Key takeaways
English court confirms crypto assets as property
This ruling strengthens investor rights and recovery options.
Victims can seek proprietary injunctions against fraudsters
Legal remedies now extend to digital asset disputes.
Decision signals growing judicial support for crypto claims
Businesses should review risk management and compliance policies.
As part of October’s Cyber Security Awareness month, we look at a landmark case involving cryptocurrency fraud - D’Aloia -v- Persons Unknown and Ors [2024] EWHC 2342 (Ch). The case explores key issues around tracing and recovery of digital assets, constructive trusts and the status of the cryptocurrency as property.
Facts
Mr D’Aloia, the Claimant, alleged that he was the victim of a sophisticated cryptocurrency scam. This was a complicated and multi-party claim. His claim against the Second Defendant (Binance) settled and his claim against the Fifth Defendant (Aux Cayes Fintech) was struck out. Mr D’Aloia issued a separate application seeking summary judgment against a number of the other Defendants but the current case concerned the issues between Mr D’Aloia and the Sixth Defendant (Bitkub). Mr D’Aloia alleged that a fraud was perpetrated on him by persons unknown in which he was induced to hand over cryptocurrency (specifically Tether’s USDT) valued at around £2.5 million. Mr D’Aloia believed he had made investments through a trading platform with a reputable regulated US brokerage. In reality, the site was a scam site alleged to have been operated by the First Defendants. After transferring the USDT to wallets controlled by the fraudsters, the funds were moved through a series of blockchain wallets before it was ultimately withdrawn by the Seventh Defendants. Bitkub was one of the cryptocurrency exchanges with whom the Seventh Defendants held their accounts.
It was alleged that some of the assets transferred by the Claimant pursuant to the fraud ended up in a Bitkub custodial wallet associated with a Ms. Hlangpan (“82e6 Wallet”). Whilst Ms Hlangpan’s wallet contained approximately USDT 400,000, USDT 46,291 was argued to be either the Claimant’s funds or their traceable proceeds (“Identifiable Cryptocurrency”), which the Claimant claimed was held by Bitkub on constructive trust.
Legal issues
The case illustrates the difficulties of tracing crypto fraud funds. Mr D’Aloia’s claim against Bitkub was ultimately unsuccessful. It is useful for clarifying the following issues:
The USDT which formed the subject matter of the Claimant’s claim against Bitkub was classified as neither a chose in action nor a chose in possession, but rather a different form of property which can be the subject of tracing and recovery and can constitute trust property in the same way as other property;
On the facts, it was possible for Mr D’Aloia’s USDT to be followed through mixed funds to the 82e6 wallet operated by Bitkub. It had not been possible to establish that the USDT in the 82e6 wallet actually belonged to Mr D’Aloia;
In terms of principles to be applied to tracing cryptocurrencies, the Court recognised the relevance of the ‘first in, first out’ (FIFO) principle clarifying how stolen assets were converted into currency. However, it cautioned that FIFO should not be the only tracing method used for cryptocurrencies. The Court acknowledged the complexity of modern money laundering techniques, a chronological sequence of events should not necessarily be adhered to, as a matter of law, but USDT was capable of being traced;
A constructive trust could potentially be imposed on Bitkub if assets from the fraudulent transaction could be traced to Bitkub and if it was shown that Bitkub received the assets with knowledge of the fraud or in circumstances where retaining them would be unjust. Whilst a trust could be imposed upon third parties who receive trust property and who are not bona fide purchasers for value without notice, Mr D’Aloia failed to demonstrate that Bitkub had received any of his funds, and it appeared that the funds had been paid away, leaving no property against which a proprietary claim could be asserted. There was insufficient evidence to trace the funds. Moreover, no claim for knowing receipt had been advanced, making it unlikely that a constructive trust could be imposed on Bitkub in this case even if Mr D’Aloia had been able to prove his assets were held by Bitkub;
Whilst not required for the current case, the Court confirmed that the defence of bona fide purchaser for value without notice was recognised in respect to the transfer of cryptoassets. The recipient of the cryptoassets must not have actual or constructive notice of any prior equitable claim or fraud at the time of acquiring the assets. In the present case had Bitkub actual notice of suspicious activity on the 82e6 wallet, there would have been no defence of bona fide purchaser available to Bitkub;
Comment
The case illustrates the challenges that cyber-fraud victims face in attempting to recover stolen funds. It also shows the approach the Court will take in applying traditional principles - Constructive Trusts – to new digital assets. Due diligence and robust security measures are essential when dealing with cryptocurrency transactions.
Without doubt, cases of fraud as detailed above are likely to increase as scammers become more and more sophisticated. Without clear evidence and analysis in support of the tracing of funds, the routes to recovery are difficult.
