Injunctions and recovering cryptocurrency following cyber attacks and fraud | Lexology

Andrew Jones, Senior Associate at Beale & Co, looks at two recent High Court cases which highlight the benefits and limits of parties and their insurers using proprietary injunctions to aid recovery of Bitcoin and other cryptocurrency following cyber attacks and fraud.

Both cyber attacks and cyber fraud are on the rise. Given the degree of anonymity it provides, cryptocurrency such as Bitcoin is often involved.

Two recent cases show the extent to which the English Courts are willing to grant proprietary injunctions to freeze cryptocurrency accounts to allow time for the victims to pursue litigation against the alleged perpetrators.

Proprietary injunctions and remedies

Proprietary injunctions and related remedies are useful legal tools for the preservation of specific property where the claimant asserts that they are the rightful owners of that property held by someone else. If granted, the Court effectively freezes the respondent’s rights to deal with the disputed property and the claimant is then permitted time to demonstrate to the Court their rightful ownership of that property. A proprietary injunction is therefore an interim remedy which restrains the respondent from dissipating the disputed property. The respondent may be the person who allegedly wrongfully obtained the disputed property, or even an innocent third party who later received the disputed property.

If the claimant can identify, freeze and ultimately recover the property, this can be a much easier path to recovery compared to a simple claim for monetary damages, not least where the perpetrator cannot be easily found or its assets are not easily identifiable or sufficient to pay such damages.

Why might a party/its insurers want a proprietary injunction over cryptocurrency?

There are many examples of why parties and their cyber or other insurers may wish to seek a proprietary injunction over cryptocurrency. They may wish to try and injunct and recover cryptocurrency stolen or paid out as a ransom to the perpetrators to unlock the insured’s IT systems, which may have already been indemnified by a Cyber or Crime policy.

The two recent cases of AA v Persons Unknown & Others, Re Bitcoin [2019] EWHC 3556 (Comm) and Toma v Murray [2020] EWHC 2295 (Ch) were examples of this type of scenario – one which was successful and one which was not.

AA re Bitcoin

In AA re Bitcoin a Canadian company was the subject of a ransomware attack, stopping them accessing their IT system until a ransom payment was made to the hackers.

The ransom payment was paid by the company’s insurers to obtain access, who then sought to recover the ransom payment from the hackers. The insurer’s claim was on the grounds that the payment did not become the `property’ of the hacker in circumstances where it was obtained illegally. The ransom payment was made in Bitcoin the usual currency requested in ransomware attacks valued at around $950,000.

The insurers traced a large proportion of the Bitcoin paid to an “account” held by the hackers at Bitfinex, a currency exchange (a company which exchanges Bitcoin into “real” currency). The insurers therefore sought a proprietary injunction over this Bitcoin to freeze it before it was withdrawn and dissipated.

Toma v Murray

In Toma v Murray, the claimants sold some Bitcoin to an account owned or controlled by a Mr Murray on LocalBitcoins.com, an online trading platform. However, the payment from Mr Murray was later reversed, leaving the claimants without their Bitcoin or their sale proceeds. Mr Murray accepted the claimants had been the victim of fraud but claimed his account had been hacked.

The claimants sought a proprietary injunction over the Bitcoin in Mr Murray’s account.

Is cryptocurrency “property”?

The first hurdle to overcome in obtaining a proprietary injunction and remedy for cryptocurrency is to establish that this type of asset is recognised in English Law as “property”. Whilst this is obvious with most assets including “real” money, whether cryptocurrency is “property” under English law has been a topic of academic debate for some time.

This issue was considered in AA re Bitcoin. The Judge was referred to two previous English cases that had treated cryptocurrency as property, although in different contexts and where the question had not been considered in great depth.

The Judge also considered the UK Jurisdiction Task Force legal statement on “Crypto Assets and Smart Contracts” published in November 2019, which was a detailed legal analysis concluding that cryptocurrency such as Bitcoin is property. The Judge found that the reasoning in the Task Force statement was compelling and should be adopted by the Courts, and therefore concluded that cryptocurrency is “property” and could therefore be subject to a proprietary injunction. Interestingly, the question does not appear to have been the subject of consideration in Toma v Murray (at least in the published judgment for the final hearing – suggesting that this primary issue may have been accepted by the parties as established law).

The decision in AA re Bitcoin finding that cryptocurrency is property was “only” at an interim remedy stage and was not an issue which was fully contested given the respondent did not appear in that case. Accordingly, there is still arguably some room for debate as there is still no Appellate-level Court decision, or legislation, which conclusively establishes that cryptocurrency is “property”. However, the cases of AA re Bitcoin and Toma v Murray certainly suggest that current judicial thinking favours treating cryptocurrency as property and proprietary injunctions and remedies are therefore available in respect of such assets.

