Demystifying the crypto fraud myth – prevention and cure are possible
by James Evison
As investment in cryptocurrency becomes more mainstream, cautionary tales of fraud, both large and small, abound.
For the victims it can be devastating. However, a small glimmer of hope is that the English common law system has proved itself sufficiently flexible over the past few years to adapt quickly to aid victims in a way that civil law jurisdictions have often struggled to match.
Crypto fraud is increasingly the subject of proceedings in the High Court and there is a body of emerging case law, which provides avenues for crypto fraud victims to seek justice.
Changes to the law
The 2019 case of AA v Persons Unknown established that crypto assets can, in fact, be property and, in doing so, opened up a box of useful legal tools for tackling fraud. These include proprietary and freezing injunctions, which can protect assets until the court has given judgment, as well as disclosure orders to require third parties such as crypto exchanges to provide details of the asset-holder.
Of course, these legal tools will only work if the assets themselves can be located. Something of an urban myth has built up around the untraceability of crypto assets. However, the block chain technology on which they are often based creates a record of each transaction. This means that tracing is possible and, if urgent action is then taken, fraudsters can be stopped from using the assets and the chances of recovery improved.
Have these tools been used successfully?
Legal and financial expertise was recently used to good effect in the 2022 case of Danisz v Persons Unknown. Mrs Danisz invested through the Matic Markets Ltd website and smelled a rat when she tried to make a withdrawal and it refused. She quickly commissioned an expert who traced at least some of her investment to a wallet on the Huobi platform.
The court, persuaded by the expert evidence and acknowledging the urgency, granted a proprietary injunction against the fraudsters and, crucially, Huobi, to prevent dissipation of the assets in the wallet. A disclosure order was also made against Huobi to compel it to disclose information about the account holders of the wallet.
Of course, no one wants to end up in the situation where they need to pursue fraudsters and the process can be costly with uncertain outcomes. This is exacerbated by the extreme volatility in the value of crypto assets – a lost asset that is worth recouping when you start proceedings could be worth very little by the time judgment is obtained.
The old adage that prevention is better than cure still holds true. Investors would be well advised to invest through platforms registered with the FCA, exercise caution before parting with their money and carefully protect the keys to their wallet. However, if things do go wrong, there is a growing army of professionals backed by a commercially sophisticated court system that is ready and willing to help.
James Evison is a Managing Associate at Stevens & Bolton LLP