The recent Commercial Court case of AA v Persons Unknown considered the legal status of cryptoassets as personal property under English law. In a significant judgment adopting the position held by the UK Jurisdiction Taskforce in its ‘Legal Statement on Cryptoassets and Smart Contracts’, the English High Court held that “a crypto asset such as Bitcoin are property” for the purposes of being subject to an interim proprietary injunction.
The Applicant insurer provided cover against cyber crime attacks. Its insured was victim to a cyber-attack whereby the First Respondent, a hacker, had managed to install malware to encrypt the insured’s computer systems. The hacker demanded a ransom payment of USD 950,000 in bitcoins to decrypt the insured’s systems. The Applicant paid the ransom of 109.25 bitcoins via an agent in exchange for the decryption software, following which the insured was able to restore its systems.
The Applicant managed to trace a substantial proportion of the transferred bitcoins to a specified address linked to the Bitfinex bitcoin exchange (operated by the Third and Fourth Respondents). Although the Applicant could not identify the entities holding the bitcoin at the address, it was likely that the operators of the exchange would be able to identify them from information held as part of their anti-money laundering requirements.
With this information, the Applicant made three applications to the court:
- for a hearing to be made in private;
- for a Norwich Pharmacal and/or a Bankers Trust disclosure order to identify the recipients (which was ultimately adjourned following the Bryan J’s comments on serving out of the jurisdiction and risk of dissipation); and
- as primary relief, for a proprietary interim injunction to prevent the dissipation of the bitcoins.
Hearings related to cyber blackmail or extortion to be heard in private
The Applicant submitted that, if the hearing were to be heard in open court, the entire purpose of the application to recover the cryptocurrency unlawfully extorted by the hacker would be defeated. Bryan J agreed, ruling that there was a risk and likelihood of tipping off the wrongdoers, of revenge or copycat attacks or of revealing confidential information as regards the insured’s systems.
Bryan J likened the case to one concerning blackmail, where it is more common for a court to permit hearings to be held in private as the interest of freedom of expression are balanced against the criminal conduct in question.
In addition, the court also held that it would be unjust to name the Third and Fourth Respondents who had not yet had the opportunity to address the court but had indeed become involved in the wrongdoing of the other Respondents.
Cryptoassets as property
Cryptocurrencies do not fall within the traditional English law definitions of personal property, being neither choses in possession (as virtual and intangible goods) nor choses in action (without embodying any right capable of being enforced). However, the Taskforce’s Legal Statement dated 18 November 2019 concluded that crypotoassets are to be treated, in principle, as property from a legal standpoint by aligning with the indicia of property as established by Lord Wilberforce’s four principles of property in National Provincial Bank v Ainsworth: being definable; identifiable by third parties; capable by their nature of assumption by third parties; and having some degree of permanence. Ultimately, the Legal Statement classified cryptoassets as being “another, third, kind of property”.
Whilst the Legal Statement is not in fact a statement of the law, Bryan J considered its commentary as to the proprietary status of cryptocurrencies in analysing whether cryptocurrencies constitute property capable of being subject to a proprietary injunction. Indeed, this is not the first English case to consider this question; Bryan J noted the following cases in which the UK courts had treated cryptocurrencies as property:
- Vorotyntseva v Money -4 Limited t/a as Nebeus .com: Worldwide freezing order granted in respect of a substantial quantity of bitcoin and ethereum.
- Liam David Robertson v Persons Unknown: Asset preservation order granted over bitcoin.
Upon accepting that cryptocurrencies are a form of property capable of being the subject of a proprietary injunction, Bryan J considered there to be a serious issue to be tried against each of the four Respondents as the bitcoin represented proceeds of monies subject to extortion and blackmail paid out by the Applicant.
This judgment highlights and covers the detailed considerations that arise in matters involving cryptocurrencies as a form of property. There are wide-ranging ramifications that may creep into other areas of law whereby the classification of cryptocurrencies as property may have a significant impact, including insolvency law (can cryptocurrency fall within one’s assets?) and finance law (can cryptocurrency be a secured asset?).
Defining cryptocurrencies as a type of property is only half the battle. In order to ensure that its proprietary injunction is effective, the Applicant would also need to be granted permission to serve its claim outside of the jurisdiction to the Third and Fourth Respondents (located outside of the UK) as the cryptocurrency exchange platforms holding the bitcoins in issue. The Applicant pursued its claims on the basis that the bitcoins were being held by the Third and Fourth Respondents as constructive trustees on behalf of the Applicant and/or the Applicant had restitutionary claims against them for holding property belonging to the Applicant to which they had no rights themselves. Further, the Applicant submitted, the account holders (First and Second Respondents) had wrongfully extorted the money and had no right to it. As seen in this judgment, so long as there is a plausible claim of constructive trust and restitutionary claims, as well as a claim in tort where damage was sustained within the jurisdiction, a court is likely to allow service out of the jurisdiction.
One must ensure that the judgment is read in context; the present case relates to an application for an interim proprietary injunction rather than a judgment following a full-fledged trial with arguments from the Respondents. In his judgment, Bryan J alluded to the necessity for clarity on what causes of action are being sought and against whom whilst adjourning the application for a Norwich Pharmacal and/or a Bankers Trust disclosure order due to the inherent complexities.
In any case, the judgment is a welcome breath of fresh air that highlights a leap forward for the legal landscape fighting to keep up with technological advancements posing new and novel problems.