The unregulated nature of the volatile cryptocurrency market has paved the way for an alarming increase in financial fraud. I previously shared an article headed the "Inconvenient Truth about Bitcoin". Within which we saw why block-chain based currency is the future albeit the article examined why bitcoin itself was bound to fail. The key aim within the article was to emphasise that for cryptocurrencies to succeed, crypto bugs must first realise and accept that government authority is necessary to legitimise the currency.
Despite warnings or caution extended by financial experts and regulators there was an exponential growth of cryptocurrency exchanges and trading platforms - with everyone jumping on the bandwagon in fear of missing out (FOMO). Crypto was designed as a censorship resistant payment mechanism that operated outside the heavily regulated financial system and is beyond the remit of a regulator. As of 2021, cryptocurrencies have been banned in mainland China whilst Hong Kong has decided to let retail investors trade cryptocurrencies under a new regulatory system; with application for licences from crypto exchanges being accepted by authorities from 1 June 2023 [Financial Times 31 May 2023].
Due to the absence of robust regulations, several cryptocurrency exchanges have become breeding grounds for criminal activity. Crypto related scams are ever increasing with litigators busying themselves with incoming enquiries about scams ranging from fraudulent Bitcoin investment schemes, phishing scams, rug pull scams involving artificially inflated coins and fake cryptocurrency exchanges.
The lack of regulation means even the established exchanges are flagrantly turning a blind eye on continued fraud. Last month, American Commodity Futures Trading Commission (CTFC) issued proceedings against the biggest exchange (by trading volume, accounting for over 40% of the global crypto market share), Binance [lawsuit]. In this case, CFTC alleges that the Binance former Chief Compliance Officer had said of certain Binance customers: "Like come on. They are here for crime." The exchange's Money Laundering Reporting Officer, according to the CFTC, accepted: "We see the bad, but we close 2 eyes."
This prompted the US Securities and Exchange Commission (SEC) to crackdown on the crypto industry, suing exchanges Coinbase (Coin.O) and Binance last week for allegedly breaching its rules.
Does this mean the exchanges should be liable for the frauds committed by numerous fraudsters? The exchanges should certainly be held accountable for flagrant breaches, if identified.
The decision of Joseph Keen Shing Law v Persons Unknown & Huobi Global Limited [26 January 2023], handed down recently by Mr Justice Pelling KC [sitting at the London Circuit Commercial Court], will certainly become a key decision on how to obtain a successful enforcement order against an exchange, in order to satisfy a judgment obtained against fraudsters.
In this case, the three defendants did not respond to the claim. The fourth defendant, Huobi Global Limited - that operates the cryptocurrency exchange in relation to the various wallets at the heart of the litigation - took part in proceedings and cooperated with the claimant and his solicitors. The claimant had obtained a post-judgment worldwide freezing order against the three defendants in relation to the assets contained in two wallets or accounts maintained with the fourth defendant. The claimant maintained a proprietary claim against the funds in those accounts, claiming that they contained proceeds of the fraud that have been inflicted on the claimant. The judge found that despite the strict proprietary claim in relation to the funds credited to that account, the claimant had succeeded in obtaining a judgment in default for all personal causes of action in relation to the losses. Therefore, there would be an ability to enforce a monetary order against the accounts controlled by the defendants responsible for the fraud - as if the accounts were maintained in England.
The judge had to decide if the court could order transfer of funds that are subject of a worldwide freezing (WWF) order into England and Wales, noting that the circumstances are generally limited. That is because the assumption, which underlines the making of a worldwide freezing order, is that the defendants concerned will comply with the order.
The judge turned to Gee on Commercial Injunctions to identify a series of principles that ought to be adopted when considering whether to make such an order to transfer funds subject to a WWF Order. Mr Justice Pelling KC identified the requirements, in particular, that "the court should be slow to make a delivery up order unless there is some evidence or inference that the property was acquired by the defendant as a result of alleged wrongdoing"; and that "an order for delivery up should generally not be made to anyone other than the claimant's solicitor or a receiver appointed by the High Court."
In conclusion, the judge ordered that the cryptocurrencies held in the relevant accounts (with the Huobi exchange) to be converted to flat currency and the flat currency to be transferred to the claimant's solicitors client account or the court's office direct (whichever was most speedy and costs effective).
This landmark decision is vital to all victims of such fraud
where the biggest hurdle in most fraud cases is enforcement of a
judgment.
If you have fallen victim to a cryptocurrency scam, it is crucial
to understand your options for seeking legal redress through the
court system.
In most situations, you have a recourse against (1) the fraudsters;
and possibly (2) the exchange.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.