Introduction
Impact on Cayman
Comment


Introduction

Adopting the analysis of the UK Jurisdiction Task Force (UKJT) on the proprietary status of cryptocurrencies, the UK High Court's recent decision in AA v Persons Unknown(1) found that cryptoassets such as bitcoin are property and are therefore capable of being the subject of a proprietary injunction or freezing order. This finding will be of interest to anybody using bitcoin as a form of payment or to carry value.

Coming to this conclusion, the court considered that cryptoassets meet the four criteria of the classic definition of 'property' set out by Lord Wilberforce in National Provincial Bank v Ainsworth ([1965] 1 AC 1175) – namely, they:

  • are definable;
  • are identifiable by third parties;
  • are capable in their nature of assumption by third parties; and
  • have some degree of permanence.(2)

Importantly for litigators in the crypto space, this decision supports the view as expressed by the UKJT(3) that the common law is capable of stretching traditional definitions and concepts to adapt to new business practices and that – notwithstanding the traditional definition of 'property' in UK law, which recognises no forms of property other than choses in possession and choses in action – there appears to be no conceptual difficulty in treating intangible things as property even if they may not be choses in action.(4) Effectively, the court approved the UKJT's view that cryptoassets constitute a third kind of property.

Impact on Cayman

Although this is a first-instance decision not yet subject to appellate consideration, and recognising that the analysis in the UKJT Legal Statement on Cryptoassets and Smart Contracts is not a statement of law, there is no reason why the Cayman courts would approach the development of the legal concept of 'property' any less purposefully. If so, litigants in the Cayman Islands would arguably have access to the full range of litigation tools when dealing with the misapplication of cryptoassets as they would with respect to any other form of property.

The Cayman Islands is a highly sophisticated legal jurisdiction and the courts have traditionally taken a robust approach to providing effective interim and final remedies in support of domestic and cross-jurisdictional commercial litigation, including constructive trust and restitutionary claims, which are likely to be highly relevant to cryptoasset litigation.

These tools in the Cayman litigator's armoury include a wide variety of injunctive relief in the form of proprietary injunctions and freezing orders, granted both in support of domestic proceedings and, where appropriate, ancillary to, and in aid of, foreign proceedings for the purposes of facilitating a foreign court that has primary jurisdiction over the proceedings.

As explained by the court in AA v Persons Unknown, in addition to a proprietary injunction, ancillary relief in the form of disclosure orders for the provision of information are particularly apposite in the crypto space, where the rapid speed at which cryptoassets are moved makes it crucial to trace and establish location as quickly and accurately as possible. These ancillary disclosure orders are routinely sought and granted in conjunction with injunctive relief in the Cayman Islands. In appropriate circumstances, pre-action Norwich Pharmacal orders and Bankers Books orders are also available in the Cayman Islands. However, for reasons touched upon in AA v Persons Unknown, there remains some uncertainty as to the availability of this type of relief where it would require service of proceedings out of the jurisdiction, and the courts continue to grapple with the novel issues relating to cryptocurrencies in this regard. Notably, the UK court expressed its willingness to hear applications in cyber extortion cases in private, on the basis that the publicity may negatively affect the claimant's ability to subsequently make recoveries by tipping off the wrongdoers and enabling them to dissipate assets. The Cayman courts will likely take the same approach in appropriate circumstances.

In addition to the above relief, the Cayman courts have the power to appoint receivers to take control and preserve property pending trial, including the appointment of receivers in aid of foreign proceedings and by way of equitable execution of judgments. There are also many suitably qualified financial services professionals who have the know-how and skills to take on these appointments and achieve excellent results.

A wide variety of final remedies are available to the Cayman courts. As well as damages and declaratory relief, those litigating over lost or misapplied cryptoassets would be able to apply for restitution of property in circumstances of unjust enrichment. Where property has been misapplied in breach of trust or fiduciary duties, the Cayman courts have shown themselves to be robust in permitting claimants to trace and recover the property or its traceable proceeds from the trustee or fiduciary and third parties.

The Cayman Islands has also developed the foundation company, a unique financial structuring option which, as a hybrid vehicle, combines the traditional and innovative features of both company law and trusts law. Foundation companies are being increasingly used as vehicles outside private wealth structures and in commercial transactions and crypto offerings. Therefore, in litigation involving both cryptoassets and foundation companies, which are expected to emerge as this industry grows, the courts will be able to draw upon well-developed and commonly applied principles from these fields to deliver justice.

Comment

Despite the inherent complexities of the crypto space (and the novel and multifaceted legal issues which have yet to be resolved), when disputes arise, the Cayman Islands has a robust and highly capable legal services industry equipped with the necessary litigation tools to meet any challenges which arise.

For further information on this topic please contact Jennifer Fox or Deborah Barker Roye at Ogier by telephone (+1 345 949 9876) or email ([email protected] or [email protected]). The Ogier website can be accessed at www.ogier.com.

Endnotes

(1) AA v Persons Unknown [2019] EWHC 3556.

(2) AA v Persons Unknown [2019] EWHC 3556 [59]. See also the similar conclusions in B2C2 Limited v Quoine PTC Limited [2019] SHNC (1) 03 [142], Vorotyntseva v Money-4 Limited t/a Nebeus.com [2018] EWHC 2598(Ch) and Liam David Robertson v Persons Unknown (unreported, 15 July 2019).

(3) See Paragraph 77 of the UKJT Legal Statement on Cryptoassets and Smart Contracts, 11 November 2019.

(4) Ibid at Paragraph 83. In light of 20th century statutes which define 'property' in terms that assume that intangible property is not limited to things in action (eg, the Patents Act 1977, which describes a 'patent' as "personal property (without being a thing in action)").