Disputes - What to look out for in 2019: Crypto-asset disputes

With litigation over crypto-assets already in full swing in the US, will 2019 see actions in the English courts?

In brief

  • Growing crypto-regulation, fraudulent offerings and schemes, volatility of asset prices and increasing numbers of crypto-users, make high value disputes and enforcement likely.
  • Litigation over crypto-currencies is booming in the US, and while there are reasons why the UK offers less opportunity for claims, there are also signs that cases are likely to be brought.
  • The English courts have already granted several freezing and disclosure orders in relation to crypto-assets in 2018, and have also granted orders against “no-name” defendants. Further innovation is likely in order to prevent wealth being hidden from creditors and enforcement agencies.

More crypto-litigation

In the United States, there has been an upsurge in litigation relating to improper selling of securities, failed crypto-asset investments and fraudulent Initial Coin Offerings (ICOs). Although private lawsuits have gathered momentum, it is the Securities and Exchange Commission (SEC) that has led the growth in crypto-related securities litigation and enforcement, driven by its focus on bringing transparency and integrity to crypto-markets.

Why haven’t we yet seen the same uptick of crypto-litigation in the UK in 2018? There are several reasons, many of which look set to change in 2019:

  • First, the UK regulators have struggled to work out who is in charge of regulating and enforcing crypto-misconduct (compare the US regulators, where the SEC, CFTC, FinCen, FINRA and FTC - to mention a few - have all filed crypto-complaints). In the UK, the likely candidate for the job is the FCA - and it has been busy. As part of the Cryptoassets Taskforce, the FCA has been determining the regulatory perimeter for crypto-assets, consulting with the industry, and reporting on its next steps (see our article). But enforcement could soon be on the UK’s agenda: in December 2018, Andrew Bailey, Head of the FCA, commended the SEC on its “sensible approach built on case law” and “strong interventions”; possibly a signal for the UK to follow the US’s “strong example”.
  • Second, in the UK, the absence of the US-style class action regime makes it more difficult for investors to group together and recover their losses. As we’ve previously discussed, potential claimants must ‘opt-in’ to litigation. There are obvious difficulties in identifying, notifying and assembling possible victims to take collective action in a sector where asset ownership is anonymous. That said, in an environment of falling asset prices and with several US plaintiff firms in London looking to exploit the possibilities of group litigation orders, there is motivation and the means for claims based on misrepresentation, breach of contract or in tort, in circumstances of crypto-asset fraud or failure.
  • Third, the interaction and partnership of UK banks and financial institutions with crypto-firms increases the scope for commercial disputes involving actors with (a) substantial resources and (b) valuable reputations and market share to protect. One of the most high-profile disputes, between Ripple and R3 (backed by a banking consortium), settled in September 2018 for an undisclosed amount, but was said to be worth as much as $19bn at the height of XRP token trading.

Crypto-asset recovery

As crypto-litigation may increase, so too may crypto-recovery in civil claims and criminal enforcement. In the latter half of 2018, the English courts granted freezing and disclosure orders over crypto-assets on several occasions, enabling the successful applicants to obtain valuable co-operation from banks and traders. Similarly, the courts have permitted police to restrain crypto-assets and convert them to sterling, granting a novel application under the Proceeds of Crime Act 2002. Conversion was believed to be appropriate for ensuring that the restraint order was effective, given that the price of bitcoin was volatile (and decreasing). We anticipate that the courts will continue to be robust in subjecting crypto-assets, like other assets, to traditional orders, with the objective of providing effective redress.

Flexibility by the English courts

Finally, although there is scope for increased crypto-litigation and crypto-remedies, it is not immediately clear where disputes may be fought. Crypto activity is inherently cross-border, with many companies locating their activities in multiple jurisdictions and serving customers globally. There are good reasons, nonetheless, why disputes are likely to be brought in London (and not simply because of English law’s reputation for certainty and fairness). English courts are showing themselves to be flexible in their approach to nameless and faceless perpetrators of fraud - unfortunately, not uncommon in the crypto-world. In the case of CMOC v Persons Unknown, the Commercial Court made a worldwide freezing order against no-name defendants who had hacked CMOC and successfully forced it to pay over $8m to 50 third party banks. Such orders may become increasingly common as victims of crypto-theft are left with only an address to identify the perpetrator.

What it means for you

2019 may well herald a swell of UK litigation involving crypto-assets, fuelled by regulatory appetite for enforcement, greater numbers of crypto users and an increasingly integrated financial services industry. Where those responsible for crypto-currency frauds are hard to identify, the courts will continue to be amenable to creative approaches in order to provide redress.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.