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Kartikey Mahajan, Bhavya Chengappa and Aayushi Singh*
I. INTRODUCTION
As cryptocurrencies continue to gain mainstream traction, the increasing frequency of cryptocurrency fraud has become a troubling issue witnessed across commercial transactions. The UK has reported an increase of 41% between 2022-2023 whereas in the US, crypto fraud hiked to an all-time high of $ 3.94 billion in 2023. Witnessing yet another instance of misappropriation of blockchain assets, the Singapore High Court (“SGHC”) in its landmark decision of CLM v CLN and Others [2022] SGHC 46 and the Hong Kong High Court in Nico Constantijn Antonius Samara v Stive Jean Paul Dan [2019] HKCFI 2718 applied traditional legal remedies to adjudicate a case of crypto theft. The courts ordered a “proprietary injunction” in order to prevent the defendant from dealing with particular assets over which the claimant asserted proprietary rights pending trial and a worldwide freezing injunction (popularly known as a “Mareva injunction” which allows the Court to prevent the respondent from transferring their assets outside the ordinary course of business and beyond the jurisdiction of the relevant Court) against the defendants to prevent them from dealing in, disposing of, or diminishing the value of the crypto assets in question.
The principal aim of this article is to examine the application of traditional legal remedies, specifically proprietary and Mareva injunctions, to instances of cryptocurrency theft, as illustrated by the landmark decisions in CLM v CLN and Nico Constantijn v Stive Jean Paul Dan. The argument is that these established legal mechanisms can effectively address the unique challenges posed by the volatile and pseudonymous nature of cryptocurrency assets.
The article begins by providing an overview of the increasing prevalence of cryptocurrency fraud and its significant judicial responses. It then analyses the facts and judicial reasoning in CLM v CLN and Nico Constantijn v Stive Jean Paul Dan, highlighting the courts' use of proprietary and worldwide freezing injunctions. The discussion proceeds to address interim relief against unknown defendants, referencing relevant case law. It further examines the criteria for issuing proprietary injunctions for cryptocurrencies and evaluates the application and implications of Mareva injunctions and worldwide freezing orders.
II. BACKGROUND
In Nico Constantijn Antonius Samara v Stive Jean Paul Dan [2019] HKCFI 2718, the plaintiff alleged that the defendant, acting as a sales agent under an oral agreement, misappropriated a significant amount of the plaintiff's bitcoins. The defendant transferred digital assets to cryptocurrency wallets held with Gatecoin Limited in Hong Kong, intending to deposit the proceeds into a Hong Kong bank account accessible to the plaintiff for funds transfer to Germany. Initially, the defendant sold some bitcoins, allowing the plaintiff to transfer proceeds. However, access to the defendant's account was later restricted and terminated. The plaintiff alleged a breach of the agency agreement and obtained a Mareva injunction from the Court of First Instance, freezing assets including bitcoins.
In CLM v CLN and Others [2022] SGHC 46, the plaintiff sought recovery of approximately 109.83 Bitcoin (“BTC”) and 1,497.54 Ethereum (“ETH”) (collectively known as the "Stolen Cryptocurrency Assets") unlawfully obtained by Unknown Defendants (“1st Defendant”). Stored in digital wallets secured by passwords and recoverable via a seed phrase, the plaintiff's cryptocurrencies were accessed using the recovery seed phrases, transferring assets out of their wallets. The plaintiff traced the misappropriated assets through various digital wallets, including those controlled by Singapore-based cryptocurrency exchanges (“2nd & 3rd Defendants”).
The SGHC considered three primary reliefs sought by the plaintiff: firstly, a proprietary injunction prohibiting the 1st Defendant from dealing with, disposing of, or diminishing the value of the Stolen Cryptocurrency Assets; secondly, a worldwide freezing injunction preventing the 1st Defendant from dealing with or disposing of assets up to the value of the Stolen Cryptocurrency Assets; and thirdly, ancillary disclosure orders against the 2nd and 3rd Defendants to aid in tracing the Stolen Cryptocurrency Assets and identifying the 1st Defendants.
