English court judgments to date confirm that cryptoassets are property in the legal sense and that the Courts can deal with ownership disputes and protect victims of fraud. Claimants have a range of tools to deal with cryptoasset fraud, including worldwide freezing orders, ‘Bankers Trust’ orders and third party debt orders. The UK Government has also stated that it is open for business and seeking to attract crypto firms with open arms. The law of the jurisdiction in which property which is subject to litigation is located is referred to as the lex situs of the property. In general terms, Courts determine the lex situs of land and chattels based on their (physical) location, and in respect of enforceable personal rights over property (known as choses in action) where they are recoverable or can be enforced. Given their intangible nature, determining the lex situs of cryptoassets is a question the English Courts have needed to grapple with sooner or later.
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Using the powers provided in POCA 2002, law enforcement agencies in the UK can enforce a confiscation order against an individual who has benefitted from crime or. The potential for developers to owe fiduciary duties, as suggested in Tulip Trading, could have significant implications for the sector. The developers are often the only people who can implement an order of the court for restitution of crypto-assets by amending the blockchain, (potentially causing a “fork” in the blockchain). Exchanges’ roles are also under scrutiny, with courts expecting cooperation in preventing fraud and facilitating asset recovery. The latter are the most promising target for litigation by victims of fraud identifiable and well-resourced and are emerging as the equivalent of banks, (keen to maintain a good public reputation), in the crypto-space. Businesses should be aware of the evolving expectations and legal obligations of these key intermediaries.
Piroozzadeh v Persons Unknown and Others EWHC 1024 (Ch)
Finally, in Danisz v Persons Unknown12, in a decision which followed AA’s analysis of the property status of cryptocurrency, the claimant obtained an interim proprietary injunction, a worldwide freezing order and a Banker’s Trust order in a claim relating to the alleged misappropriation of Bitcoin. Second, for the owners of such assets, the recognition of cryptocurrencies as a form of property opens up the possibility to a claimant who has been dispossessed of such assets of various forms of protective interim relief to secure them pending final judgment and to final enforceable relief. The UK’s Financial Conduct Authority has defined cryptoassets as “cryptographically secured digital representations of value or contractual rights that use some type of distributed ledger technology (DLT) and can be transferred, stored or traded electronically”. In practice, this is likely to cover any cryptocurrencies using blockchain protocols, as well as non-fungible tokens (NFTs). Cryptocurrencies and other cryptoassets such as NFTs have exploded in popularity in recent years.
- Whilst the court’s comments were strictly obiter (as the claim failed on its facts), it discussed in detail the status of cryptoassets as property – demonstrating the English courts’ acute awareness of their important role in clarifying the law in this area when asked to, alongside Parliament.
- On the basis of the limited evidence available, the Court found that as a matter of law USDT could in theory be followed.
- Provide for the destruction of cryptoassets in exceptional circumstances—where the financial gain for the sale of those assets would be outweighed by the loss to the public of allowing that circulation of funds to continue to be used in potentially criminal ways.
- Businesses must be cognisant of these challenges and consider jurisdictional risks when dealing with international counterparts.
- Readers with an interest in cryptocurrency case law might recognise the name “D’Aloia” from a 2022 decision, referenced in our previous client alert, as the first instance of permission being granted for service via NFT in the context of cryptocurrency fraud claims.
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The main exception to that rule is the ‘bona fide purchaser for value without notice’ rule (i.e. a person who buys property in good faith and is not on notice of defects in the transferor’s title takes good title). While that applies to both types of personal property, it is more difficult to see how it could affect a chose in action (and authorities on this are hard to find). Also, there are far more statutory defences available in respect of chose in possession (for example sale of goods legislation). In short, the ability to satisfy the court that there is a serious issue could well be harder to satisfy if cryptocurrencies are classified as chose in possession because there will be a much greater likelihood of the defendant(s) having a potentially good defence. In general terms, Courts determine the lex situs of land and chattels based on their (physical) location, and in respect of enforceable personal rights over property (known as choses in action) where they are recoverable or can be enforced.
