High Court Assists Alleged Victim Of Crypto-Theft To Seek Recovery

• Published date: 15 December 2022
• Subject Matter: Technology, Fin Tech
• Law Firm: Norton Rose Fulbright
• Author: Mr Sean Murphy, Harriet Jones-Fenleigh and Aditya Badami

In LMN v Bitflyer Holdings Inc and others [2022] EWHC 2954 (Comm), the High Court granted powerful 'information orders' under the court's Norwich Pharmacal and Bankers Trust jurisdiction against cryptocurrency exchanges that are competitors to the claimant-applicant LMN. The court orders require these exchanges to provide LMN detailed customer information (including Know Your Client information), in aid of LMN's efforts to recover $10.7 million worth of misappropriated cryptocurrency.

Key Takeaways

The LMN judgment illustrates the English High Court's willingness to exercise its broad powers to help victims of crypto-theft and fraud seek recovery of their assets. We expect judgments like this are a positive signal to market participants that England and Wales is a favourable jurisdiction for conducting business involving cryptoassets (or, for that matter, other novel financial technology). If cogent evidence of wrongdoing can be presented, and existing legal doctrines can be invoked, then the English courts are open to flexibly applying those doctrines to formulate pragmatic, fit-for-purpose remedies, notwithstanding the novelty of the subject technology involved. The case also highlights that, as a matter of English law, cryptocurrencies are likely to be recognised as property, and accordingly subject to proprietary remedies (asset tracing, for example), that have been available to litigants before the English courts for centuries. LMN therefore provides a useful roadmap for victims of crypto-fraud to engage the English court system to assist in recovering misappropriated assets. As for crypto-exchanges generally, the decision tacitly suggests the types of information, records, and checks about customers that the courts may reasonably expect the exchanges to hold or carry-out, and be prepared to produce.

Background

LMN is a cryptocurrency exchange that was hacked in 2020. The hackers obtained access to LMN's systems and allegedly extracted millions of dollars-worth of cryptocurrency denominated in Bitcoin, Ripple, Tether, Ethereum, ZCash and Ethereum Classic.

LMN initially engaged various regulatory and law enforcement authorities to assist in tracking down the cryptocurrencies, ultimately to no avail. LMN then decided to seek recourse from the High Court by initiating civil proceedings against a number of rival cryptocurrency exchanges thought by LMN to have control over 'exchange addresses', to which the hackers allegedly transferred the misappropriated cryptocurrencies.

LMN made three applications across two court hearings held in London in late October and early November 2022:

1. for permission to serve court documents (i.e. the Claim Form) on the defendants out of the jurisdiction, since they were all registered outside the United Kingdom;
2. for service by alternative means (i.e. by email and by posting a link to the relevant documents on the online contact form on one of the defendant's websites); and
3. for so-called Bankers Trust relief, which would require the defendants to produce to LMN information regarding customer accounts within the defendants' respective control or possession, subject to LMN providing undertakings as to damages expenses, and restricting its collateral use of the information received from the defendants pursuant to the court order.

Service out

The court granted LMN's application for service out of the jurisdiction. In doing so, the court adopted the test emanating from the Privy Council in Altimo Holdings...