High Court will take pragmatic approach to protect crypto fraud victims

In Tai Mo Shan Ltd v Persons Unknown, the court granted an application to serve a claim, which sought to enforce a New York judgment relating to a cryptocurrency fraud, outside of the jurisdiction of England and Wales and by way of transmission of non-fungible tokens (NFTs). 

To serve an English claim out of the jurisdiction, claimants must establish a “good arguable case” that their claim falls within one of a number of service “gateways” set out in the CPR; that England is the most appropriate forum for the proceedings; and that the claim has a reasonable prospect of success. The court in this case held that these requirements were satisfied.

As part of its consideration of these issues, the court noted that cryptocurrency in a wallet held by the claimant’s solicitors in England and Wales was the only traceable proceed of the underlying fraud.  The wallet held the proceeds of an “ethical hack” ordered in related proceedings, and the New York judgment had declared that the claimants had a proprietary interest in its contents.

As regards the application to serve by NFT, the CPR gives the court power to authorise a claimant to serve by a method not otherwise permitted under the rules if there is a “good reason” for doing so.

The court considered whether the claimant had a good reason for serving its claim via NFT ‘airdrop’ into the blockchain of the crypto wallets associated with the fraud, in circumstances where neither the actual defendants nor their location were known to the claimant. The court approved service via NFT. It held that this was in accordance with the approach followed by English courts in a number of crypto cases, embracing alternative service methods and recognising the unique challenges posed by cryptocurrency.

Jennifer Craven, civil fraud litigation expert at Pinsent Masons, said: “The decision demonstrates that the courts will allow victims of crypto fraud to pursue litigation against defendants that are unknown to them, which is a common feature in crypto cases.”

“The decision is pleasing with yet another round of judicial endorsement for this alternative service method, which is becoming more and more common in crypto fraud cases. Claimants can be reassured that the courts will approach CPR service rules in the crypto context pragmatically to avoid frustrating the ability of genuine fraud victims to pursue their losses through the English courts,” she said.

The court also acknowledged the risk inherent in serving documents via NFT link of non-parties gaining access to confidential material. The court adopted the distinction made under the CPR between court documents which are available to the public upon request, and those which can be only obtained by seeking and obtaining an order from the court. The claimant proposed a solution, which the court accepted, in which the first category of documents did not require any particular protection, but the second category would be password protected.

“The practical approach followed by the court in protecting confidentiality in certain documents accompanying the claim form and particulars of claim, while balancing English open justice principes that permit public access to parties’ statements of case upon request, also shows welcome pragmatism,” said Craven.

The judgment also aligns with a recent Law Commission report and draft Bill confirming crypto assets as a type of personal property. Within the report, the Law Commission acknowledges the importance of the common law recognising property rights in crypto assets, recommending that digital assets, including cryptocurrency, should be considered a distinct category of personal property.

Commercial litigation expert Sara Esfandyari said: “Recognising property rights in crypto is particularly important for claimants seeking to enforce foreign judgments against crypto assets in English courts. This is because one of the questions an English court must ask itself is whether the foreign judgment is ‘sufficiently final and enforceable’ to enable it to be the subject of an enforcement claim in England. In this case, the judge agreed that the New York court judgment met this test, amongst other things because it considered that the judgment upheld the claimant’s property rights in cryptocurrency.”

The Law Commission believes that the common law system in England and Wales is “well-placed to provide a coherent and globally relevant regime for existing and new types of digital assets”.

“This judgment appears to support this assessment, at least in the crypto fraud space,” said Esfandyari.