In a groundbreaking decision, the High Court recently ruled on a complex cryptocurrency fraud case – D’Aloia v Persons Unknown and Ors [2024] EWHC 2342 (Ch). This case highlights the evolving legal landscape surrounding digital assets and the challenges that victims still face in attempting to recover stolen cryptocurrency.

Charlotte Hill

Charlotte Hill

Background

Fabrizio D’Aloia, the claimant, alleged that he was the victim of a sophisticated cryptocurrency scam committed by Persons Unknown. The alleged fraud was said to involve multiple defendants, including well-known cryptocurrency exchanges Binance and Bitkub. The scam resulted in the loss of approximately £2.5m worth of Tether (USDT) and other cryptocurrencies.

The fraud was orchestrated through a fake trading platform which D’Aloia believed to be associated with a reputable, US-regulated brokerage. After transferring his cryptocurrency to wallets controlled by the fraudsters, the funds were quickly moved through a series of blockchain transactions, making them difficult to trace.

D’Aloia brought claims against two categories of Persons Unknown, as well as cryptocurrency exchanges Binance Holdings Ltd, Polo Digital Assets Inc, Gate Technology Corp and Bitkub Online Co Ltd, and Aux Cayes Fintech Co Ltd. By the time of trial in June 2024, the case against Binance had settled, and the case against Aux Cayes Fintech had been struck out. D’Aloia had issued a separate application seeking summary judgment against both categories of Persons Unknown and Polo Digital Assets. As a result, the trial focused predominantly on the issues between D’Aloia and Bitkub.  

Legal issues and arguments

The case presented complex legal issues, including whether cryptocurrency can be classified as property, the ability to trace and recover stolen digital assets, and the responsibilities of cryptocurrency exchanges in preventing and addressing fraud.

1. Cryptocurrency as property: A central question was whether cryptocurrencies like USDT (which is a stablecoin that is pegged to the US dollar) could be considered property under English law. The court affirmed that cryptocurrencies are indeed property, and they are therefore capable of being traced and recovered. This aligns with previous decisions of the English High Court, as well as the recommendations of the Law Commission, which supports the recognition of digital assets as a distinct type of property (given that it is not a chose in action, nor a chose in possession).

2. Tracing and following: D’Aloia argued that the stolen USDT could be traced through the blockchain to wallets held by the defendants. However, tracing digital assets is inherently challenging due to the pseudonymous nature of blockchain transactions and the use of mixing services to obfuscate the flow of funds. The court examined the methodologies used for tracing, including the first in, first out, pari passu distributions and rolling charge approaches, and it found that, as a matter of law, USDT could be followed. It ultimately found, however, that the evidence provided was insufficient to conclusively trace D’Aloia’s funds to the defendants’ wallets.

3. Constructive trust and unjust enrichment: The claimant sought to establish that Bitkub held the stolen cryptocurrency on constructive trust, arguing that the fraud vitiated any intention to transfer beneficial ownership. The court considered whether a constructive trust could arise in cases where property is obtained by fraud and whether Bitkub was unjustly enriched or received a benefit by the receipt of the stolen funds. The court concluded that, while a constructive trust could theoretically apply, the claimant failed to provide sufficient evidence to demonstrate that his stolen USDT reached a particular wallet to establish the necessary link between the stolen funds and Bitkub.

Deputy Judge Richard Farnhill delivered a detailed judgment, addressing each of the legal issues in turn. He acknowledged the significant challenges in tracing and recovering stolen cryptocurrency but emphasised the importance of robust evidence to support such claims.

The court ultimately ruled in favour of the defendants, finding that D’Aloia had not sufficiently demonstrated that his stolen USDT had been received by Bitkub. The judgment highlighted the need for clear and convincing evidence in cases involving digital assets and the difficulties victims face in navigating the legal complexities of cryptocurrency fraud.

Implications for the future

This case underscores the evolving nature of the law around the use of digital assets and the challenges inherent in addressing digital asset fraud. It serves as a salutary reminder of the importance of due diligence and robust security measures for individuals and institutions when dealing with cryptocurrencies.

For legal practitioners, the case provides valuable insights into the application of traditional legal principles to digital assets and the evidentiary standards required to succeed in such claims. It also highlights the need for the continued development of legal frameworks to address the unique challenges posed by cryptocurrencies and other digital assets.

As the digital asset market continues to grow, cases like D’Aloia’s will become ever more common, necessitating further refinement of legal doctrines and practices to ensure that victims of digital asset fraud can seek effective remedies.

Conclusion

D’Aloia v Persons Unknown represents a significant step in the legal recognition and treatment of cryptocurrencies as property. While the claimant did not succeed in recovering his stolen funds, the case sets important precedents for future litigation involving digital assets. It also underscores the critical need for clear evidence and robust legal strategies in addressing the complexities of cryptocurrency fraud.

 

Charlotte Hill is a committee member of the London Solicitors Litigation Association and a partner at Penningtons Manches Cooper

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