Bitcoin in the news again… constructive developments, this time

It may seem that issues with Bitcoin are never out of the press but in a recent High Court decision (Jones -v- Persons Unknown [2022] EWHC 2543 (Comm)), the court went out of its way to assist a defrauded claimant and held that a cryptocurrency exchange was a constructive trustee in respect of Bitcoin which fraudsters had fraudulently transferred from the claimant to a wallet controlled by the crypto exchange. In giving the decision, the court held that the claimant was entitled to an order for the delivery up of his Bitcoin against the fraudsters and also the crypto exchange.

Constructive Trust

A constructive trust can be viewed as an essential remedy in a fraud case. It means that where property is misappropriated by fraud, equity can assist and impose a constructive trust meaning that the property is recoverable and traceable. It is already established law that Bitcoin can be treated as property – in AA -v- Persons Unknown [2019] EWHC 3556 (Comm), it was held for the purpose of granting an interim injunction, that cryptocurrencies were a form of property capable of being the subject of a proprietary injunction. 

Facts

The claimant (Mr Jones) was the victim of a large-scale cyber fraud perpetrated by a group of online cyber criminals located overseas. The fraudsters targeted individuals through the website of a fake investment company promising high returns. It persuaded clients to transfer cryptocurrency to a fake online trading platform, Extick Pro (EP).

Mr Jones responded to an online advertisement on the EP platform and invested a total of £480,206. He purchased 89.61616088 Bitcoin (current value of > £1.5 million) and transferred them to the EP platform. He was made to believe his Bitcoins were being traded profitably but in fact they were dissipated by the fraudsters across the Bitcoin blockchain.

Eventually, after various requests to withdraw his money, he was unable to do so, after being palmed off with reasons as to why his requested withdrawals were delayed, Mr Jones concluded that he could not recover his money, and instructed lawyers and investigators. Investigations established the existence of a wallet provided by a Seychelles company, Huobi Global Limited (Huobi), containing Bitcoin which must have been transferred to it by individuals connected with the fraud.

But how did he know who the fraudsters are and who can be sued? Mr Jones brought proceedings against the unknown persons to whom he had transferred his Bitcoin (the first defendant), the unknown persons who owned or controlled the accounts to which the Bitcoin were transferred (the second defendant), and against the crypto exchange, Huobi (the fourth defendant).

The claimant applied for summary judgment for an order for the delivery up of the appropriated Bitcoin belonging to him. He claimed against the first and second defendants for deceit and unjust enrichment, and against Huobi as constructive trustee of his Bitcoin because Huobi was the controller of the wallet in which Mr Jones’ Bitcoin were to be found.

High Court decision

In a novel decision, the High Court granted Mr Jones’ summary judgment application and made an order for delivery up. A further order for service of his final order on the defendants by alternative means, including by non-fungible token was made. Not surprisingly, the defendants did not appear or put in any evidence.

The judge was satisfied that Mr Jones was entitled to judgment against the first and second defendant for deceit and unjust enrichment, such that he was entitled to the return of all the Bitcoin that he transferred to the first defendant, or their equivalent. The judge was also satisfied that Huobi sat in the position of a constructive trustee as against the claimant, because Huobi was the controller of the wallet into which the Bitcoin was apparently paid. There was no evidence that Huobi had any proprietary interest in respect of these Bitcoin which would override Mr Jones’ beneficial interest. Accordingly, the judge was satisfied that the claims made against the fourth defendant as constructive trustee should succeed.

Implications

In a ground-breaking move the court imposed a constructive trust between the exchange and the defrauded victim. In so doing, it has illustrated the adaptability of constructive trusts as a remedy in fraud cases. This is the first case in which the English court has held that a crypto exchange held stolen crypto as constructive trustee and permitted summary judgment to be entered against the crypto exchange. 

The decision in this case that the crypto exchange could be treated as a constructive trustee in relation to the wallet containing stolen Bitcoin is of importance not only for those investing in cryptoassets, but also for crypto exchanges and custodians that may control wallets operated by fraudsters. In this developing area, the circumstances in which crypto exchanges will be held to hold assets on trust may well develop further over time. 

Where fraudsters are often difficult to identify and locate, the ability to target the more established crypto exchanges means that the routes to successful recovery of defrauded cryptocurrency have just become easier. 

For further information on this topic, please contact Moya Clifford.