For businesses, staying abreast of these developments is essential to navigate risks and capitalise on opportunities presented by crypto-assets. 3 Examples of decisions in which the English court treated cryptocurrencies as property when granting a worldwide freezing order (Vorotyntseva v Money-4 Limited 2018 EWHC 2596 (CH)) and an asset preservation order (Robertson v Persons Unknown (unreported). We anticipate that this trend will only increase and cases such as those describe above will become common place in the English Courts. These decisions also indicate that cryptocurrency is capable of being english law and cryptoassets traced and enforced against, similarly to other classes of property in English law.
Does English law recognise cryptoassets as property?
In reaching its conclusion that cryptoassets can be treated as property under English law, the UKJT found that it is not the private key held by an individual to validate transactions on a distributed ledger system that is regarded as property (this is just “information” ). Rather it is the ability to transact within the rules of the system including the public data and use of an individual’s private key that gives cryptoassets the characteristics of property. In an important decision for users and developers of cryptoassets, the High Court of Justice of England and Wales has confirmed in AA v Persons Unknown and Bitfinex1 that cryptoassets with characteristics similar to Bitcoin should be treated as property under English law.
Nevertheless, the announcement is likely to increase mainstream acceptance of cryptoassets within the financial sector, and further Government and regulatory initiatives will no doubt follow over the months and years to come. Cryptoassets are now increasingly being used by criminals to move and launder the profits of various crimes including drugs, fraud, and money laundering. There is also an increased risk that cryptoassets are being exploited to raise and move funds for terrorist activities.
The NLR does not wish, nor does it intend, to solicit the business of anyone or to refer anyone to an attorney or other professional. NLR does not answer legal questions nor will we refer you to an attorney or other professional if you request such information from us. The Bill will also ensure Britain maintains its pole position in the emerging global crypto race by being one of the first countries to recognise these assets in law. We have identified a growing threat from terrorists using social media platforms to fundraise, with pseudo-anonymous cryptocurrency having been chosen as a method of payment. The changes to terrorism legislation in this Bill have been introduced after close consultation with Counter-Terrorism Policing to ensure that they meet their operational requirements and will support them to tackle the types of terrorist financing which they are encountering in their investigations. In both instances, a proportion of the assets are redistributed to the agencies who investigate and bring asset recovery cases to further tackle economic crime.
D’Aloia v Persons Unknown and Others EWHC 1723 (Ch)
For example, the Law Commission is currently considering whether certain aspects of English law need reform to ensure that digital assets are given consistent recognition and protection. However, while litigators wait for these future developments, they can rest assured in the meantime that established legal rules will provide (almost) everything they need to litigate cryptocurrency claims successfully before the English court. In Wang v Darby, the court indicated that digital assets could in principle be held on trust, although on the facts in Wang v Darby, no trust arose. This is consistent with the New Zealand Cryptopia case (which held that the Cryptopia cryptocurrency exchange held the digital assets of its customers under an express trust).
- Second, for the owners of such assets, the recognition of cryptocurrencies as a form of property opens up the possibility to a claimant who has been dispossessed of such assets of various forms of protective interim relief to secure them pending final judgment and to final enforceable relief.
- The treatment of crypto-assets as property under English law has been the subject of significant recent legal development.
- Some states have laws and ethical rules regarding solicitation and advertisement practices by attorneys and/or other professionals.
- Businesses should be aware of the evolving expectations and legal obligations of these key intermediaries.
- The law defines whether and how an owner can find and recover a stolen asset, whether a contract about an asset can be enforced and whether rights are owed between parties in relation to an asset.
- As such they are not precluded from making determinations that may be inconsistent with Acts of Parliament before they are enacted.
In addition, the judge made observations on recent cryptocurrency authorities to further support his determination of USDT as property. He noted that, whilst other authorities had specifically considered the specific cryptocurrency Bitcoin, USDT operated in a similar way. The judge also noted that cryptocurrency was rivalrous in that when one person owns it another person does not. Further, he highlighted that cryptoassets exist and are enjoyed conceptually outside of the legal system and their users.