Cryptoasset Fraud: The new service gateway

A change in the Civil Procedure Rules (CPR) is set to solidify England and Wales as a hub for assisting victims of cryptoasset related fraud.

A new gateway in Practice Direction 6B of the CPR enables applications for service out of jurisdiction for orders relating to obtaining information from non-parties outside of England and Wales. This is particularly useful for the purposes of assisting victims of cryptocurrency fraud.

The change comes in light of rising trends of fraud that involve dissipation of proceeds in the form of cryptoassets, and a lack of jurisdictional gateways to facilitate recovery. In 2021 alone, the value of stolen cryptoassets amounted to at least $6.2bn. Unfortunately for most victims, the costs of pursuing recovery can often amount to more than the value of the theft. The new gateway hopes to ease the process of the initial steps of legal action intending to assist victims of fraud.

The text of the new gateway PD is as follows:

(25) A claim of application is made for disclosure in order to obtain information:

(a) regarding:

(i) the true identity of a defendant or a potential defendant; and/or

(ii) what has become of the property of a claimant or applicant;

and

(b) the claim or application is made for the purpose of proceedings already commenced or which, subject to the content of the information received, are intended to be commenced either by service in England and Wales or pursuant to CPR 6.32, CPR 6.33 or CPR 6.36.

The utility and significance of the new gateway is best understood when considered in context. There is similar pattern amongst most cases that involve fraud and crytoassets. The following scenario is entirely fictitious, but broadly represents the practical issues that lawyers have had to grapple with in recent times and how the new gateway would be relevant.

Example

OakBase is a UK based cryptocurrency exchange with tens of thousands of customers. They were recently victims of a large-scale cyberattack and a significant amount of cryptocurrency held on the exchange went missing.

OakBase sought specialist legal advice and were informed of the difficulties in recovery of stolen cryptoassets. In such situations it’s likely the cryptoassets have likely been transferred through many different wallets, often held outside of the jurisdiction. As the alleged fraudster is unidentified, they would be known as ‘Persons Unknown’.

The distributed, pseudonymous nature of cryptocurrency means that it is difficult to identify where exactly cryptoassets are held. However, it is not impossible.

The law firm instructed a team of forensic investigators and with specialist tracing techniques were able to identify a bank account in Malaysia linked to proceeds of sale from the cryptoassets that were misappropriated. The bank is likely to have information such as the source and destination of funds, linked accounts and other data that would be useful to build an understanding of the current location of the proceeds.

This information would be significant in identifying the perpetrator of the fraud, after which traditional legal remedies can be employed to recover the assets. However, a significant barrier for lawyers representing OakBase is that they need permissions from the courts to serve an order to oblige the Malaysian Bank to disclose information about the party that is involved in the wrongdoing.

This is the point at which the new gateway holds relevance: the permission to serve orders to obtain information from non-parties overseas. In this particular context, the gateway is likely to be exercised to serve Norwich Pharmacal and Bankers Trust Orders out of jurisdiction.

Put simply, Norwich Pharmacal and Bankers Trust Orders oblige parties to disclose information that would help in identifying the wrongdoer, helping to trace the assets. The type of order used depends on various factors, such as the type of party being served, and the stage of proceedings. Both however, are useful in providing essential information to a fraud practitioner in shaping their claim at an early stage, and to aid recovery of assets.

In some previous cases, the courts have held that Bankers Trust Orders can be served outside the jurisdiction (CMOC v Persons Unknown) but were granted hesitantly. Decisions surrounding Norwich Pharmacal Orders have been controversial. It has been held that NPOs cannot be served outside the jurisdiction (AB Bank Ltd v Abu Dhabi Commercial Bank), but this is inconsistent with a recent decision in which permission had been given to service an NPO outside the jurisdiction (Mr Dollar Bill Ltd v Persons Unknown and Others). The new gateway reduces the friction in serving Bankers Trust Orders, and hopes to bring much needed consistency to decisions surrounding service of Norwich Pharmacal Orders overseas.

Ultimately, in our scenario, the ability to service orders through the new gateway accelerates the information gathering stage of the process so OakBase can commence proceedings against Persons Unknown, and attempt a recovery of the stolen cryptoassets. Needless to say, this change is welcomed by fraud practitioners.

The gateway’s introduction comes at a time where England and Wales is establishing itself as the go-to jurisdiction to commence any proceedings in the realm of cryptoasset fraud.

Rulings from 2019 onwards have recognised the proprietary status of cryptoassets and the Law Commission is set to take a step further through proposing explicit recognition of a ‘third category of personal property’ in the conclusion of the recent Digital Assets Consultation. In addition to this, the recent case of D’Aloia involved the courts permitting service by NFT showcasing the courts’ willingness to embrace novel methods as a means of tackling cryptoasset fraud. Undeniably, England and Wales continue to pave the way in adapting existing legal principles to provide remedy to victims of cryptoasset related fraud.

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