In an important recent decision in the case of AA v Persons Unknown & Ors, Re Bitcoin1, the English High Court has granted a proprietary injunction sought by the applicant insurance company (the "Applicant") over Bitcoin, on the basis that cryptocurrencies constitute property under English law, and are therefore capable of being the subject of interim proprietary injunctions. In doing so, the Court endorsed the view of the UK Jurisdictional Taskforce of the LawTech Delivery Panel, in its "Legal Statement on the Status of Cryptoassets and Smart Contracts", that cyptoassets constitute property under English law ( see our December 2019 Legal Update for further details).
In October 2019, a hacker or hackers (the "First and Second Defendants") infiltrated the IT system of a Canadian insurance company, which was itself insured against cyber-crime attacks by the Applicant (the "Insured") and installed malware called BitPaymer, which caused all of the Insured's data and IT systems to become encrypted. The First and Second Defendants subsequently demanded the equivalent of US$950,000 in Bitcoin in return for the decryption software that would allow the Insured to decrypt and regain access to their IT systems.
Following a period of negotiation, conducted on behalf of the Applicant by a specialist intermediary known as an Incident Response Company, and given the importance of the Insured being able to gain access to its systems, the Applicant arranged for the Bitcoin ransom to be paid, to an electronic address (also known as a "wallet") provided by the First and Second Defendants. Shortly after the payment was made, the Insured received the necessary decryption tools and over a period of several days, was able to regain access to its IT systems.
The Applicant subsequently engaged a third party company, Chainalysis, Inc., a blockchain investigations outfit who specialise in cryptoasset investigations, to trace the Bitcoin that had been paid to the First and Second Defendants. The investigation revealed that, of the 109.25 Bitcoins that had been transferred as the ransom payment, 13.25 Bitcoins (worth approximately US$120,000 at the time) had been converted into an untraceable fiat currency, while the remaining 96 Bitcoins had been transferred to a specific, traceable, "wallet". The wallet was found to be linked to an exchange known as Bitfinex operated by the Third and Fourth Defendants (both registered in the British Virgin Islands).
The Applicant sought a proprietary injunction against the First to Fourth defendants, as well as ancillary disclosure orders against the Third and Fourth Defendants, to require them to verify the identities of the customers who held the Bitcoin wallets in question (i.e. the First and Second Defendants).
For the purpose of the application, which Mr Justice Bryan agreed should be heard in private and on an ex parte basis (insofar as the First and Second Defendants were concerned), an anonymity order was sought to protect the identities of both the Insured and the Applicant. Having considered the relevant provisions of the CPR (Rule 39.2) and recent case law, as well as the well-established and important principle of open justice, addressed recently by the Supreme Court in Cape Intermediate Holdings Limited v Dring2 ( discussed in our July 2019 Legal Update), Bryan J deemed that both measures were necessary due to the risk of retaliatory or copycat attacks against both parties, in addition to the fact that publicity of the case would defeat the object of the hearing by tipping off the First and Second Defendants. The reporting restrictions on the case were lifted once the injunction had been granted and served on the Third and Fourth Defendants.
The fundamental question for the Court to consider for the purposes of the application was whether or not cryptocurrencies constituted a form of property capable of being the subject of a proprietary injunction. While there was some limited authority for the proposition that crypto currencies should be deemed "property"3, Bryan J noted that neither of the two cases had "considered the issue in depth".
The starting point was that, in Bryan J's words4, prima facie "there is a difficulty in treating Bitcoins and other cryptocurrencies as a form of property" by reference to the two kinds of property traditionally recognised by English law ("All personal things are either in possession or action"5). They are neither choses in possession (on the basis that they are virtual, not tangible, and cannot be "possessed"), nor choses in action (on the basis that they do not embody any right capable of being enforced by action).
However, while conceding that the LawTech Delivery Panel's Legal Statement did not constitute a statement of the law, Bryan J concluded that the Statement's detailed legal analysis of the proprietary status of cryptocurrencies was "compelling" and should be adopted by the court. In particular, Bryan J suggested that, although crypto currencies do not sit within either of the two traditional kinds of property, it was "fallacious to proceed on the basis that the English law of property recognises no forms of property other than choses in possession and choses in action"6. He cited with approval the Legal Statement's conclusion that Fry LJ's decision in Colonial Bank should not "be treated as limiting the scope of what kinds of things can be property in law" and that "the fact that a cryptoasset might not be a thing in action on the narrower definition of that term does not in itself mean that it cannot be treated as property".
Further, Bryan J considered that cryptoassets satisfied the four classic criteria for property set out by Lord Wilberforce in National Provincial Bank v Ainsworth7 case; namely they were (i) definable; (ii) identifiable by third parties; (iii) capable in their nature of assumption by third parties; and (iv) capable of some degree of permanence. As such, Bryan J was satisfied – at least to the level required for the purposes of an application for interim relief – that Bitcoin constitute property, and was capable of being the subject of a proprietary injunction.
This decision, which has potentially far reaching consequences for financial institutions and corporates faced with ever-increasing cyber threats, as well as their insurers, is a significant first judicial consideration of the Legal Statement since its publication in November 2019. In endorsing the conclusions set out in the Legal Statement, the decision has clarified the status of cyptoassets as property under English law and, in doing so, provides greater certainty for cryptocurrency investors and users as to legal rights in owning, transferring and using cryptocurrency. The potential availability of interim relief such as injunctions in the event of the misappropriation of cryptocurrencies will be a welcome development for many.
For cryptocurrency investors, this decision will be a welcome development in the legal framework underpinning the viability of such assets. Whether or not domestic or international legislation is introduced to further strengthen the legal framework around cryptoassets in response to the increasing use and mis-use of such assets globally remains to be seen.
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