Bitkub successfully defends English High Court claim in first-of-its-kind crypto judgment4 October 2024

Judge Farnhill noted that, given the foundation of USDT is the cryptographic security of the blockchain, there is more than a mere hope that transactions will be honoured – “there is an expectation that this will happen based on cryptographic security that is designed to make it happen”.

In terms of what the nature of an asset such as USDT is, Judge Farnhill noted that it is more than mere data, and that it is a “combination of both data and transactional functionalities” which is sufficient to provide the expectation that the transaction will be honoured and thus enable it to attract property rights.

Farnhill’s conclusion was therefore that “USDT, while neither a chose in possession nor a chose in action, is capable of attracting property rights for the purposes of English law”.

This finding offers cryptocurrency users greater certainty that, whilst cryptocurrency such as USDT is independent of any particular legal system, the English Courts are inclined to recognise that property rights attach to such assets.

Whether/how crypto-assets can be followed and/or traced

Following and tracing are both exercises in locating assets in the hands of a defendant or third party:

• following is the process of following the same asset as it moves hand to hand; and
• tracing is the process of identifying a new asset as a substitute for the old.

In considering whether USDT can be traced/followed, Farnhill found that, consistent with his characterisation of USDT as property, it can be characterised as a “persistent thing”, maintaining a distinct entity even in a mixture, allowing it to be followed through different wallets, even where those wallets contained or subsequently received USDT from other sources.

Farnhill held that, in principle, USDT, a distinct class of asset to which property rights attach, could be traced or followed. However, in this case:

• tracing could not be done, as tracing through mixed funds is impermissible under common law; and
• Farnhill considered there was no evidence, whether from Tether Ltd or any other source, which allowed the following exercise to be undertaken.

Some instructive comments were also made on tracing methods available to fraud victims. Farnhill confirmed that established methods such as the ‘first in first out’ method are not the only options, and that other methods are available to parties provided that those methods are methodologically sound, treat all innocent claimants comparably and are properly evidenced. It is this last factor – providing proper and robust evidence – which poses a big challenge in situations where funds are alleged to have passed through multiple wallets.

Concluding remarks

This is a welcome Judgment which provides important clarification and guidance in relation to the nature of the property rights associated with cryptocurrencies.

It also illustrates the difficulty of bringing an English Court claim against a foreign cryptocurrency exchange, or tracing cryptocurrency to it, in circumstances where the funds have allegedly passed through multiple wallets, and in circumstances where the exchange is subject to and complying with local laws and regulations which dictate how it should be run and how it manages client information.

The full Judgment can be read here.

Footnotes

[1] In particular:

• AA v Persons Unknown [2019] EWHC 3556 (Comm): Judge Farnhill referred to Bryan J’s judgment in AA v Persons Unknown [2019] in which Bryan J accepted that property was not limited to choses in possession and choses in action, but that cryptoassets are also property. Brian J had relied on the four criteria set out in Lord Wilberforce’s classic definition of property in National Provincial Bank v Ainsworth [1965] AC 1175 as being (i) definable, (ii) identifiable by third parties, (iii) capable in their nature of assumption by third parties and (iv) having some degree of permanence.
• Tulip Trading v Van Der Laan [2023] EWCA Civ 83: Judge Farnhill also referred to Birss J’s judgment in Tulip Trading v Van Der Laan [2023] which he read as indicating that:
  • cryptoassets attract property rights;
  • a key aspect of cryptoassets is that they are rivalrous, that is to say ownership by one person prevents ownership by another, and this can be contrasted with information, which is not rivalrous even if it has value; and
  • cryptoassets exist as something outside the minds of their users (and in that sense are tangible).

The Law Commission Report: Farnhill picked up on certain comments of the Law Commission, in particular, their view that “In England and Wales, across the common law world, and in other jurisdictions, there is now a persuasive, clear and well-reasoned body of case law that concludes that certain digital assets are capable of being objects of personal property rights. Much of the reasoning in that case law relies on analysis that supports or is consistent with our approach that recognises there is a third category of thing to which personal property rights can relate.”