Proprietary Injunction Against A Crypto-exchange? Not So Fast'

• Jurisdiction: European Union
• Law Firm: Norton Rose Fulbright
• Subject Matter: Finance and Banking, Technology, Financial Services, Fin Tech
• Author: Mr Aditya Badami
• Published date: 15 June 2023

Jahangir Piroozzadeh v Persons Unknown et al [2023] EWHC 1024 (Ch) (Piroozzadeh) is the first reported decision in which freezing injunctions relating to misappropriation of crypto-assets initially granted on a without notice basis have been discharged by the High Court on their return date (i.e. on the date the parties return to the court, all defendants having been given notice, for the purposes of arguing the substantive merits of the application and the continuation of the initial orders). The particular defendant that successfully had the freezing injunction against it discharged was the crypto-asset exchange Binance Holdings Limited (Binance), which the claimant alleged was a constructive trustee of the misappropriated Tether (or its proceeds), and on that basis liable to account to the claimant as beneficiary.

Background

In November 2021, a Canadian man Mr Piroozzadeh, was induced by a stranger with whom he had had unsolicited WhatsApp contact to transfer 870,818 Tether, equivalent to CAD$1.9 million (c.'1.13 million). Shortly thereafter, Mr Piroozzadeh, realised that he had fallen prey to scammers. In an attempt to retrieve his funds, he sought freezing injunctions from the English High Court against a number of entities and unknown individuals, alleged to have been involved in the scam, whether as parties through which the allegedly misappropriated Tether had passed, or as the scam's principal architects.

Bona fide purchase for value and (im)practicalities

A decisive fact in Binance's favour was that, on its "uncontradicted evidence", "the [Binance] user does not retain any property in the Tether deposited with the exchange." Rather, "the user's account is credited with the amount of the deposit and they are then permitted to draw against any credit balance as in a conventional banking arrangement. The Tether, like other crypto assets, are then swept into a central unsegregated pool address known as a 'hot wallet' where they are treated as part of the eighth defendant's [Binance's] general assets. They are not specifically segregated to be held for the sole benefit of the user from whose account they have been transferred". The result of this arrangement is that tracing Tether from a user's account through to the general pool of assets (i.e. the 'hot wallet') would be "an essentially futile and close to impossible and possibly impossible exercise."

Against the above procedural and factual backdrop, Binance made "four headline points" in support...