Out-Law News 3 min. read

Court backs cryptocurrency exchange bid to trace alleged fraudsters

A judge in England and Wales has granted a cryptocurrency exchange a court order requiring six other cryptocurrency exchanges to share information which could help it identify alleged fraudsters.

According to cryptocurrency exchange LMN, hackers managed to access its systems in 2020 and steal millions of dollars-worth of cryptocurrency. It has sought help from regulatory and law enforcement agencies and engaged a forensic investigator to trace where the funds went. It has said, however, that those investigations have only got it so far and that it needs the six other cryptocurrency exchanges to disclose information they may hold about the individuals behind transactions it has traced to assist its investigations further.

LMN’s application for information orders was granted by Mr Justice Butcher at the High Court.

The court ordered the provision of wide-ranging information and documentation. It includes the name of the account holder(s) linked to each of the exchange addresses to which transactions have been traced, ‘know your customer’ (KYC) information and documents provided in respect of the account(s), and any other data that identifies or is likely to identify the account holder(s) – such as email and residential addresses, phone numbers and bank account details.

The six cryptocurrency exchanges have also been ordered to explain, to the best of their ability, what became of the stolen assets, the relevant balance figures in the customer account(s); and some of the exchanges have been specifically ordered to share information that could be used to identify other recipients of the stolen assets too.

Civil fraud litigator Andrew Barns-Graham of Pinsent Masons said: “Frequently the most difficult initial challenge for the victims of fraud is to identify who has defrauded them and to find out what has happened to their money. An important recent change to the English procedural rules relating to service and jurisdiction has given victims the ability to seek disclosure of this information from third parties such as banks and exchanges situated overseas.”

“The ruling in this case is the first reported judgment on this new procedural rule and it is excellent news to see it operating smoothly and as intended. It has the potential to be a real game-changer and should help to entrench the English courts as a jurisdiction of choice for the victims of international frauds,” he said.

Mehreen Siddiqui, who specialises in civil fraud and asset recovery at Pinsent Masons, said: “This decision is the latest in a series of recent cases which demonstrate that the English courts are willing to engage with the field of cryptocurrency. This is a positive development for the jurisdiction, with the English courts once again proving agile in applying established legal principles to this class of asset in order to provide relief for victims of cryptocurrency fraud.”

“Fraudulent activity tends to rise across sectors in times of economic distress. Those with investments in cryptocurrencies may gain some comfort from the fact that the English courts are clearly able and willing to adapt the legal framework available to them to novel issues faced by parties,” she said.

Siddiqui said the decision will be viewed favourably by victims of fraud who seek further information from third parties who have become innocently mixed-up in the wrongdoing of others, in order to formulate their legal strategy and ultimately seek redress from fraudsters.

“Due to the decentralised nature of the asset, and the general resistance to regulation within the cryptocurrency community – though there are developments on the horizon – it is more often than not a feature of proceedings concerning cryptocurrency that the ultimate location of the stolen asset cannot be established without specialist assistance,” Siddiqui said. “Therefore, as occurred in the present case, experts in cryptocurrency forensics and asset tracing will need to be engaged.”

“LMN’s expert could trace the stolen assets to 26 ‘exchange addresses’ – essentially unique locators for where the cryptocurrency is held – but could not identify the individuals behind the transactions. LMN had reason to believe that the six other cryptocurrency exchanges or associated companies each collected KYC or anti-money laundering information, and therefore could be able to provide relevant information that would allow the identification of the ultimate fraudster(s),” she said.

Siddiqui also said that the decision highlights that even identifying the correct respondent entities which might have been responsible for operating the various cryptocurrency exchanges, and thus holding relevant documents, may not prove easy.

She said: “LMN provided evidence to the court that suggested that ‘many exchanges use different companies to contract in different jurisdictions and thus the relevant entity might depend on where the natural person associated with a target address was located’. This is therefore another feature of the cryptocurrency world that should be on the radar of potential claimants and their advisers.”

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