Further primary legislation may be needed for crypto-asset recovery, says senior judge

Monday, 11 December 2023
The judge in charge of the London Circuit Commercial Court has published a detailed discussion of topical issues in cryptocurrency claims in England and Wales.

Mark Pelling HHJ has expressed scepticism of the view that primary legislation will not be necessary in the future to determine the law governing crypto-assets. However, he acknowledges that English law is now 'reasonably clear' that crypto-assets will be treated as property capable of being bought, sold and held on trust. This view was upheld, or at least not overturned, in the England and Wales Court of Appeal case of Tulip Trading Limited (A Seychelles Company) v Bitcoin Association For BSV & Ors (2023, EWCA Civ 83). However, Pelling notes that the technology is rapidly evolving and new frauds are being developed all the time, very often with an international dimension.

Some difficulties have been addressed by changes to procedural rules. Until recently, the common law was such that permission could in principle be obtained to serve applications for Bankers Trust orders, but could not be obtained where what was sought was a Norwich Pharmacal order. This issue was removed by adding a further gateway permitting the service of proceedings outside England and Wales, where the claim is for information regarding the true identity of a defendant or what has become of the property of the claimant. Unfortunately, said Pelling, this has not made obtaining information orders materially easier or cheaper. Even if the court is persuaded to make an order, there are practical difficulties in getting a foreign-based institution to comply.

Some international agreement is now emerging on how to deal with crypto-fraud, he says. The recognition of crypto-assets as property is not limited to England and Wales but has been followed in recent cases in both New Zealand and Singapore. 'Whilst it is likely that this approach will continue to be adopted by common law courts, it is noteworthy that the Law Commission [of England and Wales] recommended statutory confirmation that a thing will not be prevented from being the object of personal property rights by reason of it being neither a thing in action nor a thing in possession', he commented.

The Law Commission's June 2023 report suggested that the common law as it exists in England and Wales is able to facilitate and support these emerging technologies and that generally no legislative reform is necessary. However, it did call for creation of a distinct legal category of personal property in addition to the two existing choses of possession and action, to give more certainty.

Another issue that is of practical importance concerns the location of a crypto-asset, noted Pelling, because it is likely to be determinative in identifying the governing law. In turn, that affects whether England and Wales is the most appropriate jurisdiction in which to commence the claim.

'In the crypto fraud context...the position is significantly more difficult [than purely domestic fraud] and as with much else the problem starts at the border', he said. 'This is not just a problem that faces the English courts but will face any state court that obtains its jurisdiction by service. Even where that is not so there is in any event a real practical problem posed by compliance or enforcement.'

A further difficulty is how to sue criminals whose identity is unknown and who may be based in jurisdictions where it is likely to be impractical to serve proceedings or enforce English orders. To deal with this, the English courts have developed the practice of permitting proceedings to be commenced against persons unknown.

Pelling believes the English courts will continue to develop common-law principles in order to cope with the challenges posed by a largely unregulated economic sector, but international cooperation is essential. 'There will continue to be real difficulties about protecting those who need protecting unless the sector internationally applies itself to developing systems that are capable of operating across frontiers and which will enable relatively speedy and inexpensive enforcement', he said. 'It is possible that will turn out to be some form of generally approved arbitral system available for use by third parties seeking information or other orders against exchanges embedded in an internationally recognised set of terms that all in the sector are willing to accede to.'


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