In Jones v Persons Unknown & Others1 the
After granting judgment in favour of the claimant for claims of deceit and unjust enrichment against fraudsters, the court went on to rule that a crypto exchange controlling the wallet holding the claimant's stolen Bitcoin was a constructive trustee. The court ordered the fraudsters and the exchange to deliver up the Bitcoin to the claimant.
The decision that an exchange is a constructive trustee in these circumstances remains controversial and will likely be tested in future contested litigation where the stolen funds have been deposited and then withdrawn from an innocent exchange. Contested cases may also explore the question of whether and in what circumstances stolen crypto assets can be traced through intermediary accounts, particularly where they have been mixed with other assets that are not part of the fraud.
Background
The claimant,
At the outset,
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summary judgment against the fraudsters for deceit and unjust enrichment, on the basis that they had no reasonable grounds to defend the claim;
- The fraudsters were liable for deceit and unjust enrichment
Huobi held the misappropriated funds on constructive trust forMr Jones - The fraudsters and the exchange must return the stolen Bitcoin to
Mr Jones - The freezing and proprietary injunctions should be extended post judgment to aid enforcement of the judgment
Mr Jones could serve the orders out of jurisdictionMr Jones could serve the orders by NFT
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an order for delivery up (i.e. the return) of the stolen Bitcoin traced to the wallet on the
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continuation of the interim proprietary and non-proprietary injunctions already obtained;
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permission to serve the orders out of jurisdiction; and
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permission for service by alternative means against the fraudsters and
The High Court's judgment
Mr Nigel Cooke KC gave summary judgment in favour of
Noting that no rebuttal evidence was submitted by any of the defendants, the judge found
As such, this is the first instance where a ruling has been made that an exchange holds stolen crypto assets on a constructive trust. The judge made this decision on the basis that
The judge found that
Following the rationale in D'Aloia, the judge found that there were exceptional circumstances that permitted alternative service by NFT, namely that the identity and location of the fraudsters was unknown. Therefore, no traditional means of service was deemed likely to be effective and service by NFT was more likely to bring the proceedings and the orders to the attention of the fraudsters.
In respect of
Comments
The imposition of a constructive trust on a crypto exchange holding misappropriated assets is significant as the first final ruling of its kind in
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as bona fide purchasers for value, and acting in good faith, exchanges are not constructive trustees, as they were not part of the underlying fraud, nor were they put on actual or constructive notice of the fraud; and
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exchanges cannot be liable in unjust enrichment as they have provided value for the services they have provided.
If these arguments succeeded a victim would still have routes to recover misappropriated assets that remain in wallets held by an exchange (or would be able to enforce a judgment for damages against those assets), but would not be able to recover from the exchange itself the value of assets which had initially been deposited in wallets controlled by the exchange but which were subsequently withdrawn (unless the victim establishes wrongdoing of some kind on the part of the exchange). This outcome is analogous, for example, to the position of other third parties which have innocently received misappropriated funds.
Footnotes
1. [2022] EWHC 2543 (Comm)
2. [2022] EWHC 1723 (Ch)
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.
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