The entitlement to claims for cryptocurrencies hinges on liability rules, which compensate infringements with monetary damages, and property rules, which involve court-ordered remedies such as injunctions and abstention orders. Given the volatile nature of crypto-asset values, arguments support property rules for relief against cryptocurrencies, as damages assessed at a specific time may not account adequately for value appreciation/depreciation or their derivatives. Both cases illustrate the application of traditional proprietary remedies—‘proprietary injunctions against unknown defendants’ and ‘worldwide Mareva injunctions’—to prevent parties from disposing of or diminishing assets up to the value of the Stolen Cryptocurrency Assets.
III. INTERIM RELIEF AGAINST UNKNOWN DEFENDANTS
One of the significant questions raised while issuing provisional measures of relief against unknown persons was whether the court has the authority to grant such interim remedies against Unknown Defendants in cases involving cryptocurrency theft.
The landmark decision in Bloomsbury Publishing Group Ltd and another v News Group Newspapers Ltd and Others [2003] 1 WLR 1633 ("Bloomsbury") by the England & Wales High Court (EWHC) was the first to acknowledge a court's jurisdiction to issue by ruling in favour of the Claimant and granting an injunction against the Defendant whose description was vague, on the pretext that it allowed for clear identification of the Defendant. This jurisdiction to issue injunctions against anonymous parties was subsequently invoked in the cryptocurrency domain against unidentified fraudsters in the Malaysian case of Zschimmer & Schwarz GmbH & Co KG Chemische Fabriken v Persons Unknown & Anor [2021] 7 MLJ 178 ("Zschimmer").
Building upon these precedents, the SGHC, outlined several rationales for granting interim relief against unknown defendants:
Despite the legal requirement for a named defendant, the Singapore Rules of Court do not mandate specific identification of the Defendant. Like the findings in Bloomsbury, where the EWHC acknowledged that the UK Civil Procedure Rules Practice Directions merely stipulated that the title of the proceedings "should state the full name of each party" without necessitating the naming of a specific defendant.
In Zschimmer, the Malaysian Court addressed the context of cyber fraud and the prevalence of fake email addresses, where fraudsters often remained unidentified for extended periods. However, this circumstance does not impede the granting of appropriate relief to the Plaintiff. Additionally, the Court observed that there were no provisions in the Malaysian Rules of Court, 2012 that would prevent the filing of writs of summons and applications against persons of unknown identity.
Considering these considerations, the SGHC provided a caveat that the definition of "first defendants" or "persons unknown" must be sufficiently precise and conspicuous to establish a clear demarcation between included and excluded parties. In the Zschimmer judgment, the Court set forth the following criteria for identifying "persons unknown":
Any individual or entity involved in, assisting in, or participating in the fraud.
Any individual or entity who received misappropriated amounts from the plaintiff (including any traceable proceeds thereof) outside the scope of genuine business transactions with either another defendant or a third party.
In cases falling under (1) or (2), excluding those involved solely in the provision of banking facilities.
In the judgment, the Court determined that the first requirement had been met, as there was clear evidence of 'participation in fraud', thus justifying the grant of interim relief to the plaintiff. This stance has also been reaffirmed in the context of freezing injunctions when the EWHC in CMOC v Persons Unknown [2017] EWHC 3599 (Comm) recognized Bloomsbury as authoritative and affirmed that courts possess jurisdiction to issue interlocutory injunctions against unidentified parties. The Court thereby acceded to the plaintiff’s request for a worldwide freezing injunction against persons of unknown identity, along with ancillary disclosure orders against certain banks that had received the stolen proceeds.
IV. PROPRIETARY INJUNCTION
Another significant aspect addressed by the SGHC in the CLN judgment was the issuance of a proprietary injunction, restraining the first defendants from engaging in transactions that would affect the value of the Stolen Cryptocurrency Assets. A proprietary injunction, an interim remedy, is granted by a court in support of a claim for proprietary relief, specifically targeting an asset in which the plaintiff asserts a proprietary interest. It effectively prohibits a defendant from handling the asset and its associated proceeds.
