How victims of crypto fraud can identify and locate fraudsters and recover their misappropriated crypto assets

With the growing popularity of cryptocurrencies, the number of cases involving fraud is on the rise. One of the most popular forms of crypto fraud is the ‘address poisoning’ scam (also referred to as a ‘zero-value transfer’ scam).

This is a form of fraud where a fraudster creates a wallet address which looks similar or near identical to a wallet address which the victim knew and dealt with in the past. The victim is tricked into thinking that they are making a payment to a legitimate wallet, when in fact it belongs to the fraudster. As soon as crypto lands in that wallet the fraudster seeks to dissipate it by making further transfers between various other wallets to conceal its destination.

When victims in this scenario realise that they have been defrauded out of crypto and wish to bring a claim, they face three immediate issues: (i) they do not know the identity of the fraudsters they wish to sue; (ii) they do not know where the misappropriated crypto ended up; and (iii) they cannot do anything to stop its further dissipation, obfuscation of its trail and concealment.

Although situations like this may seem unfortunate and difficult, there are a number of legal tools which may help to resolve these issues.

Freezing and ancillary disclosure orders

In Philip Smith and Jason Kardachi (in their capacity as joint liquidators) v Torque Group Holdings Ltd BVIHC (COM) 2021/0031, the BVI High Court accepted that cryptocurrency is a type of property. This finding has a number of implications, including that the BVI Courts have the power to grant orders ‘freezing’ crypto assets. A freezing order is a type of interim injunction which restrains a respondent from disposing of, dealing with or diminishing their assets. Its primary purpose is to prevent the dissipation or concealment of assets that would otherwise be available to satisfy a judgment or award.

As demonstrated by AQF v XIO and Others BVIHC(COM) 2023/0239, it is possible to obtain a freezing order against the alleged fraudsters as ‘Persons Unknown’, as well as relevant BVI-based third parties over whom the BVI courts have personal jurisdiction, such as issuers and operators of relevant cryptocurrencies. These parties are referred to as ‘non-cause of action defendants’ (NCADs) and typically have the power to ‘freeze’ the misappropriated crypto by disabling functions which allow for its sending and exchange.

Provisions of standard form freezing orders usually include ancillary disclosure order provisions, which compel respondents to disclose the value and whereabouts of their worldwide assets (including the misappropriated assets). In cases which involve ‘Persons Unknown’, these disclosure provisions may also compel various innocent third parties to disclose information, which may help to establish the identity of fraudsters. Such an order was granted in AQF v XIO, where Ethereum and TRON issuers were compelled to provide information about the owners of the wallets to which misappropriated crypto was transferred.

A freezing order must be served on the parties against which it is obtained. Service will be effected via personal service, or in cases involving foreign defendants, through foreign governments, judicial or consular authorities, and in accordance with any relevant conventions and the laws of the country in which it is to be served. In cases of freezing orders made against ‘Persons Unknown’, service is inherently problematic because the identity and whereabouts of fraudsters is unknown.

However, if the victim knows (or obtains from NCADs) the fraudsters’ email addresses, or is able to send documents via file transfer to any of the text message platforms or applications relating to user accounts associated with any of the digital wallet addresses where misappropriated assets were transferred, or via non-fungible token (NFT) airdrop to the digital wallet addresses, the Court may make an order for service by alternative means pursuant to CPR 7.10. When making an application for an order for service by alternative means, it is crucially important to show that the proposed method of service is likely to enable the person to be served to ascertain the contents of the court process and that it is not contrary to the laws of the country in which court process is to be served.

An order for alternative service both by email and NFT airdrop was granted in AQF v XIO. The BVI Court held that such an order would be consistent with the overriding objective to deal with cases justly, expeditiously and effectively. In its reasoning, the BVI Court relied on the analysis of the English Court in D’Aloia v Persons Unknown and Binance Holdings Limited and Others [2022] EWHC 1723 (Ch), where it explored the novel mode of service by NFT airdrop and observed that its advantage is that the drop of the documents into the system will embed the service in the blockchain.

Norwich Pharmacal Order

In certain circumstances obtaining a freezing order against NCADs may not be a feasible option. However, provided that it is possible to follow the movement of crypto to a custodial account such as an exchange, it may be possible to obtain information that would help to identify fraudsters by obtaining a disclosure order (referred as a Norwich Pharmacal Order) against the custodian.

Depending on the particular circumstances of the case, information which may be obtained by means of a Norwich Pharmacal Order includes the following:

• the names in which the accounts are held;
• ‘know your customer’ information and documents provided in respect of the accounts;
• any other information and documents held in relation to the accounts which may identify the holder of the accounts, including email addresses, residential addresses, phone numbers and bank account details;
• an explanation as to what has become of the misappropriated cryptocurrency;
• the balance in the relevant customer accounts; and
• to the extent any further transfers have been made to other customer accounts, the name and residential address of each accountholder.

Find out more about obtaining a Norwich Pharmacal Order.

Letter of Request

A combination of a freezing order and an ancillary disclosure order (or alternatively, a Norwich Pharmacal Order) may be sufficient to establish the identity of fraudsters in cases such as AQF v XIO, i.e. where the issuers and operators holding the relevant information are based in the BVI.

However, it may not be sufficient when a wallet into which misappropriated crypto is transferred interacts with a foreign exchange, as was the case in ChainSwap Limited v Persons Unknown BVIHC (COM) 2022/0031. In that case, the misappropriated crypto was transferred to a wallet which interacted with an exchange based in Croatia, and which held ‘know your customer’ information about the owner of the wallet. The BVI Court signed a ‘letter of request’ addressed to the Croatian judicial authorities seeking assistance in obtaining evidence from the exchange, including information that would help to identify fraudsters.

A ‘letter of request’ is a request to foreign judicial authorities to assist in obtaining evidence from a person who is subject to their jurisdiction. The letter may contain a request for oral or written examination of a person, as well as for the production of documents by them. This tool can be particularly helpful in crypto cases, which often involve foreign parties mixed up in the fraud.

However, it cannot be used to compel a person to state what relevant documents are or have been in their possession, custody, or power, or to produce any documents other than specific documents that the BVI Court considers are or are likely to be in their possession, custody, or power.

A party applying for the issue of a letter of request needs to prepare a draft letter of request and, where appropriate, specify:

• the names and addresses of the persons to be examined;
• the questions to be put to them or a statement of the subject-matter about which they are to be examined;
• the documents or other property, real or personal, to be inspected;
• any requirements as to how the evidence should be given; and
• any special method or procedure, which should be followed by the judicial authorities, which execute a letter of request.

Contacts

If you would like further guidance on the issues covered in this guide, please contact a member of our specialist BVI Litigation and Dispute Resolution team.