Securing Digital Wealth | Recovering Crypto Assets

Why should I read this?

In recent months, the cryptocurrency market has experienced a significant resurgence, with Bitcoin's value reaching an all-time high. This revival has not only captured the attention of investors but has also drawn the scrutiny of cybercriminals. The digital nature of cryptocurrencies makes them a prime target for various forms of cybercrime, including hacking, ransomware, and phishing attacks.

As the market expands, both individual investors and large institutions find themselves at risk. The loss of crypto assets can lead to complex legal challenges, particularly because the recovery process is not straightforward. Current legal frameworks are often ill-equipped to handle the intricacies of blockchain technology and the decentralised nature of the "Web3" industry. Legal practitioners are tasked with navigating this uncharted territory, applying established legal principles to a novel and rapidly evolving landscape.

Despite the multitude of hurdles faced, there are success stories. Legal precedents are being set as courts adapt traditional legal remedies to the "on-chain" environment. Proprietary injunctions, freezing orders, and relief against "persons unknown" are some of the legal strategies being employed to tackle crypto-related crimes.

What steps should I do to begin the process of crypto asset recovery?

The recovery of lost or stolen crypto assets is a complex and nuanced process involving several steps and the cooperation of various entities. The initial step in the recovery process often involves swift and strategic legal action. The type of actions taken are normally emergency and ex parte applications. Time is of the essence, as crypto assets can be transferred on the blockchain quickly and without the normal restrictions found in traditional banking and finance. For example, the filing of a Mareva injunction can often be a potentially critical move. This type of injunction serves as a powerful tool to freeze the crypto assets, preventing their dissipation and ensuring that the assets remain within the jurisdiction of the court. When dealing with the complex and often anonymous nature of blockchain technology, this legal measure can be instrumental in securing a pathway to potentially reclaim stolen cryptocurrency. The process of obtaining a Mareva injunction requires the applicant to provide solid evidence that there is a real risk of asset dissipation. Once granted, it can have far-reaching implications, including the possibility of worldwide asset freezing, thereby providing a lifeline to victims of cryptocurrency theft.

The Mareva injunction is typically sought after an initial track and trace of the stolen assets, which involves using blockchain forensics tools to locate the funds. If successful, the injunction can be a decisive first step in the multifaceted journey of asset recovery, which may also involve reporting the theft to authorities, notifying cryptocurrency exchanges or wallet providers, and often engaging specialised legal and investigative services to navigate the process of reclaiming stolen digital assets.

What if I don't know who has stolen my crypto assets?

The recovery of crypto assets in cases involving unidentified bad actors has been a significant challenge in the legal field. However, recent developments in the UK have provided a framework for victims seeking recovery of crypto assets. Notably, the English High Court has set precedents in cases like AA v Persons Unknown¹ and Ion Science Ltd v Persons Unknown², treating cryptocurrencies as property and allowing for proprietary freezing injunctions and disclosure orders against "persons unknown". These legal tools have been instrumental in aiding the recovery of assets in international cryptocurrency fraud cases, even when the perpetrators' identities remain concealed.

The AA decision set a precedent in the context of the legal status of Bitcoin, as the court applied the criteria established in the Ainsworth judgment, to affirm that Bitcoin could be classified as property for injunctive orders. It should be noted the AA decision was not a final judgment, and the court was only determining if temporary orders could be made to avoid the assets being lost. The classification of Bitcoin is however crucial as it underpins the court's ability to issue injunctions and orders that are instrumental in cases of misappropriated digital assets. The AA case also underscores the challenges posed by the global nature of cryptocurrency, necessitating service orders for proceedings to reach entities outside the UK. The subsequent Ion Science Ltd case further solidified the approach taken in the AA case, reinforcing the court's willingness to grant relief to victims of cryptocurrency fraud. The private hearings in these cases reflect the courts' recognition of the high risk of asset dissipation in crypto-related disputes and their commitment to protecting claimants' identities and assets during the legal process.

Moreover, the Ion Science Ltd case brought to the fore the concept of "lex situs" in the context of crypto assets, a significant step in addressing the complexities of jurisdiction in the digital domain. By determining that the lex situs of crypto assets is the owner's domicile, the UK courts have provided a measure of clarity on jurisdictional issues, although this area of law continues to develop.

The subsequent UK case of Fetch Ltd v Persons Unknown³ is a prime example of how courts are adapting to the challenges posed by the digital age. In this case, the claimant's Binance exchange account was compromised, leading to the sale and unauthorised transfer of cryptocurrency. The court's decision to impose a constructive trust on the fraudulent recipient underscores the principle that equity will not allow a wrongdoer to profit from their misconduct.

The innovative approach of the UK courts extends to the service and delivery of legal proceedings. In cases like D'Aloia v Persons Unknown⁴ and Jones v Persons Unknown⁵, the courts have demonstrated flexibility by allowing for service through a non-fungible token (NFT). This method acknowledges the difficulties in regular service methods due to the anonymity provided by blockchain technology.

