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The Fight Against Crypto Scams

British Virgin Islands Court Grants a Worldwide Freezing Order Against “Persons Unknown”

Bitcoin and Gavel - The Fight Against Crypto Scams

In an important decision for victims of crypto-related fraud in the Commonwealth Caribbean, the British Virgin Islands (BVI) Commercial Court confirmed in ChainSwap vs. Persons Unknown BVIHC (COM) 2022/0031 that the Court could grant a worldwide freezing order against Defendants identified only by reference to their crypto wallets.

Background

ChainSwap is a company incorporated in the BVI and provides  “cross-chain bridging” allowing cryptocurrency tokens to be transferred between different blockchains. ChainSwap’s bridges redirect tokens that are sent to its addresses into a specific “vault wallet”. The vault wallet runs a smart contract code, which keeps a tally of disabled tokens and newly minted tokens to ensure each corresponds. 

In July 2021, ChainSwap was hacked by unknown hackers on at least one occasion who managed to steal a number of tokens from cryptocurrency wallets. The hackers managed to exploit vulnerabilities in ChainSwap’s computer programs and amended the open-source code on which ChainSwap’s bridge operates. By altering the code, the hackers:

  1. Redirected tokens from the bridge to a private digital wallet owned by the hackers rather than going to the vault wallet.
  2. Removed the token minting quota, meaning that an unlimited number of new tokens could be issued without the need for any tokens at all to be received into the vault wallet. The newly minted tokens were directed into private digital wallets belonging to the hackers.

The misappropriated assets were then traded and exchanged for different cryptocurrency tokens and stablecoins through Tornado cash, a decentralized mixing/tumbling service, which obfuscates the origin of crypto-asset transactions. Some funds were also traced to a cryptocurrency exchange located in Croatia called Electrocoin D.O.O.

The hackers sent funds to three separate wallet addresses, and a fourth following the use of Tornado cash service. The persons unknown who owned those addresses are the first to fourth defendants in these proceedings.

Following an ex parte hearing on 17 February 2022, Jack J granted a worldwide freezing order, which was extended at the return date on 15 March 2022. The Defendants failed to show up, and consequently, a permanent worldwide freezing order against unknown persons was granted on 4 May 2022.

Legal Imprint

 The Judge, Jack J, acknowledged Jackson J’s decision in Ward Hadaway LLP v Persons Unknown (unreported 26th April 2022), in England, which permitted a claim to be brought against persons unknown, particularly useful where hackers’ identities are not yet known but Jackson J’s judgment was sealed, so his reasoning was unclear.

ChainSwap obtained a worldwide freezing injunction against the defendants. This is a useful tool preventing the movement of assets up to a certain value against currently unknown parties on an interim basis.

Jack J, also noted that had ChainSwap tabled an arguable application that the stolen assets were its property, then the Court would have been able to grant a proprietary injunction in addition to the worldwide freezing order. In the present instance, ChainSwap was not seeking a proprietary injunction, since it was not asserting a proprietary right in the crypto-assets. Usually proprietary injunctions are the most helpful relief when seeking to freeze funds in crypto hacking cases, as these injunctions prevent the dissipation of particular named assets. However, ChainSwap brought the proceedings in an effort to repair any damage to its reputation caused by the hack, including loss of income.

Following the seminal decision in AA v Persons Unknown [2019] EWHC 3556 (Comm), English courts have accepted that crypto-assets constitute “property” for the purposes of obtaining all kinds of relief, including a proprietary injunctions and worldwide freezing injunctions against persons unknown. Similar conclusions have been drawn by the Singapore International Commercial Court in B2C2 Limited v Quoine PTC Limited [2019] SGHC (I) 03 and the New Zealand High Court in Ruscoe v Cryptopia Ltd (in liquidation) [2020] NZHC 782.

Commentary

 The subject of crypto-related fraud and crypto-asset recovery is becoming commonplace. To this end, Courts are fast evolving to assist claimants facing novel challenges in this developing area of law. As the first decision of its kind in the BVI, the ChainSwap case is expected to have a far-reaching effect for victims faced with ever-increasing cyber threats and crypto-related fraud in the BVI and other Commonwealth Caribbean jurisdictions.

ChainSwap demonstrates the Court’s willingness to act urgently and to provide pragmatic and effective remedies to “limit the risk of dissipation if no relief is granted”. If victims are to counteract crypto-fraud and recover their crypto-assets, swift and urgent judicial intervention is, therefore, necessary because crypto-assets can be easily obfuscated, moved from wallet to wallet and across borders in relatively short periods of time.

Should ChainSwap have sought to follow the exact funds that were stolen, or their traceable proceeds, it could have utilized a proprietary injunction over those funds in order to assist in mitigating risk of those funds dissipating.

Nevertheless, the BVI have now reaffirmed the English Court’s approach in granting relief against persons unknown where hacks have occurred.

Co-Authored and Edited by:

  1. Brian Sanya Mondoh, Barrister and Attorney at Law, Trinidad and Tobago
  2. Matthew Green, Solicitor, England and Wales, Brandsmiths, UK

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Disclaimer: The information provided on this blog does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this blog are for general informational purposes only. Information on this blog may not constitute the most up-to-date legal or other information. Readers of this blog should contact their barrister/attorney to obtain advice with respect to any particular legal matter.

Author

Brian is a Dual Qualified Barrister and Attorney at Law. He has a cross-border practice offering advisory work on compliance and regulation. He regularly advises clients on Know Your Client (KYC) and Anti Money Laundering (AML) laws in jurisdictions monitored by the Financial Action Task Force (FATF). Brian also advises and speaks internationally on the legal implications of computational law and emergent technologies such as blockchain, cryptocurrencies, Decentralised Finance (DeFi), Decentralised Autonomous Organisations (DAOs) and Crowdfunding etc.

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