Courts in offshore jurisdictions have started to adopt the
decisions of the English Courts when granting relief with respect
to the dissipation and recovery of crypto-assets. One example is
the recent decision in ChainSwap v Persons Unknown where the
BVI court granted a freezing order over assets held by persons
unknown in relation to a crypto fraud and follows similar decisions
in the UK and other commonwealth countries where such relief is now
commonly granted. Therefore, we consider the recent English
decision in D'Aloia v Persons Unknown and Others [2022]
EWHC 1723 (Ch) which highlights the possibility that the
controllers and operators of a crypto exchange may be considered a
trustee of misappropriated assets flowing through any crypto wallet
that it maintains and that it would therefore have a duty to
account to victims of the misappropriation for any unauthorized
profits or gain made as trustee.
Background
The case concerns an application by Mr Fabrizio D'Aloia for
interim injunctive relief and disclosure against a number of
defendants, arising out of what he alleged to be the fraudulent
misappropriation of cryptocurrency in the form of approximately 2.1
million USDT, and 230,000 USDC by persons unknown. Mr D'Aloia
alleged he was induced, by way of fraudulent misrepresentation, to
transfer USDT and USDC from his Coinbase and Crypto.com wallets to
the operators of the "tda-finan" website, who were
persons unknown. By using crypto investigation specialists, Mr
D'Aloia confirmed that some 2.175 million of USDT and USDC was
transferred to a number of private addresses and wallets operated
by, or under the control of, various cryptocurrency exchanges. The
decision importantly considers the satisfaction of the test for
injunctive relief as it relates to crypto assets, including whether
the English courts are the most appropriate forum for such an
application with reference to the lex situs of the crypto
assets in question and where the damage occurred.
Can an exchange can be responsible for the proceeds
lost?
One of the most significant developments from the decision stems
from the Court's ruling that there was a good arguable case
that Mr D'Aloia has a claim not only against the fraudsters who
stole his cryptocurrency, but also against the controller and
operator of one of the exchanges which controlled the wallets
through which it was possible to trace the crypto assets stolen
from Mr D'Aloia. In doing so, it highlighted the possibility
that an exchange with sufficient control over wallets that it
maintains will be considered a trustee of misappropriated assets
flowing through those wallets and in turn have a duty to account to
victims of the misappropriation for any unauthorized profits or
gain made as a result of its role as trustee. It remains to be seen
whether Mr D'Aloia's claim in this regard will be
successful at trial. Nonetheless, the fact that such a claim has
been allowed to proceed is a significant decision not only in the
England and Wales, but also offshore and specifically in the Cayman
Islands and the BVI where such decisions are highly persuasive and
likely to be followed.
Practical consequences
The decision in D'Aloia v Persons Unknown is
significant as it demonstrates the possibility for victims of
crypto fraud to have direct claims against the controllers and
operators of crypto exchanges for equitable compensation where a
constructive trust claim is made out. In circumstances where taking
action against the fraudsters is ordinarily very difficult given
the pseudonymous nature of crypto assets and the associated
difficulty of identifying the fraudsters, victims of crypto-related
fraud will now consider the availability of direct claims against
crypto exchanges, as the known parties, where those exchanges have
been notified that they are in possession of fraudulently
misappropriated crypto-assets. Where crypto-assets are the subject
of a potential dispute, a Court may make an order requiring that
such assets be properly ring-fenced and not withdrawn. Crypto
exchanges in the Cayman Islands and the BVI will need to consider
best practice, including the level of control they exercise over
wallets, and the procedures needed to mitigate against the risk of
misappropriated funds being held in wallets maintained by the
exchange.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.