The Osbourne⁶ case further illustrates the UK courts' willingness to extend their reach to digital assets like NFTs. When the claimant's NFT artworks were stolen and appeared in another account on the Opensea marketplace, the court treated the NFTs as property, granting a disclosure order against Opensea and permitting service outside of the UK. This decision is significant as it treated NFTs as property under the law, providing a legal framework for the protection of digital assets.

These cases collectively signal a shift in the legal system, one that is becoming more adept at handling the intricacies of cryptocurrency and digital assets. The proactive stance of the UK judiciary in these matters reflects a broader trend towards the modernisation of legal processes and the recognition of the evolving nature of property and ownership in the digital age.

What is the current approach in the Irish courts on crypto asset recovery?

The UK decisions demonstrate a realistic and practical approach, and while not binding on the Irish courts, they are of persuasive value and could potentially influence Irish jurisprudence in this area. Unfortunately, there is limited case law in this jurisdiction, and it is not yet clear how our courts will handle the multiplicity of issues presented by crypto assets.

The legal status of cryptocurrencies in Ireland, particularly whether they are considered property under Irish law, has been a subject of considerable interest and debate. The Irish courts have not yet had the opportunity to categorically define cryptocurrencies as property, but there have been instances where the courts have applied traditional legal remedies to cryptocurrencies, indicating an implicit recognition of their value and function as assets.⁷ For example, the High Court has granted orders freezing cryptocurrencies based on applications by the Criminal Assets Bureau (CAB), which suggests an inclination to treat them as property for the purposes of legal proceedings.

Notably, the High Court has granted Norwich Pharmacal Orders (NPOs) in cases like Williams v Coinbase Europe Ltd⁸ and Stanbury v Coinbase Europe Ltd⁹, compelling companies to disclose information that could assist in identifying the owners of accounts related to stolen crypto assets. The successful applications for disclosure orders in these cases highlight the potential for our legal system to adapt and address the challenges posed by the traceability and recovery of stolen or misappropriated cryptocurrencies. The Irish courts' approach in issuing orders relating to the proceeds of crime, including cryptocurrency, indicates a recognition of the need for legal remedies that can keep pace with technological advancements.

Additionally, CAB plays a pivotal role in addressing serious organised crime related to cryptocurrency. CAB's powers include the ability to freeze and recover assets derived from criminal activity, including cryptocurrency. The Proceeds of Crime Act 1996 empowers CAB to apply to the High Court for freezing orders on assets suspected of being derived from criminal conduct. In recent cases, the Irish courts have recognised cryptocurrencies like Ethereum as assets capable of recovery under these powers¹⁰. Furthermore, victims of crypto fraud may also have recourse through civil forfeiture processes, which allow CAB to seize proceeds of criminal conduct without pursuing criminal charges. This is particularly relevant when the perpetrator is unknown or resides outside the jurisdiction.

However, concerns raised by Irish practitioners regarding the adequacy of court rules on service of proceedings out of the jurisdiction reflect broader uncertainties in the application of traditional legal principles to modern digital assets.¹¹ The comparison with the UK's broader scope in such matters suggests a potential area for reform. In addition, the lack of clarity on how Irish property and equity law will adapt to cryptocurrencies is indicative of a global legal community grappling with the integration of an expansive new asset class into existing legal frameworks. The absence of trials or full hearings in many cases where temporary or interim court orders were made further complicates the establishment of robust legal precedents.

What next?

The regulatory landscape for cryptocurrencies in Ireland is still evolving. While cryptocurrencies are not recognised as legal tender, the transposition of the EU Fifth Anti-Money Laundering Directive into Irish law has extended anti-money laundering and counter-terrorism financing rules to virtual asset service providers, including those dealing with cryptocurrencies and digital wallets. This development indicates a move towards more formal recognition and regulation of crypto assets in the financial system.

While there is no definitive answer yet on the status of cryptocurrencies as property under Irish law, the actions of the Irish courts and the legislative developments suggest a trend towards recognising and regulating cryptocurrencies as assets. The EU's Digital Finance Strategy 2020, which includes a proposed legislative framework for Markets in Crypto-Assets, is expected to bring changes by 2024. This aligns with the global movement towards integrating cryptocurrencies within the legal and financial system, ensuring that they are subject to appropriate oversight and legal standards. As the legal landscape continues to evolve, it is likely that more concrete definitions and regulations will emerge, providing greater certainty for investors, regulators, and legal practitioners alike.

For more information on the recovery of crypto assets contact:

The recovery of crypto assets requires navigating a maze of legal, technological, and jurisdictional challenges, demanding a high level of expertise and collaboration across different fields of law and technology.

With special thanks to Daire O'Herlihy, Solicitor; and Melanie Ardiff, Professional Support Lawyer for their contributions to this article.

Footnotes

1 AA v Persons Unknown [2019] EWHC 3556 (Comm)