The central inquiry examined by the SGHC was whether cryptocurrency, such as the Stolen Cryptocurrency Assets in this case, could indeed give rise to proprietary rights justifying protection via a proprietary injunction. The Court affirmed this possibility by referencing the test established in Bouvier, Yves Charles Edgar and Another v Accent Delight International Ltd and Another and Another Appeal [2015] 5 SLR 558 ("Bouvier"), which outlines a two-pronged approach to obtain a proprietary injunction: the existence of a serious question to be tried; and the balance of convenience weighing in favour of granting the injunction.
Firstly, the Court adopted Bouvier's interpretation that a "serious question" arises when the plaintiff asserts a "proprietary interest." The recognition of cryptocurrency as "property" has been widely accepted across various jurisdictions, including the U.K., Hong Kong, and Singapore, wherein it satisfies the traditional criteria for property classification. This consensus was recently reaffirmed by the SGHC in ByBit Fintech Ltd v Ho Kai Xin and Others [2023] SGHC 199. However, some authorities, such as the UK Law Commission and the EWHC’s Judge Bryan in AA v Persons Unknown and Others [2019] EWHC 3556 (Comm), have questioned cryptocurrency's fit within traditional property categorizations, suggesting the creation of a distinct third category. The SGHC, relying on the principles laid down in National Provincial Bank Ltd v Ainsworth [1965] AC 1175 ("Ainsworth"), affirmed that cryptocurrency qualifies as "property" since it meets certain criteria, including definability, identifiability by third parties, transferability, and permanence.
Secondly, the ‘balance of convenience’ standard under property law, as articulated in Bouvier, requires comparing the potential prejudice faced by the applicant if the injunction is not granted against the prejudice suffered by the respondent if the applicant's claim fails. The SGHC determined that the balance of convenience favoured granting the proprietary injunction, as failure to do so could result in the dissipation of the cryptocurrency assets by the defendants, potentially undermining a favourable judgment for the plaintiff. Even in the event of a plaintiff's claim being refuted, the defendants could be compensated through damages for any losses incurred due to the plaintiff's inability to manage their cryptocurrency assets efficiently.
Having satisfied these criteria, the SGHC granted the proprietary injunction, prohibiting the first defendants from engaging in activities that could affect the value of the Stolen Cryptocurrency Assets.
V. MAREVA INJUNCTION & WORLDWIDE FREEZING ORDERS
A “Mareva injunction” or a “freezing order” is an interlocutory ad-personam injunction which restricts the judgment debtor from disposing of or diminishing the value of his own assets, to prevent the execution of the judgment decree. This remedy is granted mostly when there is a reasonable apprehension that the debtor will otherwise dissipate the assets, and the plaintiff would not be able to realize his claims if an injunction is not granted.
The Hong Kong Court of Appeal in the Falcon Private Bank Ltd v Borry Bernard Edouard Charles Limited, unreported, HCA 1934/2011 explained the effects of a Mareva Injunction, stating that a Mareva injunction aims to prevent the defendant from dissipating assets against which the claimant seeks to enforce a judgment, either immediately or in the future. It allows the claimant to secure potential assets that could satisfy the judgment, provided there is a valid claim against the defendant and identifiable assets at risk of dissipation. The threshold for granting a proprietary injunction is lower than a Mareva injunction since the former does not require establishing a risk of dissipation.
The SGHC in CLM granted a worldwide Mareva Injunction on considerations that:
Firstly, whenever any misappropriation of property takes place without the plaintiff’s consent, a constructive trust arises by operation of law over the stolen assets, since it would be unconscionable for the misappropriating party to assert any beneficial interest in the property or their traceable proceeds. This on a stand-alone basis forms a strong case against the defendant.
Secondly, the Court held that to prove a real risk of dissipation, there must be some “solid evidence” to demonstrate the risk, and not just bare assertions and allegations. In this case, the first defendant had already dissipated some of the stolen assets through a series of digital wallets which were solely created for the purposes of frustrating the plaintiff’s tracing and recovery efforts and had no transactions other than ones concerning Stolen Cryptocurrency Assets. This implies that the consideration by the Court was whether the defendant had manifested dishonest intentions and actions in evaluating whether there was a real risk of dissipation concerning the assets of the defendant.