The balance of convenience

The other hurdle to overcome in obtaining any proprietary injunction for cryptocurrency is satisfying the two-stage test for obtaining junctions: (1) There is a serious issue to be tried; and (2) That the balance of convenience lies in granting the injunction.

A proprietary injunction is merely an interim remedy restraining the use of the property in question until a full trial at a later date determining the claimant’s right to the disputed property. Accordingly, at the injunction stage, the claimant only has to show that its claim to the property has a real prospect of success at that later date and is not just frivolous or vexatious if it can show this then there is a “serious issue to be tried”. The Court in both AA re Bitcoin and Toma v Murray readily accepted that the claims had reasonable prospects of success based on the evidence submitted and therefore passed the “serious issue to be tried” requirement.

The “balance of convenience” second stage of the test proved more challenging, however. An injunction restraining the right of the respondent using the property in question until a later trial, which could be months or years away, when the claimant’s right to the property is not yet conclusively determined, is a serious restriction on the respondent’s use of the property it holds. Therefore, this part of the test requires the Court to consider:

  • Whether monetary damages would be an adequate remedy instead of the proprietary injunction and remedy;
  • The adequacy of the cross-undertaking of damages given by the claimant to the respondent. Generally, a claimant seeking any injunction is required to give an undertaking to pay, and prove it has the means to pay, the respondent damages for any losses the respondent suffers from not being able to use the property for the injunction period if the claimant’s subsequent full claim to the property ultimately fails.

In AA re Bitcoin, the Court readily accepted that the balance of convenience lay in favour of granting the interim injunction. The identity and whereabouts of the hackers who had extorted the ransom payment were unknown, so if the insurers ultimately succeeded in its claim, there would be clear doubts as to possibility of the recovery of any damages awarded. Further, the Court was satisfied the insurer had a strong claim and that there was a real risk of the hackers dissipating the Bitcoin prior to trial and leaving the insurer with no meaningful remedy on recovery. The insurer was also able to easily prove that it had the means to fund the required cross-undertaking in damages, if it was ever called upon. The Court therefore granted to the insurers the proprietary injunction over the disputed Bitcoin that it had paid as a ransom.

However, the claimants in Toma v Murray did not have the same fortune and failed to satisfy the Court of the “balance of convenience” test. The Judge decided:

  • The claimants were essentially seeking the value of the Bitcoin, around 120,000, which (if the claimants were ultimately successful) was also capable of being satisfied in monetary terms rather than requiring any need to give back the specific Bitcoin involved;
  • Unlike in AA re Bitcoin, Mr Murray’s identity was known and he held a separate significant asset a mortgage-free property recently purchased for 4.8m which could be used to satisfy any award of damages in the claim, which was estimated to be worth only around 120,000;
  • Also unlike AA re Bitcoin, the claimants admitted they would have difficulty in funding their cross-undertaking in damages to Mr Murray if their claim failed and Mr Murray suffered losses from not being able to use his Bitcoin in the interim period; and
  • There was a particular risk of loss to Mr Murray in that regard, given that the value of Bitcoin was volatile.

The Court therefore denied the claimants in Toma v Murray a proprietary injunction and Mr Murrary was free to do what he wanted with the Bitcoin in dispute pending full trial.

Comment

The two cases of AA re Bitcoin and Toma v Murray demonstrate albeit we wait for a conclusive Appellate Court decision that parties and their insurers can be reasonably confident the Courts will treat cryptocurrency as “property” and therefore a proprietary injunction and remedy is potentially available in such cases. Depending on the circumstances, this could lead to better recovery prospects compared to claims for monetary damages.

However, the Toma v Murray case shows some of the inherent issues with cryptocurrency that may cause difficulties in obtaining an injunction. The particularly volatile nature of the value of cryptocurrency means the risk of loss to the respondent, if an injunction is granted but the claimant’s full claim later fails, is exacerbated compared to “real” money or most other assets. Further, there is nothing inherently precious about cryptocurrency other than its store of value and the ability to exchange it into hard cash. If monetary damages are a sufficient remedy, therefore, a proprietary injunction is unlikely to be granted. Compare that to, for example, a rare and irreplaceable vintage car where monetary damages (even if clearly recoverable) may be unlikely to suffice as a remedy for the claimant.

However, as AA re Bitcoin shows, if it can be shown that the recovery of monetary damages may be doubtful for some reason for example if the defendant is unknown, potentially outside the jurisdiction and particularly if a potential criminal who would otherwise seek to put their assets beyond the grasp of the claimant then the claimant is on stronger ground.

Finally, one obvious point to bear in mind if seeking to obtain an injunction over and recovery of cryptocurrency thieves move cryptocurrency quickly, so you need to act fast!