John O’Riordan
Dillon Eustace, Dublin
john.oriordan@dilloneustace.ie

Peter Bredin
Dillon Eustace, Dublin
peter.bredin@dilloneustace.ie

Challenges in crypto-related proceedings

Like any sector, disputes involving crypto assets can be wide-ranging in nature, including breach of contract claims between investors and the operators of trading platforms, applications for the disclosure of account holder information and misrepresentation claims on investment risks. However, in the case of crypto assets, there can be additional challenges to overcome in seeking redress.

There are also certain risk factors which investors must consider when dealing with crypto assets. While there have been developments towards increased regulation, including the European Union Markets in Crypto-Assets Regulation^[1] (MiCA), due to be introduced in 2024, relatively minimal oversight has been a characteristic of the industry to date. In addition, there is the threat of asset misappropriation, with crypto-focused scams, the targeting of crypto wallets and the hacking of digital asset exchanges being just some examples of crypto-related fraud. Investors will then often face difficulties in locating stolen assets, particularly given the often anonymous nature of cryptocurrency.

When faced with the possibility of having to bring legal proceedings related to crypto assets, challenges can arise from the outset. Identifying the correct entity against which to bring an action can be difficult, given the confidentiality that can be availed of by investors or the sometimes less transparent manner in which certain businesses in the industry operate. For example, it may not be apparent, based on publicly available information, what structure a trading platform has or what jurisdiction it is based in. In 2021, Binance, one of the world’s leading crypto trading platforms, suffered a service outage which caused the platform to fail, leaving users unable to trade at a time when crypto prices were falling. Investors faced difficulties in determining the appropriate jurisdiction in which to take a claim, given that Binance has no official headquarters and against whom to bring the action, given uncertainty in the user terms as to which entity had contracted with the investors.

Jurisdiction issues can also be to the fore in the case of misappropriated assets, for example, where the location of the offending party is unknown or whether an action should be brought in the country where the stolen assets are located or in the owner’s country of domicile.

Once proceedings have initiated, the parties may have to navigate issues such as complications in quantifying loss due to sharp market fluctuations, the decentralised nature of crypto and indeed, the often highly complex and technical nature of the disputes themselves.

Finally, even when a judgment or order has been obtained, challenges with enforcement can frustrate redress, including on account of the unknown location of the opposing parties or refusal on the part of courts to enforce some crypto related awards obtained through arbitration.

As such, the ability of the courts and arbitral tribunals to adapt their procedures and remedies to meet these challenges can have considerable ramifications for affected parties.  

Use of traditional legal remedies to recover misappropriated crypto assets

Traditional legal remedies have provided asset recovery related assistance to investors who have been the victim of fraud. The potential for the dissipation of crypto assets, which can be shifted in form and moved outside of jurisdictions in seconds, may necessitate the requirement for urgent freezing orders or injunctions. The courts have been willing to assist investors by granting applications to assist with tracing and recovery, including Mareva injunctions and disclosure orders.

Taking Ireland as an example, the Irish Commercial Court in Trafalgar Developments Limited v Mazepin[2] granted judgment in default of appearance against two defendants in a dispute relating to an alleged corporate ‘raider attack’ of a Russian company with the intent of wrongfully divesting the plaintiffs of their shares in the company. The court accepted that there was a significant risk of the defendants dissipating their assets in frustration of the judgment and it granted a worldwide Mareva-type injunction, freezing their assets. The order extended to include the defendants’ cryptocurrency wallets. The court also granted ancillary disclosure orders requiring the defendants to disclose on affidavit all cryptocurrency wallets in which they had a direct or indirect legal or beneficial interest.

The Irish High Court has also used Norwich Pharmacal Orders (NPO) to assist cryptocurrency holders seeking to recover stolen cryptocurrency. An NPO is a type of court order which compels a respondent to disclose certain information to an applicant. It is an equitable remedy that is often sought against an innocent third party who possesses information about the identity of an anonymous wrongdoer.

