Change to procedure in English court could help victims of crypto fraud

Out-Law Analysis | 19 Aug 2022 | 11:12 am | 4 min. read

Cryptocurrency fraud claims have increased in volume significantly over the last 12 to 18 months, but procedural and jurisdictional difficulties leave many victims debating whether to pursue civil claims in England and Wales.

Cryptocurrency fraud claims have increased in volume significantly over the last 12 to 18 months, but procedural and jurisdictional difficulties leave many victims debating whether to pursue civil claims in England and Wales.

In a speech at this year’s Crypto Disputes Conference, Judge Mark Pelling QC addressed some of the principal issues that arise in cryptocurrency and crypto asset fraud claims as well as announcing that a new jurisdictional gateway will be incorporated into the Civil Procedure Rules.

Identifying crypto fraudsters

Pelling QC started by noting that victims of crypto fraud often have difficulty identifying those who engineered the fraud, where the stolen assets have been transferred to, and who holds information that can be used to identify the fraudsters.

Pelling further added that, whilst the court will permit claims to be brought and will grant injunctions against ‘persons unknown’, the defendants must fall into an identified class.

In our experience, it is usually not economically justifiable for victims of crypto scams to bring civil claims on an individual basis.

Bringing a claim against persons unknown is likely to be made even harder if the stolen crypto assets have been broken down into small chunks and sent to many different addresses. Often, fraudsters convert large sums of crypto into small amounts which are then moved across wallets, casinos or exchanges. The initial tracing exercise to determine where the fraudulent proceeds have ended up can be complex, time-consuming and costly – deterring victims from pursuing the fraud.

Pelling commented that it may be necessary to bring proceedings against different classes of persons unknown in order to cater for these possibilities.

Serving proceedings and seeking freezing orders

Pelling went on to state that victims also struggle to serve proceedings and to seek worldwide freezing orders against anonymous fraudsters – who are often located outside England and Wales – as well as to seek information disclosure orders against the entity that administers the relevant wallets. When the respondent entity is located outside England and Wales, there is no procedural gateway that permits a Norwich Pharmacal order (NPO) to be served outside of the jurisdiction.

In such cases, a bankers trust order can only be served outside England and Wales if the claimant first brings a “realistically arguable proprietary claim” against the alleged fraudsters which passes through at least one of the jurisdictional gateways. But if the respondent entity is located out of England and Wales and is not amenable to enforcement procedures, then seeking such orders may be an expensive and ultimately pointless exercise.

Pelling added that, more broadly, the principle of treating crypto-assets as located in the place where the person who owns it is domiciled or resident is not firmly established in English law; however, he commented that it was "unlikely" that the direction of travel will be reversed in relation to the courts' treatment of digital assets on this point.

There continue to be unanswered questions over whether certain types of digital assets, such as non-fungible tokens (NFTs), are considered property and can therefore form the basis of a proprietary claim in the first place.

Forming claimant groups

Pelling’s conclusion that civil claims in respect of crypto fraud are challenging is certainly correct. Funding the claims is another significant challenge. Indeed, in our experience, it is usually not economically justifiable for victims of crypto scams to bring civil claims on an individual basis. Frequently, however, the scams affect very large victim groups, where the total amount at stake is an eight or nine figure sum.

This fundamentally alters the economics of civil litigation and opens up the possibility of forming claimant groups in order to aggregate the value of their claims and gain access to the commercial litigation funding market. This will not always be possible – it needs to be assessed on a case-by-case basis – but it is an option that victims should consider, especially since it is seldom realistic for them to rely on public enforcement processes as a means of recovering their losses.

A new procedural gateway offers a solution

Pelling unveiled a new procedural gateway (CPR PD 6B) which should address some of the issues crypto fraud victims face. When it takes effect on 1 October 2022, the new gateway will permit the service out of the jurisdiction of a claim for disclosure of information regarding the true identity of a potential defendant and/or what has become of the claimant’s property in aid of proceedings which the claimant intends to commence. This would not require the claimant to first commence Part 7 proceedings against persons unknown. This is a welcome change and a good example of the English courts’ role as a progressive forum for complex international fraud disputes.

Pelling predicted that cryptocurrency fraud claims will increase in the coming years, as more people become familiar with the availability of cryptocurrency assets. The new gateway will assist the victims of these frauds to obtain access to the English civil justice system. It should also substantially reduce the cost – and increase the efficacy – of at least the information-gathering stage of the process, which hopefully will in turn encourage more victims to engage with the legal process. When trying to persuade an English court to make a disclosure order, however, victims will still need to bear in mind a number of practical and legal implications. The English courts apply strict legal thresholds, particularly in relation to NPOs, which, for example, should not generally be sought against someone who is themselves a wrongdoer.

Time is always of the essence in fraud cases, especially cases involving highly liquid assets such as cryptocurrencies. To avoid wasting costs and time, and to ensure the right international litigation recovery strategy is deployed, it is important that victims seek appropriate legal advice when navigating the potential routes to recovering their losses.

Co-written by Hinesh Shah and Sanita Heer of Pinsent Masons.