Bringing disputes in from the ether: the crypto-asset legal landscape in England

English law is a favoured governing law in commercial contracts around the world, the English courts have long been favoured for resolving international disputes, and London is perhaps the world’s leading arbitral venue. The pace of growth in the crypto-assets space might have tested this reputation, but thus far the English legal system is up to the task.

Are crypto-assets property?

Crypto assets can be defined as ‘a digital representation of value or rights which may be transferred and stored electronically, using distributed ledger technology or similar technology.’ But in the eyes of the law, a fundamental question arises – are they property? English law traditionally views property as being of only two kinds: choses in possession, being transferable by delivery, or choses in action, being rights, which can only be claimed or enforced by action. UK legislature provides no guidance, consequently there was initial uncertainty as to how crypto-assets might be treated by the courts.

To address this and provide market confidence, the UK Jurisdiction Taskforce published a paper in 2019 recommending that crypto-assets ‘be treated in principle as property’. This position was later cited with approval in AA v Persons Unknown, Re Bitcoin [2019] EWHC 3556 (Comm). Whilst recognising that cryptocurrency does not necessarily fall within the two traditional categories, the court suggested that a broader interpretation of property should be adopted. As assets capable of being defined, identified, and assumed by third parties, and having a degree of permanence, Bryan J ultimately held that they fulfil all the classic indicia of “property” as established in National Provincial Bank v Ainsworth [1965] 1 AC 1175.

This position has been adopted in a number of first instance decisions and it is now generally accepted that English law recognises all crypto-assets as property.

The position has also been rubber stamped by the Law Commission of England and Wales in its 2023 report on digital assets. However, the defining feature of these recommendations is that they are very limited. The Law Commission recognised that ‘the law of England and Wales has proven itself sufficiently resilient and flexible to recognise some digital assets as capable of being things to which personal property rights can relate.’ The Law Commission report recommends that, as ‘a confirmation and restatement of the existing common law position’, legislation be enacted to ‘explicitly recognise that a thing will not be deprived of legal status as an object of personal property rights merely by reason of the fact that it is neither a thing in action nor a thing in possession.’ In accordance with those recommendations, on 22 February 2024, the Law Commission launched a short consultation exercise on the draft legislation that would see the codification of a ‘third’ category of personal property.

What remedies are available?

The importance of recognising crypto-assets as a form of property is that the usual proprietary remedies in the English courts are now available to owners of crypto-assets in circumstances where those assets have been stolen or fraudulently misappropriated. In particular, the English courts have been willing to grant traditional proprietary and information orders to allow parties to preserve and trace property and to seek financial redress. This armoury is one of the reasons that England has traditionally been such a desirable jurisdiction for a party that has been wronged. For example:

• In Vorotyntseva v Money-4 Limited t/a Nebeus.com [2018] EWHC 2596 (Ch), one of the first cases to come before the English courts concerning cryptocurrencies, a worldwide freezing order (WWFO) was successfully obtained against a company and its directors alleged to have been involved in the misappropriation of cryptocurrencies (Bitcoin and Ethereum) paid to them for the purpose of testing a trading platform.
• In Ion Science Limited v Persons Unknown, 21 December 2020 (Commercial Court), the English court granted a proprietary injunction (to prevent the defendants from dealing with the claimant’s assets in their possession) and a WWFO (to prevent the defendants from dealing with their own assets), against persons who at the time were unknown, in support of a claim of cyber fraud and dissipation of Bitcoin. In addition, a Bankers Trust order (a type of disclosure order aimed at facilitating the recovery of property) was made against the coin exchange that processed the transactions.
• In Osbourne v Persons Unknown and Others [2022] EWHC 1021 (Com), HHJ Pelling confirmed that the remedies available for cryptocurrency also extend to other crypto-assets, including non-fungible tokens (NFTs).

Where are crypto-assets located?

A legal determination of where the assets are located is relevant to questions concerning the law governing the claim, a determination of a court’s own jurisdiction, and practical considerations concerning service of the court documents on foreign defendants.

Following Butcher J’s decision in Ion Science, it is now generally accepted that the principles of conflicts of law apply to crypto-assets in the same way that they apply to other forms of tangible property. Whilst the lex situs of physical assets is usually determined based on their physical location, the English court has held that for crypto-assets it is the place where the owner of the crypto-asset is domiciled. However, the court appears to have taken a slightly different approach in Tulip Trading Limited v Bitcoin Association for BSV [2022] EWHC 667 (Ch). In Tulip Trading, the court considered the claimant’s place of residence as applicable. Provided that the person or company (i.e., the claimant) is domiciled in England before the act occurred, the English courts will be satisfied that the asset is located here for the purpose of establishing that the laws of England are the substantive law to be applied.