In Parcel Connect Ltd & Ors v Twitter International Company[3], the Irish High Court noted that the premise of such an application, as set out in Norwich Pharmacal v Customs & Excise[4], is that:

‘[E]ven if the defendant is not legally responsible for the wrongdoing… it has nevertheless got so mixed up in the wrongdoing… as to have facilitated the wrongdoing, it has come under a duty to assist the plaintiff by disclosing the identity of the wrongdoer’.

The court held that there is an onus on the party seeking a NPO to make out a strong prima facie case of wrongful activity but certainty is not required.

In Williams v Coinbase Europe Ltd[5], an application for a NPO was made to the Irish High Court as part of efforts to trace approximately $1.8m in Bitcoin, which was stolen from the plaintiff’s cryptocurrency wallet in February 2021. In Stanbury v Coinbase Europe Ltd,[6] a similar application was made to the Irish court by the plaintiff who claimed that 41.96 Bitcoin had been stolen from his digital wallet due to a hack of his user account on the now-defunct Japanese Bitcoin exchange, MtGox.

Both plaintiffs employed the services of specialist cryptographic tracing firms, which enabled them to trace some of their stolen Bitcoin to accounts held by unknown persons with the Irish registered company, Coinbase Europe Limited (Coinbase). While Coinbase did not object to the plaintiffs’ applications, its position was that, due to contractual and data protection obligations, it could not provide the information sought unless ordered by a court to do so. NPOs were, therefore, sought to compel Coinbase to provide information that would assist in identifying the unknown account holders.

In each case, the court ordered Coinbase to disclose to the plaintiffs within five days all information in its possession that would identify or assist in identifying the person(s) unknown who owned or had access to the relevant accounts. The information to be disclosed included, but was not limited to, the names, email addresses, telephone numbers and IP addresses associated with all logins and logouts relating to the accounts. The court was satisfied that the plaintiffs in each case had made a strong prima facie case of wrongdoing, and that there was no other means for the plaintiffs to establish the owners of the accounts. The orders in both cases were granted subject to the plaintiffs’ undertakings to only use the information disclosed to seek redress in relation to the wrongdoing complained of.

While not related to crypto assets, a 2023 judgment of the Irish High Court, Electricity Supply Board and ESB Networks DAC v Richmond Homes and Arkmount Construction Limited[7] indicated that the NPO jurisdiction in Ireland can extend beyond information that relates to the identity of alleged wrongdoers in certain circumstances; the court stressed that the jurisdiction must be exercised sparingly.

Crypto assets as a form of property

In other jurisdictions, the courts have assisted investors by recognising crypto assets as a form of property, and so provided scope for traditional legal and equitable proprietary remedies to be availed of in the context of misappropriated crypto assets.

In the United Kingdom, the English High Court in AA v Persons Unknown & Ors, Re Bitcoin,^[8] found that crypto assets satisfy the four classic criteria of property as established in National Provincial Bank v Ainsworth:^[9] ie, that they are definable, identifiable by third parties, capable in their nature of assumption by third parties, and have some degree of permanence. Having accepted that crypto assets constituted property and that all other requirements had been met, the court granted a proprietary injunction over traced Bitcoin that had been paid as ransom by a pharmaceutical company to hackers.

In the Hong Kong case of Nico Constantijn Antonius Samara v Stive Jean Paul Dan,^[10] a Dutch citizen entered into an agreement for his Bitcoin to be sold by the defendant, with the funds to be transferred from the defendant’s bank account in Hong Kong to the bank account of the plaintiff in Germany. However, after several months, the plaintiff lost online access to the defendant’s account. The plaintiff applied for an injunction to freeze the assets of the defendant up to $2.6m and, after tracing the sale proceeds, applied for a proprietary injunction. The Hong Kong High Court found that there was a good arguable case of fraud and dishonesty, and there was a real risk of dissipation of assets. The court granted the injunction sought.

