A rising tide of crypto disputes

The increased popularity of cryptoassets has driven a surge in crypto-related disputes. Broadly speaking, these fall under three main categories.

The first is cryptoasset recovery, following a fraud or theft. This type of dispute covers a broad array of scenarios including hacks and confidence tricks (also known as ‘pig butchering’ scams). It also includes so-called ‘rug pull’ scams, such as fraudulent initial coin offerings. These types of fraud-related claims are typically issued against ‘persons unknown’ (because the identity of the fraudsters is often unknown at the start of the case) and also against third parties, such as crypto exchanges for the purposes of seeking disclosure orders.

The second category covers (non-fraud related) claims against crypto platforms and exchanges. It includes claims where individuals are seeking to recover from a crypto exchange losses suffered from a crypto investment, for example by alleging that they have been mis-sold a particular cryptoasset or product, or that an exchange was not permitted to sell that asset or product in the first place. Other examples include disputes arising from automatic liquidations conducted by an exchange during periods of market turmoil. Finally, claims against exchanges have also recently been brought in relation to competition issues under section 47B of the Competition Act 1998 and also concerning intellectual property issues.

The third category covers disputes which do not relate to the legal or technical nature of cryptoassets, but where the underlying business or subject matter is crypto-related.  An example is Wang v Darby [2021] EWHC 3054 (Comm), which fundamentally was a case turning on the construction of a contract concerning certain cryptoassets. 

Current trends in crypto fraud

Cryptoasset fraud is being committed on an enormous scale. According to Chainalysis, $6.2bn of crypto was stolen from victims globally in 2021, representing an annual increase of about 80%. By July this year, thefts by hacking had reportedly reached $1.9bn, compared with just under $1.2bn at the same point in 2021.

One issue driving this upward trend is the targeting of decentralised finance ‘DeFi’ bridges. DeFi bridges essentially enable cryptoasset holders to move their assets between different blockchain networks, for example swapping from the bitcoin blockchain to the ether blockchain. Hacks of DeFi bridges reportedly account for around 80% of recently stolen cryptoassets. Demand for DeFi bridges is steadily increasing as the cryptoasset ecosystems evolve – around $215bn was locked in DeFi bridges at March 2022, a 156% increase on March 2021. The concentration of assets locked in DeFi bridges makes them attractive targets for cybercriminals. Indeed, the largest-ever crypto hack involved the Poly Network bridge: c.$600m of assets were stolen in August 2021.

On the other hand, and at first blush counterintuitively, the value of illicit activity associated with crypto scams appears to be decreasing, at least for now. As at mid-August this year, total scam revenue for 2022 reportedly sat at $1.6bn, 65% lower than the end of July 2021. However, this decline is likely to be a product of the fall in value of crypto currencies from their peaks in November 2021, rather than a sign that crypto scams are becoming less prevalent. The so-called ‘crypto winter’ vastly reduced the value of cryptoassets across the board, thereby also reducing the value of scam revenue. 

What action can victims take?

The English courts have shown themselves to be adept at assisting victims of crypto fraud, though the process is expensive. A fairly standard ‘playbook’ has developed.  Victims typically seek to obtain a proprietary injunction and a worldwide freezing order to secure the stolen crypto and prevent it from being dissipated further.  Victims also typically seek disclosure orders (known as Bankers Trust and Norwich Pharmacal orders) against exchanges to compel disclosure of information about the identity of the fraudsters.

If a victim wishes to seek the assistance of the English court, there are two key reasons why they should act quickly in instructing lawyers and a blockchain-tracing expert. First, cryptocurrency can be moved very quickly and its trail can be obfuscated by mixing it with other funds and/or transferring it through various wallet addresses. Second, because of the powerful relief at the English court’s disposal, one factor it considers when deciding whether to grant such relief is whether the victim is in ‘hot pursuit’ of their assets. As such, in order to maximise the prospects of tracking the stolen crypto and obtaining powerful relief from the English Court, speed is key.

How effective have remedies sought in the English court been in recovering stolen cryptoassets?

Provided the misappropriated crypto is swiftly tracked and frozen by court order in the hands of a reputable exchange, the remedies can be very effective and there are reasonable prospects of recovery.  However, it is difficult to know the number of successful recoveries to date. This is a new area, and often a confidential settlement will ensue if effective relief is obtained (which therefore would not be publicly reported).  

However, one high-profile recent case demonstrates the potential effectiveness of court-based remedies: the BVI case of ChainSwap v Persons Unknown. Having fallen victim to a hack on a DeFi bridge, the claimant swiftly instructed lawyers and blockchain data analytics experts to initially identify the wallet belonging to the hackers. The claimant was then able to obtain a freezing injunction over the cryptoassets and a disclosure order against a relevant exchange (that is, the same relief as the English courts can grant in cases falling within their jurisdiction). This ultimately led to the hacker making contact with the claimant’s lawyers and offering to settle.

Dan Wyatt is a partner, Chris Whitehouse a senior associate and Harvey Briggs an associate at RPC, London