPOs and Bankers Trust orders being sought. The court has been ready to find that the respondent crypto exchange is required to give disclosure to the claimant.
For example, in the English case of Mr Dollar Bill Ltd v Persons Unknown, the claimant had been the victim of an alleged cryptocurrency fraud. To assist in tracing the missing Bitcoins, an NPO and a Bankers Trust order against two cryptocurrency exchanges were granted. The claimant was also granted a proprietary injunction to prevent further dissipation of the Bitcoins.
Third party debt order (TPDO). The English High Court, in Ion Science Ltd v Persons Unknown, granted what is thought to be the first TPDO in proceedings arising from cryptocurrency fraud relating to a cryptocurrency initial coin offering.
Conclusion
The cases and remedies set out above demonstrate the pragmatic and flexible approach that the common law courts have taken. Existing legal principles have been applied to the digital asset space to tackle the increasingly frequent cybercrime involving digital assets, and to grant the appropriate combination of remedies. The courts have generally permitted the claimants to commence action against the unidentified fraudsters/hackers (as “persons unknown”) and grant freezing and disclosure orders in their favour to assist in securing and recovering, to the extent possible, the proceeds of the fraud.
Edmond Fung is a senior associate at Loeb Smith Attorneys in Hong Kong
LOEB SMITH ATTORNEYS
Room 306, 3/F Printing House
6 Duddell Street
Central
Hong Kong
www.loebsmith.com
Contact details:
T: +852 3583 5000
E: edmond.fung@loebsmith.com