Thirdly, the First Defendants were unlikely to have sufficient assets in Singapore to satisfy an award of damages in the Plaintiff’s favour as only a portion of the Stolen Cryptocurrency Assets was known to have been transferred to digital wallets controlled by the crypto exchange. That was because the value of the plaintiff’s claim was around USD 7 million, while less than USD 1 million worth of the Stolen Cryptocurrency Assets are known to have been transferred to digital wallets. In such an event, issuing a worldwide freezing order to prevent defendants from disposing of other properties where transactions have taken place was imperative.
VI. ANALYSIS AND TAKEAWAYS
In certain legal contexts, a preference for damages over proprietary injunctions has emerged, particularly in cases involving unidentified defendants. This departure from the norm was evident in Toma v Murray [2020] EWHC 2295, where the court declined to grant a proprietary injunction against a defendant accused of Bitcoin theft held in a coin depot account. Instead, the court opted for a damages remedy, deeming the recovery claim to be monetary in nature, as it sought compensation for the value of the bitcoin. This decision was influenced by the unique circumstance where the defendant was identified and possessed unencumbered assets, rendering monetary compensation a viable recourse, unlike typical cases of crypto theft where defendants remain unidentified.
Another aspect considered by the SGHC was the desirability of cryptocurrencies like BTC and ETH, which are actively traded in markets. However, as the cryptocurrency landscape evolves, other digital currencies with less market value and desirability, such as Facebook's Libra, present novel challenges. Whether the criterion of "assumption by third parties" remains suitable for preventing crypto theft across various cryptocurrencies or if a more inclusive criterion is necessary warrants further examination.
Considering the volatile nature of cryptocurrencies, freezing orders may secure assets but not necessarily their values, as market fluctuations can significantly impact asset worth. Some courts have explored converting volatile crypto assets into more stable fiat currencies to mitigate this risk, albeit with complexities requiring substantial cross-undertakings from claimants to protect defendants against potential losses from asset appreciation during the freeze period. The litigant has a plethora of variables to consider in addition; such as how much it will cost to obtain and maintain a Mareva injunction, how strong their case is and what are the odds of a settlement.
In cases like Nico, the threshold for proving a risk of asset dissipation, particularly in the context of Worldwide Freezing Mareva Injunctions is crucial. While cryptocurrency is perceived as being capable of easy and anonymous dissipation, courts require an assessment of facts to establish such a risk. Plaintiffs may infer the risk from the circumstances of the fraud itself, but judgments based on such inferences could have significant implications, potentially leading to asset freezes across jurisdictions based on perceived risks rather than concrete evidence. Thus, the volatile nature of cryptocurrency markets poses challenges in accurately assessing defendants' intent, highlighting the need for careful consideration in legal rulings with global ramifications.
VII. CONCLUSION
The future of legal actions for digital assets is unlikely to be straightforward, with increasing grey areas despite existing case laws protecting asset owners. Digital assets are recognised as property, yet significant debate persists over whether they can be treated as "money" and governed like fiat currency. Furthermore, the traceability of stolen funds remains a major issue, complicated by crypto mixers that blend cryptocurrencies to obscure their origins. However, courts have shown a willingness to adapt, as seen in the issuance of proprietary and worldwide Mareva injunctions. In the CLM case, an ancillary disclosure order was issued to uncover details about stolen assets, aiding in the identification of primary defendants and any collaborators. This judicial recognition that digital assets can give rise to property rights offers legal certainty for cryptocurrency users and extends the use of interim orders to unidentified defendants. As we venture further into this novel legal territory, much clarification is needed to address the unique scenarios posed by digital assets. Nevertheless, recognising cryptocurrency as property and allowing Mareva injunctions against them are welcome developments.
*Kartikey Mahajan is a Partner at Khaitan and Co., Singapore, kartikey.mahajan@khaitanco.com. Bhavya Chengappa is a Senior Associate at Khaitan and Co., Bangalore, bhavya.chengappa@khaitanco.com. Aayushi Singh is an Associate at Khaitan and Co., New Delhi, aayushi.singh@khaitanco.com