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Bitcoin held to be 'property' as court grants freezing injunction

Locations

United Kingdom

In the first reported decision of its kind, the Commercial Court has granted a freezing injunction against persons unknown holding Bitcoin, whilst also breaking new ground in determining that Bitcoin is property.
AA v Persons Unknown & Bitfinex [2019] EWHC 3556
 

Background

The Claimant was the insurer of a Canadian company whose systems had been targeted by cyber criminals and infected by sophisticated malware. The malware encrypted the company's systems, rending the company unable to conduct any business. The perpetrators demanded $950,000 in Bitcoin in order to provide the decryption tool to unfreeze the company's systems. This ransom was paid by the company's insurer and the decryption tool was then provided.

A blockchain analysis firm (Chainanalysis Inc.) working for the insurer was able to trace the transfer of the Bitcoins to a specific address, an exchange called Bitfinex.

The claimant applied for a persons unknown proprietary freezing injunction against those persons which demanded the Bitcoin and those persons who now held the Bitcoin. It also sought a proprietary freezing injunction and ancillary disclosure against Bitfinex, which was incorporated in the British Virgin Islands.

The Law

The 'persons unknown' jurisdiction has been longstanding in English law, whereby defendants can be identified as a 'class' by reference to particular characteristics. Its use has been made most notably in claims for misuse of private information and theft of confidential information in order to target anonymous persons from wrongly distributing, publishing and using private or confidential information. It was only recently extended to freezing injunctions in the case of CMOC v Persons Unknown [2018] EWHC 230 (Comm) (see our blog post on this case here). Such injunctive relief is typically accompanied by applications for ancillary relief for the disclosure of information in order to trace the ultimate wrongdoers.

Proprietary injunctive freezing orders can be sought where the claimant asserts that the assets held be the defendant are in fact the claimant's property. The question of whether Bitcoin can be 'property' in English law was yet to be substantively considered by the courts.

Judgment

The difficult in treating Bitcoins (and other cryptocurrencies) as property for the purposes of a proprietary freezing injunction is that they are neither chose in possession (because they are virtual and intangible) nor are they chose in action (because they do not embody any right capable of being enforced by the action). English law traditionally only views property as either a chose in possession or a chose in action. However, the judge concluded that it would be fallacious to proceed on the basis that the law of property recognises no other forms of property. Taking cue from the recent Legal Statement on crypto assets by the UK Jurisdictional Task Force, and the classic definition of property in National Provincial Bank v Ainsworth [1965] 1 AC 1175 as being definable, identifiable by third parties, capable in their nature of assumption by third parties and having some degreed of permanence, Mr Justice Bryan held that crypto assets such as Bitcoin are property.

Accordingly, the court granted a proprietary freezing injunction against both persons unknown and against Bitfinex, whilst also allowing for service by alternate means (email) given the urgent nature of the application to freeze and trace the Bitcoin. Bitfinex was also required to disclose the identities of those holding the Bitcoin on the blockchain, which would enable the claimant to trace the perpetrators.

Comment

This case again demonstrates the Commercial Court's willingness to push the boundaries and deliver innovative decisions in order to allow victims of fraud to trace and recover monies. Cyber criminals are increasingly using more sophisticated techniques to steal or extort monies from victims and the Commercial Court should be lauded for keeping pace.

Crypto currencies may no longer become a secure and untraceable place for fraudsters to place their ill-gotten gains, given the services offered by blockchain analysis companies which can trace the transfer of such assets coupled with the English court's willingness to enforce against them.

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