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    Cryptocurrency Lawsuits: Identifying Scammers

    An increase in claims of misconduct related to cryptocurrency has been recorded in English courts. At the same time, the actions are becoming more and more skillful, so the court system had to adapt to the current situation. And the adaptation was successful. For example, the High Court of London has developed a set of rules governing the field of cryptocurrency fraud, although the exact boundaries have not been fixed before. Judge Peeling KC (the responsible judge of the London District Commercial Court) spoke to identify the main topics that are on the agenda of the judicial authorities in proceedings in relation to cryptocurrency.

    Location determination

    Crypto fraud is a complex area, and the main difficulty is precisely finding the scammer himself. In many cases, only the e-mail through which the crime was committed serves as the sole identifier of the fraudster. In this state of affairs, the initiation and further execution of court proceedings is associated with many problems. In some jurisdictions, this very fact may prove to be an insurmountable obstacle.

    The courts have expressed their agreement to make pragmatic decisions.

    If the claim is directed at a fraudster whose identity has not been established, a court case is initiated, but the document states that in relation to “unknown persons”. A wide list of persons falls under the category of “unknown persons”, since any potential defendant who is served with a claim form can determine whether they fall under a certain class. When it comes to crypto fraud, then the category of “unknown persons” includes: (1) individuals or companies who, with clear permission or consent, gain access to the victim’s accounts; (2) persons who are knowledgeable recipients of the applicant’s crypto assets; and (3) those who are innocent recipients of the applicant’s crypto assets (Fetch.AI Limited and another v of unknown persons [2021] EWHC 2254 (Comm)).

    In his statement, Pelling KC stated that the third category includes those who ensure that the person or company that received the assets of the transfer does not fall under the scope of a potential lawsuit or injunction. The third category is also responsible for the fraud committed, so claims for the recovery of such assets can be directed in their direction.

    The law establishes that servicing defendants who go beyond the boundaries of jurisdiction in a manner consistent with local law, procedural rules allow servicing in other ways, if this is permissible. In relation to “unknown persons”, it is almost always possible only to use alternative methods within the framework of judicial proceedings. But in the current issue, the courts are ready to switch to alternative methods. Since most scams occur via email, it was decided to work on crypto exchanges through administrator wallets and through NFT on wallets through which fraudulent activities were carried out.

    Assistance in identifying a fraudster

    As a rule, if during the proceedings, when the defendant (known or unknown person) does not belong to this jurisdiction, the court must issue a permit to the plaintiff. The court must consider several factors that the plaintiff must provide in order to obtain permission to consider a case that goes beyond the jurisdiction:

    • The evidence provided by the plaintiff that the claim relates to the action described in paragraph 3.1 of Practice Direction 6B of the Civil Procedure Rules is not only valid, but also has the opportunity to be proven in practice;
    • The existence of a serious dispute between the plaintiff and the defendant, which needs to be considered;
    • England and Wales are among the most suitable forums for resolving a dispute.

    Most plaintiffs have the opportunity to provide all the evidence and fulfill the requirements provided. Although serious preparation is required before filing a lawsuit against fraudsters, which often includes the need to obtain data from third parties, namely banks, crypto exchanges or other technology providers that are on the list outside the jurisdiction.

    The country’s legislation prescribes a clear list of methods through which data can be obtained, including Bankers’ Trust orders and Norwich Pharmacal orders. In short, both make it possible (but if the specified conditions are met) to obtain a court order to disclose the necessary data.

    Only recently, permission could be obtained only through the Bankers’ Trust orders, although subject to certain conditions, but it was not possible to obtain permission for the orders of Norwich Pharmacal. In October 2022, an additional jurisdictional portal was added to paragraph 3.1 of Practice Direction 6B of the Civil Procedure Rules, which would stop obstacles. This change has given a real opportunity to conduct such proceedings in court, when it comes to the need to provide information about the identity of the defendant or the plaintiff’s property.

    Despite the above changes, there are a number of obstacles to compliance with the rules by third parties. If a court in England has granted permission to execute an order, there is no guarantee that they will be executed. Pelling KC stated that practical problems stand in the way of fulfilling the requirements, as well as the refusal of the courts under whose jurisdiction the legal entity belongs to fulfill the permit.

    Location of the crypto asset

    Finding a crypto asset is the next issue that requires close attention. When the issue was first studied, it was assumed that the location of the crypto asset was unconditionally the same as the place of residence of the fraudster himself. But in his statement, Judge Pelling KC noted that such an approach had become more lenient. Currently, the location of cryptocurrency is assessed based on residency criteria. In Tulip v Van der Laan [2022] EWHC 667 (Ch), the Court of Appeal decided that there was indisputable evidence that the plaintiff, despite being a company registered in Seychelles, was a resident of the jurisdiction, since the central management and control was located in the territories under the jurisdiction of the court. In this case, bitcoin remains within England.

    As a rule, law classifies crypto assets as property, therefore it can act as the subject of property claims. Pelling KC explained that the courts should take into account whether the victim’s property interest in the crypto assets that were seized as part of the fraud remains. As a rule, there is constructive trust in crypto assets transferred after a fraudulent act.

    The judge gave an example when bitcoin was deleted from the victim’s wallet, which was previously credited to some wallet. In this matter, constructive trust becomes one of the principles when considering. Although there are difficulties here, especially if the victim himself transferred the crypto assets under the agreement, even though it was concluded as part of fraudulent actions.

    The legislation of the country stipulates that the asset belongs to the recipient’s property until the contract is terminated. After that, the recipient retains the amounts received within the framework of a constructive trust for the transferring party, but without retrospective effect. The judge said that this situation could cause complex issues in the field of jurisdiction that have not yet been considered by the courts.

    Future challenges

    The Law Commission has published a report on the results of 2023 on digital assets. The report indicated that legislative reform was required, and problems related to new technologies could be regulated by common law. Although Judge Pelling KC expressed distrust of this position, since primary legislation may be required in the future.

    Despite the problems of legislation in the future, it is already clear that the consideration of cases related to cryptocurrency fraud within the framework of several jurisdictions is an ambiguous issue. English legislation and the courts, have already been able to go through the adaptation phase, so we should expect that the form of a “generally recognized arbitration system”, which facilitates the discovery of data from crypto exchanges, will actively and successfully function at the international level. Peeling KC doubts that regulation at the national level will provide a clear result.

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