For the first time following a full trial, the English High Court in D’Aloia v Persons Unknown, Bitkub and others [2024] EWHC 2342 (Ch) has confirmed that cryptocurrency, specifically USD Tether (USDT), can be traced and can constitute property under English law. The court also made observations as to key legal and evidential links needed in the context of cryptocurrency fraud.
The court gave a lengthy judgment, acknowledging that this was because the relevant legal points are “novel, contentious or both”. Novel points are not new in this case: in an earlier decision, the High Court gave Mr D’Aloia permission to serve proceedings on the defendants via a non-fungible token on a blockchain and email.
Background
Mr D’Aloia alleged that he was the victim of a cryptocurrency scam orchestrated by the First Defendants (referred to as Persons Unknown Category A). He claimed that he was induced to transfer USDT totalling around £2.5 million, to online wallets controlled by the First Defendants. The funds were then allegedly transferred through various blockchain wallets before being withdrawn by the Seventh Defendants (referred to as Persons Unknown Category B). Other defendants, including a Thai company, Bitkub Online Co Limited (Bitkub), were cryptocurrency exchanges where the Seventh Defendants held accounts.
The primary focus of the trial was on the liability of Bitkub. Mr D’Aloia argued that his cryptocurrency was identifiable as being comprised within the transfer to the ‘82e6 Wallet’ held with Bitkub and could be traced. He alleged that Bitkub held his identifiable cryptocurrency on constructive trust or that it had been unjustly enriched by having received it, and was liable to him accordingly.
In assessing these points, the court considered several issues as to the status and treatment of cryptocurrency under English law.
Are cryptocurrencies property?
The court referred to previous case law, including AA v Persons Unknown [2019] EWHC 3556 (Comm) and Tulip Trading v Van der Laan [2023] EWCA Civ 83, which recognised on (an interim basis) that cryptoassets such as bitcoin could be treated as property. The court also considered academic commentary and the Law Commission’s Digital Assets Final Report, which supported the view that digital assets could be objects of personal property rights. The Law Commission’s report emphasised the need for the legal system to adapt to technological advancements and recognise the proprietary nature of digital assets.
Following a thorough analysis, the court confirmed that USDT is capable of attracting property rights under English law, which aligns with the evolving legal landscape that increasingly recognises the unique characteristics of digital assets.
Can cryptocurrency be, as a matter of law, traced through a mixed fund or followed?
The court noted the distinction between following (tracking the same asset as it moves from hand to hand) and tracing (identifying a new asset as the substitute for the old). These are both methods of locating assets which are, or can be taken to be, an asset belonging to the party asserting ownership of them.
The court comprehensively reviewed the law on tracing in equity and at common law and concluded that it is not possible to trace at common law through a mixed fund. Tracing was available to Mr D’Aloia in respect of his equitable claims and USDT can also be followed as a matter of law, but on the facts, it was not possible to follow the USDT to the 82e6 wallet.
The court scrutinised the tracing process, which involved understanding multiple transactions (or ‘hops’) across various wallets, supported by expert evidence. The court criticised the expert evidence before it, concluding that it was unhelpful and noting, “That is especially problematic in a case such as this, where much turns on their work to understand the flow of funds, if any, from Mr D’Aloia to the 82e6 wallet.” The court found that the methodology of Mr D’Aloia’s expert, Mr Moore, was unclear and inconsistent and concluded that it was not able to rely on the approach taken.
Given the claimant failed to show that any of his funds were received in the 82e6 wallet, the tracing claim against Bitkub failed. The court highlighted the need for precise and reliable evidence in tracing claims, which was not provided in this case.
Was Bitkub unjustly enriched at Mr D’Aloia’s expense?
The court went on to consider whether Bitkub was enriched at the expense of Mr D’Aloia and whether the enrichment was unjust. The court addressed the four questions from Banque Financière de la Cité v Parc (Battersea) Ltd [1999] 1 AC 221: (i) Has the defendant been benefitted, in the sense of being enriched?; (ii) Was the enrichment at the expense of the claimant?; (iii) Was the retention of the enrichment unjust?; and (iv) Are there any defences?
This claim failed on the basis that Mr D’Aloia failed to show that Bitkub was enriched with his USDT (i.e., the enrichment was not at his expense). He did not demonstrate that any of his funds reached the 82e6 wallet.
Did the circumstances give rise to a constructive trust on Bitkub?
The court examined whether a constructive trust could be imposed on Bitkub based on various grounds (the equitable proprietary claim): fraud, vitiated intention (here, due to alleged mistake), rescission of the original contract pursuant to which Mr D’Aloia transferred his funds, and failure of Bitkub to act in a commercially reasonable manner and freeze the account from which payment out of funds was ultimately made, due to suspicious activity.
The court considered each basis in detail and, in short, concluded that while a constructive trust arose over the funds received by the First Defendants (who would be the trustees, not Bitkub), Mr D’Aloia failed to show that Bitkub received any of his funds. The equitable proprietary claim against Bitkub failed. (Interestingly, no claim in knowing receipt or dishonest assistance was pursued by Mr D’Aloia against Bitkub on the facts.)
Concluding thoughts
The court concluded its analysis quite clearly: “Mr D’Aloia has failed to show on the balance of probabilities that any of his USDT ever arrived at the 82e6 wallet. In the circumstances, Mr D’Aloia has no claim against Bitkub because it did not receive anything from him. It holds no trust funds; there is no normatively defective transaction as between Bitkub and Mr D’Aloia to undo.”
Throughout the judgment, the court also noted issues with the pleadings, in that the case advanced was not as pleaded in key respects. In this context, the court noted in its conclusion that no claim for knowing receipt was advanced against Bitkub and as such, “the legal link connecting Mr D’Aloia with Bitkub is simply missing from his claim”.
This judgment will provide a particularly useful reference point for other claims of this nature involving crypto fraud, especially where the fraudsters themselves cannot be identified and the victim of the fraud looks to pursue the currency exchanges in the chain. As demonstrated, clear analysis and interrogation of the legal and evidential links to these entities on the facts of each case are of key importance.
Duran Ross, partner, Lewis Silkin and Nicola Thompson, senior practice development lawyer, Lewis Silkin
