Issues in Cryptocurrency Fraud Claims

The Courts and Tribunals Judiciary has published the Speech by HHJ Pelling KC: Issues in Crypto Currency Fraud Claims – an update, an interesting and thoughtful review of recent developments given at the ThoughtLeaders4 Annual Crypto in Disputes Conference on 28 June 2023.  

His Honour Judge Mark Pelling (King’s Counsel) supports the Law Commission’s conclusion in its Digital Assets report that the common law is largely well positioned to resolve the ‘highly nuanced and complex’ issues that remain to be resolved in crypto disputes, and which will continue to arise from the proliferation over time of new products and ‘different and ever advancing technology’. HHJ Pelling is confident that foreign entities will continue to engage with the English courts, because they provide responses that are fair, proportionate and predictable.  

The speech considers the commission’s ‘novel proposal’ for the creation of a panel of industry-specific technical experts and others to ‘provide non-binding guidance on the complex and evolving factual and legal issues relating to control involving certain digital assets (and other issues relating to digital asset systems and markets more broadly)’, with the objective of enabling consistent and informed decision-making. The judge agrees that this is a potential model, but notes that alternatives could include creating a specialist court and/or group of judges to deal with crypto disputes.  

The speech then turns to crypto disputes – in particular, claims arising from fraud – and notes that crypto-related frauds are becoming more sophisticated and more ambitious, resulting in claims that are increasing in value and are now being made by commercial organisations, as well as individuals. The judge predicts an uptick in fraud claims when the values of cryptocurrencies are perceived to be strongly rising.  

The judge recognizes the acute difficulties faced by investigating and making claims against unknown fraudsters operating in a myriad of offshore jurisdictions. The law was changed this year to allow Norwich Pharmacal (disclosure) orders to be made against foreign entities that may have information regarding the identity of fraudsters or what has become of misappropriated cryptocurrency. The judge notes that foreign exchanges appear to be complying with disclosure orders – he thinks because of the reputational damage that would result from them being seen not complying with orders obtained by victims of fraud.

Various recent court decisions were flagged:

  • The Court of Appeal decision in Tulip v. van der Laan,[1] in which the judge emphasised that the question of whether cryptocurrency is property is now settled in English law and noted that the court decided the crypto-assets at issue were located in England, as the claimant company was resident in the jurisdiction, notwithstanding that it was incorporated in the Seychelles. The Tulip case also will determine whether crypto-asset software developers owe a duty to help recover bitcoin that is inaccessible as a result of criminal activity (see our February 2023 blog on the case).
  • The availability of the litigation process in the theft of non-fungible tokens (NFTs) – as at a minimum, it is now at least realistically arguable that NFTs should be treated as property as a matter of English law (see our February 2023 blog on stolen crypto-assets).
  • The judge notes that an important remaining question is whether – and in what circumstances – an exchange can have any substantive liability for losses suffered by a victim of fraud. In this context, he considers the decision in Piroozzadeh v. Persons Unknown and Others,[2] where a victim of fraud could not obtain a proprietary injunction against an exchange. In this case, Tether (a cryptocurrency) alleged to derive from stolen funds was transferred to an exchange and swept from a customer account into the exchange’s central unsegregated “hot wallet” (or omnibus account), where the funds were treated as part of the assets of the exchange, leaving a debt owed to the customer. This meant that the exchange was a bona fide purchaser for value without notice of the underlying fraud.
  • Service of court proceedings by NFT will be authorised in an appropriate case (see our September 2022 blog post on service by blockchain technology).

[1] [2023] EWCA Civ 83.[2] [2023] EWHC 1024 (Ch).


James Maton

Victoria Barlow