In the Singapore case of CLM v CLN & others,^[11] an action was commenced to trace and recover crypto assets that had been allegedly misappropriated by unidentified persons. A portion of the stolen assets was traced to digital wallets controlled by crypto exchanges with operations in Singapore. The Singapore High Court found that there were no issues with ordering injunctions, including proprietary injunctions, against unknown persons based on existing jurisprudence. It held that cryptocurrencies satisfy the definition of property, there was a serious question to be tried and the balance of convenience lay in favour of granting the injunction as there was a real risk of dissipation of the stolen crypto-assets that would prevent recovery even if judgement was obtained. It also made ancillary disclosure orders to assist in the tracing of stolen crypto and the identification of the parties responsible for the theft.

While cryptocurrencies have not been recognised as property across all jurisdictions, there appears to be a trend in favour of allowing for the utilisation of proprietary remedies, which may serve to provide a degree of protection for cryptocurrency investors. However, even where crypto assets have been recognised as property, questions remain as to what sort of property they might be and the corresponding legal consequences that may flow from any such classifications.  

Use of arbitration

Many crypto businesses include arbitration agreements in their contracts. Arbitration can work well in resolving cross-border disputes, which is often a feature of crypto-related actions. The fact that arbitration rules allow for relative procedural flexibility and the ability to appoint arbitrators with relevant experience and expertise in what can be very technical matters make it an attractive option for crypto-related disputes.

However, crypto businesses can face difficulties in the event it is necessary to rely on arbitration clauses in their agreements. While one of the main advantages of international arbitration is the ability to have a resulting award recognised and enforced in multiple jurisdictions under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention), there is a ‘public policy’ exception that courts, albeit rarely, have invoked to deny enforcement of crypto-related awards.

The Court of Appeal of Western Central Greece^[12] ruled that the recognition of a US-seated arbitral award granting damages in Bitcoin would run contrary to Greek public policy since crypto was considered a digital asset and not a currency under Greek law and the European Central Bank did not guarantee any rights to use crypto Bitcoin as payment. The court found that the use of crypto transactions was harmful to Greece’s interests due to the lack of regulation and facilitation of tax evasion and economic crime.

In Payward Inc v Chechetkin,^[13] the English Commercial Court refused to enforce an arbitration award issued by an arbitration tribunal seated in California on the basis it would be contrary to UK public policy. The award had been in favour of the trading platform operator against a UK-based lawyer who had incurred losses of £600,000 trading cryptocurrency.

The English Commercial Court identified a number of key issues to be considered before enforcing the award:

• Was the investor a consumer for the purposes of the relevant English consumer legislation?
• Was the English court bound by determinations on jurisdiction made by a sole arbitrator in another jurisdiction?
• Were the relevant pieces of consumer legislation, the Consumer Rights Act 2015 and Financial Services and Markets Act 2002, expressions of public policy in the UK?
• If so, would enforcement of the award be contrary to public policy under the legislation?

The Court held that the investor was a consumer and the court had a legislative obligation to determine whether the terms were fair. Of particular note in terms of arbitration clauses in crypto agreements, the Court held that while an arbitration clause in an agreement is not inherently unfair, it was not reasonable for this consumer to agree to arbitration in California. He would have had to instruct US counsel which would be expensive and inconvenient, there would be no appeal on an error of English law and United States federal courts were not suitable for supervising English law.

In the US, trading platform users have sought to avoid arbitration clauses altogether on the basis of, inter alia, unconscionability, with the applications being successful or dismissed depending on the particular facts.^[14] Arguments made include that the users did not actively have to confirm the terms and they were difficult to find on the website. It has also been argued that online user agreements are frequently updated, overlap or disappear, depriving the user of adequate notice of the arbitration clause.

While arbitration clauses are likely to remain a feature of contractual relations in this area, the foregoing does serve to highlight the requirement to consider contractual provisions in the context of applicable contractual jurisprudence and consumer legislation.

Conclusion

An overarching issue in this sphere is how to operate in an area that is constantly evolving. As can be seen, traditional legal forums and remedies can be utilised and adapted to this industry, but limitations and restrictions exist. However, developments in the area are fast paced: efforts to coordinate regulatory frameworks across jurisdictions, identified internationally as a key priority, will also serve to change the landscape in the short to medium term.