Crypto Exchange Found To Hold Stolen Assets On Trust For Victim Of Crypto Crime

• Jurisdiction: United States,Federal
• Law Firm: Cooley LLP
• Subject Matter: Technology, Fin Tech
• Author: Alicia Johnson-Cole
• Published date: 27 January 2023

In Jones v Persons Unknown & Others¹ the High Court made several rulings of interest in the developing area of crypto fraud litigation.

After granting judgment in favour of the claimant for claims of deceit and unjust enrichment against fraudsters, the court went on to rule that a crypto exchange controlling the wallet holding the claimant's stolen Bitcoin was a constructive trustee. The court ordered the fraudsters and the exchange to deliver up the Bitcoin to the claimant.

The decision that an exchange is a constructive trustee in these circumstances remains controversial and will likely be tested in future contested litigation where the stolen funds have been deposited and then withdrawn from an innocent exchange. Contested cases may also explore the question of whether and in what circumstances stolen crypto assets can be traced through intermediary accounts, particularly where they have been mixed with other assets that are not part of the fraud.

Background

The claimant, Mr Jones, was the victim of a large-scale crypto fraud. The fraudsters set up a fake online crypto trading company called Extick Pro ('EP') promising high returns to clients. Mr Jones opened an EP account in 2019 and, over the course of a year, transferred 89.61616088 Bitcoin to the EP platform (valued at approximately '1.5 million on the date of the judgment).

Mr Jones did not operate the account himself but instead gave trading instructions to a so-called representative of EP. The platform reported to Mr Jones that large trading profits were accruing in his account. In fact, the fraudsters operating the EP platform had stolen the Bitcoin. After several largely unsuccessful attempts to withdraw his funds, Mr Jones instructed lawyers and investigators to recover his assets. The investigators traced the stolen Bitcoin to a wallet on the Huobi trading platform but were unable to identify the people who had carried out the fraud.

Mr Jones commenced proceedings for the recovery of and relief in respect of the stolen Bitcoin, based on deceit and/or unjust enrichment against the fraudsters. Mr Jones also brought claims against Huobi as a constructive trustee of the Bitcoin.

At the outset, Mr Jones obtained worldwide freezing orders against the fraudsters, as well as Huobi, seeking to secure the funds that remained in the fraudsters' wallet. The fraudsters and Huobi did not engage in the litigation and it appeared that, despite the injunctions, the quantity of Bitcoin held in the wallet was...