The regulatory focus on digital assets has increased dramatically in recent years. As crypto investors and virtual service providers await the potential arrival of co-ordinated global regulation, national regulatory frameworks are also developing, albeit incrementally.
Due to the absence of comprehensive crypto-specific regulations, the English High Court has demonstrated readiness to employ existing powers in tackling emerging challenges presented by disputes involving cryptocurrencies. This pragmatic approach finds support in the Law Commission's recent report on digital assets.
In the case Law v. Persons Unknown and Huobi Global Limited [2023] 1 WLUK 577, the court revealed its willingness to help a claimant facilitate recovery of cryptoassets held by ‘persons unknown’ on exchanges outside England and Wales.
Background
Mr Law, the claimant, had been the victim of a sophisticated fraud, through which he had been persuaded to transfer his digital assets to a crypto trading company which – it later materialised – did not exist. He brought a claim to recover these misappropriated assets and obtained interim relief against persons unknown. He also obtained Bankers Trust orders to obtain information from certain crypto exchanges, who complied throughout by providing the disclosure and assistance sought.
With information obtained, Mr Law identified two wallet holders that had received the proceeds of his assets and he successfully obtained judgment in default against them, as the three persons unknown failed to file a defence. He also sought and obtained a post-judgment proprietary freezing order, freezing cryptoassets held in their accounts with Huobi Global, in an offshore jurisdiction. However, notwithstanding the post-judgment freezing order, Mr Law was unable to enforce his judgment debt directly against funds held outside the jurisdiction.
Route to enforcement
Mr Law therefore applied for an order requiring delivery up of the crypto assets that were the subject of the proprietary freezing order in reliance on Jones v Persons Unknown and ancillary relief pursuant to section 37 SCA 1981, requiring specified cryptoassets to be converted into fiat currency and transferred to the Court Funds Office in England (CFO). In granting the relief, the judge noted that the circumstances in which a court will order funds subject to a worldwide freezing order to be transferred into England and Wales are generally limited, because it is usually assumed that defendants will comply with the freezing order.
However, the court also recognised that this was an exceptional case, in which public policy arguments supported the enforcement of the judgment in favour of Mr Law. Although Huobi was at the time freezing the account holders’ wallets to protect the assets, the court observed it had no way of ensuring that that position would not change, nor any control over the actions of the persons unknown.
In terms of practicalities, the court considered two ways of converting the cryptocurrency into fiat. The first involved Huobi transferring the crypto to Mr Law’s English solicitors and it being converted by them; the alternative was that Huobi would convert it and pay it on to the same solicitors. The solicitors were then obliged to transfer the fiat to the CFO. Interestingly, the court considered but declined the suggestion that a receiver be appointed, citing the costs of that appointment – which in turn would reduce the sums available for enforcement - as a reason why it would not be necessary or appropriate in these circumstances.
By having the crypto assets converted to fiat and transferred to the CFO, Mr Law could make a subsequent application under CPR 72.10 for release of those funds to him in satisfaction of the judgment debt. As part of this application, the claimant was required to give a cross undertaking in damages in the event that any part of the order was later to be set aside.
Implications
The ruling lays the groundwork for claimants to recover cryptoassets that have been transferred out of the jurisdiction more easily. The ruling will be of interest to individuals and businesses seeking to enforce English judgments obtained in respect of misappropriated digital assets. It further demonstrates the ability of the English courts to innovate and adapt to emerging challenges in the digital era and to facilitate the recovery of stolen crypto assets, even when these assets are transferred out of England and Wales in an effort to place them beyond the reach of the court.
The decision not to appoint a receiver, shows the court placing importance on proportionality of steps taken as compared to the sums in issue. This again illustrates the pragmatism and commerciality of English judges, when faced with novel issues.
Ultimately, the ruling illustrates the continued support provided by the English courts – and legal bodies – in the absence of specific legislation or regulation.
There is, however, an increasing demand for global regulation in the crypto space and an expectation that it will come soon: the high-profile implosion of FTX, the former cryptocurrency exchange and hedge fund, and its close relationship with Alameda Research, has provided regulators with fresh impetus to tighten existing standards, or to create new ones.
In the meantime, those who have suffered a loss of crypto or other digital assets will continue to look to the English courts for support and creative ways of recovering their losses.
Going forward
Crypto’s emergence as a global asset class means that it is increasingly interconnected with the traditional financial ecosystem and not currently subject to similar regulatory scrutiny and legislative control. The inherent risks of crypto are heightened by the pace and scale of innovation, a lack of clarity surrounding standards and expectations and an inconsistent focus on risk management.
Alert to these risks, the EU has recently finalised a package of crypto regulations and IOSCO, the body that sets global standards for securities markets regulation, has recently published guidelines for authorities to toughen their standards and proposed new global policy standards for crypto regulation. The UK is taking steps to set out its own proposals. Irrespective of these developments, however, regulators may still not be moving fast enough in the right direction. Until regulation is implemented effectively and consistently in this sector, there will be a stream of crypto cases in the UK courts.
Support for the development of the treatment of crypto assets through the routine evolution of common law is clear from the Law Commission’s report on digital assets – and this is encouraging for legal practitioners in this space and our clients.
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