December 10, 2020

What is the legal status of digital currencies?

This increased prominence has come with its own challenges, not least for courts when determining the legal status of them.

Why is the status important?

Establishing the status of a digital currency is necessary in order for a Court to determine what remedies are available to a claimant.

For example, individuals that have been the victim of theft of personal property, will generally seek proprietary remedies. Such remedies can allow a claimant to “follow” or “trace” the personal property which has been stolen, allowing them to identify the third parties that may have had possession of the property, and to request the property be returned. This right can even be enforced against an innocent third party where the personal property has ended up in their possession.

In the context of financial crimes or theft, the assertion of a proprietary right will usually be followed by a Court granting a freezing order. These are interim injunctions that prevent a party from disposing of or dealing with its assets.

Where actual monetary funds have been taken from a conventional bank account, courts have clear scope to exercise discretion to grant such orders. However the position with digital currencies is less clear-cut. This largely comes from difficulties in defining precisely what digital currencies are. There is no universally accepted legal definition, statutory framework or uniformed approach being adopted by the courts deliberating such matters. The FCA’s definition for cryptocurrencies in general is to view these as “unregulated tokens”, which serve the primary purpose of operating as a “means of exchange”.

Generally, before a Court will be willing to intervene and extend one of the remedies outlined above in favour of a claimant, they will need to be satisfied that the misappropriated “possession” is capable of being deemed the property of the claimant. This was the crux of the issue in the matter of Robertson v Persons Unknown, heard in the Commercial Court in 2019.

What approach was taken in the case of Robertson?

The matter of Robertson concerned an individual who had been the victim of a targeted spear phishing attack, culminating in the claimant transferring 100 Bitcoin to an unknown third party’s digital currency wallet. Following such transfer being made, eighty of these Bitcoin were transferred by the unknown third party to a wallet at crypto-exchange, Coinbase UK, with the remaining twenty Bitcoin transferred elsewhere.

The claimant sought the following:

  • Rescission of the transaction on the basis that the claimant had been fraudulently induced, and therefore the restoration of the Bitcoin to the claimant
  • A declaration that a trust arose over the transferred Bitcoins, on the basis that these were provided by the claimant for the purposes outlined within the phishing email (albeit fraudulently induced), and that the claimant was the beneficiary of said trust which would remain valid until the funds were used in the manner which the fraudster had stated they would be
  • Damages for deceit
  • The value of the Bitcoins which had been transferred on the basis that the third parties to which these had been transferred as a result of the fraud had been unjustly enriched.

The approach taken by the Judge deliberating this matter was interesting, ultimately asserting the following:

  • No freezing order would be made against the third party wallet on the crypto-exchange due to it not being possible to ascertain whether the holder of such wallet was a part of the fraud
  • The claimant had a proprietary claim over the eighty Bitcoin, despite, rather confusingly, the City of London Law Society (CLLS), who were invited to provide their submissions on the case, stating that cryptocurrencies are neither choses in possession (i.e. not physical / tangible items), nor are they choses in action (i.e. they do not confer rights which are enforceable against another person, for example a right to an estate in land by virtue of intestacy)
  • For the purposes of granting an order for the monies to be returned, and in the interim to impose a freezing order, it did not matter whether the Court treated them as choses in action or some form of other intangible property, and cryptocurrencies are “some other intangible asset”.

So is the positon now clear?

In this instance, despite the judges somewhat dodging the question of whether the misappropriated Bitcoin were possessions or personal property, it was confirmed in the interim ruling that the stolen cryptocurrency amounted to “some other form of intangible assets”. They appeared to view these as some other form of property which is not easily elsewhere classified, but to which a claimant can still assert a legal proprietary right (in this instance, where fraud has been present). This was the final conclusion in the subsequent case of AA v Persons Unknown & Ors, Re Bitcoin.

This seems to bring the current treatment of cryptocurrencies somewhat into line with the treatment of Patents, as set out in the Patents Act 1977, which states that “[a]ny patent or application for a patent is a personal property (without being a thing in action)”.

Whilst these rulings provide a useful insight into the matters that a Court will take into account when considering whether an enforceable proprietary right exists, these have not been robustly challenged. Additionally, in the context of the case with Robertson, where the facts revolved around a clear fraud and subsequent misappropriation, the intervention of the Court was easier to justify. Without it being determined that these are personal property in the conventional sense, it remains to be seen what the approach would have been where cryptocurrencies are transferred between bona fide parties, acting in good faith.

It is therefore almost inevitable, as alluded to the CLLS submissions made to the Court in the case of Robertson, that a solid regulatory / legislative framework will need to be put in place to govern the treatment and status of cryptocurrencies generally, in an effort to clear the murky waters.

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