Cryptocurrency: a digital wave across the legal world

The Financial Conduct Authority defined cryptoassets as “cryptographically secured digital representations of value or contractual rights that use some type of distributed ledger technology (DLT) and can be transferred, stored or traded electronically”. This definition encapsulates cryptocurrencies using blockchain protocols, as well as non-fungible tokens (NFTs).

Cryptocurrency is a rapidly evolving asset class, and cryptoassets such as NFTs, have gained popularity over the recent years. However, the issue is, this evolution is raising a variety of novel legal issues which the English courts are ironing out rapidly through various case law. Although the English courts are arguably reacting positively to this change, there are inevitably legal grey areas that still need to be addressed to prepare for this wave of digitalisation.

Cryptoassets classified as property

The English courts confirmed in Robertson V Persons Unknown [2019] that Cryptoassets are classed as property and consequently will be afforded protection. In this case, the claimant was a victim of ‘spear-phishing’ in which he was deceived into sending 100 Bitcoin to a fraudster. The courts confirmed that the cryptoassets were indeed property, thus they granted an asset preservation order over the stolen Bitcoin. This is a highly significant judgment, as it demonstrates the English courts enthusiasm to tackle the growing concern of cyber fraud, whilst addressing the legal grey area of whether cryptocurrency could be classed as property.

Significantly, echoing the trending wave, the UK Jurisdiction Taskforce of the LawTech Delivery Panel stated in a ‘Legal Statement’ that cryptoassets can essentially in principle be treated as property. This brings us to the question of what protection by the court can cryptocurrency then afford?

Protection by the court in relation to cryptocurrency as property

The High Court compelled by the UK Jurisdiction Taskforce of the LawTech Delivery Panels statement, reinforced that cryptoassets such as Bitcoin constitute property capable of being the subject of a proprietary injunction, as the court in AA v Persons Unknown [2019] granted an injunction to assist in the recovery of Bitcoin that had been paid to satisfy a malware ransom demand. Crucially this is a significant decision, as Bitcoin was found to meet the four criteria set out in Lord Wilberforce’s seminal definition of property. This is likely to have far reaching implications by paving the way for crypotassets to be regarded as a mainstream asset class.

The courts have shown they are willing to grant an array of orders, for example, a ‘Bankers Trust’ Order, in Ion Science Ltd v Persons Unknow and others [2020], revealed the identity of the company owning the account that was used to execute a fraud against the claimant. The court then made a Third-party Debt Order, allowing the claimant to recover its losses from the account.

The courts are also likely to order an Asset Preservation Order which prevents any dealings with stolen Bitcoin, as it is a form of transaction whereby in one click the asset can be dissipated. The English courts have also granted numerous freezing orders and other injunctions. For example, in Danisz v Persons Unknown [2022], the High Court granted the claimant an interim proprietary injunction and a worldwide freezing order. Signifying that courts understand the urgency to prevent cryptocurrencies transactions occurring in the events of fraud, thus are prepared to offer an array of orders available to prevent further loss.

Grey areas in relation to cryptocurrency

However, a grey area is that if Bitcoin and other cryptocurrencies are classed as property, and can be the subject of interim remedies, then from a litigators perspective the concern arises of the issues Bitcoin presents when applying for freezing orders. For example, the issue arises how Bitcoins interact with the standard form freezing order and the usual duties on freezing order applicants. Unlike asset freezes on traditional assets, which allows litigators and asset-tracing professionals put account providers on notice and have entries made in property registers as well as investigations of possible undisclosed assets, Bitcoin by its very nature, operates without the extensive traditional institutional infrastructure that is often relied on when tracing assets, thus a new approach will be needed for cryptocurrencies.

There are also limits to the use of Bitcoin in the legal world. For example, in Tulip Trading V Bitcoin Association BSV and others [2022] the court rejected the claimant’s proposal to post security for the defendant’s costs by transferring Bitcoin to their solicitors. This highlights the courts emphasis that although the law is evolving to bring cryptocurrency into the scope of the legal world, cryptoassets such as Bitcoin are too volatile to meet the test for adequate security. This is because the fall in value of Bitcoin could result in the security being effectively valueless.

The law evolving to accommodate cryptocurrency further

It seems unlikely that English courts will accept Bitcoin as acceptable security for costs unless an acceptable mechanism can be used to address price volatility. However other forms of cryptocurrency may be acceptable, as the HM Treasury has proposed to regulate stablecoins pegged at traditional fiat currency to maintain a stable value. This suggests that in the future if the proposals are adequately established, some forms of cryptocurrency may be acceptable security.

In the evolving technological and digital world, businesses are adapting to the new digital reality, as Mastercard announced it will begin to accept crypto payments on its networks and Tesla proposing to price its cars in cryptocurrency. This evidently signifies the legal world needs to keep up with this change, as criminals are too advancing in this area, with the US government having seized more than 1 billion US dollars’ worth of Bitcoin in enforcement actions related to the defunct darknet marketplace.

The English courts and UK government have shown their enthusiasm to adapt to cryptoassets by offering an array of orders to deal with crypto fraud. However, further development in the legal world can naturally be expected in the following years, with cryptoassets becoming an increasingly mainstream asset. Disputes are likely to increase relating to securities and rights, consequently, additional regulatory oversight will be necessary, as it is a highly complex area which clients will look to seek advice on how these assets can be identified, preserved and enforced against. Signifying further development in the legal field is on the horizon to keep up with the new digital era.