This insight examines the case of Law v Persons Unknown. It explains the steps taken by Grant Thornton UK LLP's specialist Digital Asset Recovery team to trace and recover the stolen cryptocurrency and considers His Honour Judge Pelling KC’s landmark decision to order that the stolen cryptocurrency be exchanged into fiat and transferred to the Court Funds Office.
Mr Law was contacted by individuals who claimed to be employees of a crypto trading company. On their request, Mr Law transferred a large amount of his cryptocurrency to them. However, when it became apparent that the crypto trading company the individuals purported to act for did not exist, it was clear that Mr Law had been scammed and a significant amount of his cryptocurrency had been stolen.
On discovering the theft, Mr Law promptly sought legal advice. Our Digital Asset Recovery team was engaged to conduct forensic blockchain analysis which monitored the onward transfer of the stolen cryptocurrency. This exercise traced the assets to two wallets operated by different exchanges: Huobi and Kraken.
Mr Law relied on our analysis in support of an application for injunctive relief against the scammers (being persons unknown) and for disclosure orders against Huobi and Kraken to identify the owners of the wallets that had received the stolen cryptocurrency. The application was granted in March 2022 and the client proceeded with his substantive claim for relief against the scammers. They did not engage with the proceedings and in June 2022 Mr Law obtained judgment against them. The Court also granted a post-judgment freezing order which ensured the stolen cryptocurrency remained ‘frozen’ pending Mr Law’s judgment debt being satisfied.
Unsurprisingly, the scammers did not pay the judgment debt, prompting Mr Law to apply for an order requiring the delivery of the ‘frozen’ cryptocurrency. Given the scammers' non-compliance with the orders of the English Court, it would fall to one of the exchanges, Huobi, to facilitate that delivery by transferring the tokens under its control into fiat and on to the Court Funds Office.
As an offshore entity, Huobi was not subject to the jurisdiction of the English Court or bound to comply with any of its orders. Further, Mr Law had not sought any substantive relief against the exchanges, meaning they were only nominal defendants to the proceedings. This could have rendered any order made futile. However, Huobi indicated that it would consider complying with any order made in the proceeding, giving Mr Law sufficient comfort to proceed with the application.
In a novel ruling, the Court granted Mr Law’s application and made an order requiring Huobi to facilitate the transfer of the stolen cryptocurrency to fiat and then into the Court’s control. As it had indicated it might, Huobi complied with the order and arranged the necessary transfers with the assistance of another exchange, CEX.io.
Mr Law subsequently applied to have the funds released from the Court Funds Office to him in satisfaction of his judgment debt. That application was granted and Mr Law recovered his stolen cryptocurrency in full.
Scams continue to pose a threat to anyone investing in digital assets, but the outcome of this case shows that there are now tried and tested routes to allow victims to recover their losses. These are the key takeaways that lawyers and their clients need to be aware of.
Our ability to trace the stolen cryptocurrency shortly after it had been stolen and to work quickly and effectively with Mr Law’s legal team allowed him to obtain urgent injunctive relief which prevented the onward dissipation of the stolen cryptocurrency. This was a vital step in ensuring that the assets against which he would later enforce were protected.
The Court's decision builds on the fast-growing body of digital asset related case law, including decisions which have held cryptocurrencies constitute a form of property and which have dealt with service of proceedings on unknown hackers. However, it also treads new ground by facilitating the transfer of cryptocurrency into fiat and then into the court’s control. It's vital that, in addition to using the Court’s previous decisions, practitioners continue to consider how wider forms of relief can apply in the digital asset context.
Huobi’s compliance with the English Court's order reinforces the cooperative nature of the cryptocurrency market, where entities are often willing to assist victims of fraud as far as their regulatory and legal regimes allow them to do so. This collaborative approach can overcome jurisdictional issues that may otherwise arise given the cross-border nature of digital asset recovery.
The nature and value of the stolen cryptocurrency in Mr Law’s case meant that it was appropriate for the frozen cryptocurrency to be transferred into fiat and put under the Court’s control. However, in many cases, the appropriate course will be to seek the appointment of a receiver to hold the ring and, when appropriate, facilitate the sale of the stolen assets. A receiver with expertise in digital assets is well placed to evaluate and address the risks associated with the volatility in value of cryptocurrency, ensure assets are held and transferred securely, and comply with any regulatory requirements. These are just some of the factors that may render an order for delivery up inappropriate in other cases.
Most importantly, Mr Law’s case demonstrates that previously theoretical recovery strategies are now being used to generate actual returns for victims of digital asset fraud. While previously victims may have lost hope in circumstances where they had their cryptocurrency stolen by an unknown hacker or fraudster, they can now look to cases like Mr Law's to show that losses can be recovered, and even recovered in full.
For more insight and guidance on digital recovery actions get in touch with Carmel King, Dan Sutch, or Frederic Buret.