In most cases of theft of crypto-assets, the defendant and the asset will be based outside the jurisdiction and, in some cases, their identity and location will be unknown. In all cases concerning the English court’s jurisdiction it must establish: (i) that there is a serious issue to be tried on the merits, (ii) that there is a good arguable case that the claim falls within one of the jurisdictional gateways in the Civil Procedure Rules (CPR) Practice Direction (PD) 6B, and (iii) that England is the proper forum for the claim to be brought and that, in those circumstance, the English court ought to exercise its discretion and permit service out. Following the decision in Fetch.ai Ltd v Persons Unknown [2021] EWHC 2254, provided that the claimant can demonstrate that the assets were in England “before the justiciable act occurred”, the court is likely to be satisfied that for proprietary remedies at least one of the jurisdictional gateways in CPR PD6B will apply.

The English court has also shown a willingness to exercise its discretion to permit service out for propriety injunctions, as well as other relief, against both persons unknown and the holders of crypto trading accounts (as necessary) in order to prevent fraudsters from dealing with the assets. To date the court has exercised its discretion in this space in relation to the granting of WWFOs, ancillary information disclosure orders, Bankers Trust orders, and – more recently – Norwich Pharmacal orders (a form of disclosure order made against third parties to obtain documents or information often relating to the identity of persons). The inherent flexibility of the English courts has also extended to utilising the technology available in this space to open-up new forms of service, notably via a NFT.

Expanding the class of potential defendants

More recently the English court has left open the question of whether actions against network developers on the basis on breaches of fiduciary duty may be available, as considered in Tulip Trading.

In that case, a claim was brought against various network developers following an alleged cyber hack which resulted in the theft of the claimant’s ‘private keys’ and therefore loss of access to the claimant’s cryptocurrency. In addition to questions concerning the appropriate jurisdiction in which to bring the claim, the court was asked to consider whether – as the claimant alleged – the developers of the decentralised network, on which the currency was held and traded, owed fiduciary duties to the owners to assist in regaining control of the asset. At first instance, the High Court found that it would not be fair, just, or reasonable to establish a fiduciary duty in those circumstances.

On appeal of the preliminary decision concerning whether the English courts have jurisdiction to hear the dispute, the Court of Appeal signalled a different approach. Birss LJ, in the lead judgment, suggested that it may be possible in principle to construct an argument that the developers of a given network are sufficiently well defined to give rise to a claim of this sort. Further, in developing the chain on which cryptocurrency is held and traded, he suggested that it may be said that the developers have undertaken a role akin to that of a fiduciary – making discretionary decisions and exercising powers in relation to property owned and held for and on behalf of others. The court has left the door open for an incremental, but significant, expansion of the law in this area.

In Jones v Persons Unknown [2022], an order was made against a crypto exchange for delivery up of cryptocurrency which was alleged to have been stolen and traced to a wallet on its exchange. In granting summary judgment for the claimant, HHJ Pelling found that the exchange was acting as a constructive trustee of the stolen asset in favour of the rightful owner, the claimant. This is the first case in which a trustee relationship has been established in this context. The potential scope of the duties owed as ‘trustees’ by exchanges or others holding crypto-assets remains untested.

Key takeaways

• As one of only a few jurisdictions to recognise crypto-assets as a type of property, England is at the vanguard of crypto-asset disputes.
• As intangible assets are susceptible to theft and fraud, the scope for further civil litigation in this area is wide and varied. Claims relating to conspiracy, deceit, breach of trust, dishonest assistance, conversion, and restitution causes of action are all likely.
• Many of these types of claims will also be resolved in international arbitration, given the inherent flexibility and confidentiality of arbitration procedures.
• English courts have shown an initial willingness to expand the current legal framework to accommodate further developments – including the possibility of fiduciary duties owed by developers of networks.
• Each of the issues identified have only been tested at an interim stage. It remains to be seen how these issues will be addressed if contested at a full hearing.
• Following the Law Commission’s June 2023 report and February 2024 consultation paper on proposed draft legislation to be enacted confirming the existence of a third category of property rights, parties should closely monitor developments to see how their rights and obligations are impacted.