Written by 4:21 pm Cryptocurrency

Singapore Court grants proprietary and Mareva injunctions against persons unknown for cryptocurrency theft

With the surge in the popularity of cryptocurrencies, thefts, hacks, and frauds involving cryptocurrency assets are becoming more frequent. Masked behind VPNs and anonymous identities, the perpetrators of these crimes can easily transfer the stolen cryptocurrency assets across the globe and layer transactions across numerous intermediate addresses to impede the tracing of the stolen assets. For the victims of such crimes, their main concern is what legal remedies are available to them given the borderless nature of cryptocurrency and the anonymity of the perpetrators.

Across the Causeway, the Singapore High Court (“High Court”) had, in the landmark decision of CLM v CLN and others [2022] SGHC 46 (“CLM”), applied established legal principles to cryptocurrencies to provide relief to a victim of cryptocurrency theft. In CLM, the High Court granted a proprietary injunction and a worldwide freezing injunction (also known as a Mareva injunction) to prevent the dissipation of the stolen cryptocurrency assets, against persons unknown suspected of having participated in or assisted with the theft of the cryptocurrency assets. The High Court also granted disclosure orders against two cryptocurrency exchanges to assist with asset tracing and the identification of the perpetrators involved.

We examine the salient points of the High Court’s decision in CLM.

Brief facts

The Plaintiff, an American entrepreneur, commenced an action to trace and recover his cryptocurrency assets, specifically Bitcoin and Ethereum, worth approximately USD7.08 million at the material time (“Stolen Cryptocurrency Assets”), that were misappropriated from him by unknown individuals.

The Stolen Cryptocurrency Assets were accessible through two separate digital wallets (“Digital Wallets”) controlled by mobile applications on the Plaintiff’s mobile phone and were protected with passwords. In the event the Plaintiff’s mobile phone was lost or destroyed, the Digital Wallets could be unlocked using a recovery seed phrase1 which would recover the passwords and restore access to the private keys2 so that the Plaintiff could access his cryptocurrency assets.

The Plaintiff claimed that unidentified persons (the “First Defendants”) had used his recovery seed phrases to access the private keys, and thereafter transferred the Stolen Cryptocurrency Assets out of the Digital Wallets. Through subsequent investigations and tracing efforts, the Plaintiff was able to determine that the Stolen Cryptocurrency Assets had been dissipated through a series of digital wallets, including digital wallets that were controlled by cryptocurrency exchanges with operations in Singapore (the “Second and Third Defendants”).

Decision of the High Court

In coming to its decision, the High Court had to first deal with the following novel points of law:

  • whether the High Court has jurisdiction to grant interim orders against defendants whose identities were unknown; and
  • whether a proprietary injunction and Mareva injunction could be granted over cryptocurrency assets.

Issue 1: Whether the High Court has jurisdiction to grant interim orders against persons unknown

As the identities of the First Defendants were unknown at the time of the filing and hearing of the injunction application, the preliminary issue the High Court had to deal with was whether it had the jurisdiction to grant interim orders against persons unknown. The High Court answered this in the affirmative but emphasised that the description of the persons unknown would have to be “sufficiently certain as to identify both those who are included and those who are not”.

In CLM, the First Defendants were described by the Plaintiff as any person who “carried out, participated in or assisted in the theft of the [Stolen Cryptocurrency Assets] save for the provision of cryptocurrency hosting or trading facilities”. The High Court held that the Plaintiff’s description of the First Defendants was sufficiently clear as there was sufficient certainty as to who fell within and outside the description.

Issue 2: Whether a proprietary injunction could be granted over cryptocurrency assets

As set out by the Singapore Court of Appeal in Bouvier, Yves Charles Edgar and another v Accent Delight International Ltd and another and another appeal [2015] 5 SLR 558 (“Bouvier”), to obtain a proprietary injunction, the Plaintiff had to satisfy the High Court that (1) there is a serious question to be tried; and (2) the balance of convenience lies in favour of granting the injunction.

On the first requirement, there is a serious question to be tried so long as “the plaintiffs have a seriously arguable case that they [have] a proprietary interest”. In this regard, the High Court had to consider whether the Stolen Cryptocurrency Assets were capable of giving rise to proprietary rights which could be protected by a proprietary injunction. The High Court answered this in the affirmative.

As a starting point, the High Court referred to the classic definition of a property right established in the English case of National Provincial Bank Ltd v Ainsworth [1965] AC 1175 (“Ainsworth”), which stated that such a right must be [1] definable, [2] identifiable by third parties, [3] capable in its nature of assumption by third parties, and [4] have some degree of permanence or stability.”

The High Court also referred to foreign legal authorities, in particular the New Zealand case of Ruscoe v Cryptopia Ltd (in liq) [2020] 2 NZLR 809 (“Ruscoe”) which held that cryptocurrencies satisfy the definition of a property right in Ainsworth for the following reasons:

[Firstly] the right must be definable the asset must hence be capable of being isolated from other assets whether of the same type or of other types and thereby identified. To this end, cryptocurrencies are computer-readable strings of characters which are recorded on networks of computers established for the purpose of recording those strings, and are sufficiently distinct to be capable of then being allocated to an account holder on that particular network.

[Secondly] the right must be identifiable by third parties, which requires that the asset must have an owner being capable of being recognised as such by third parties. An important indicator is whether the owner has the power to exclude others from using or benefiting from the asset. In this vein, excludability is achieved in respect of cryptocurrencies by the computer software allocating the owner with a private key, which is required to record a transfer of the cryptocurrency from one account to another.

[Thirdly] the right must be capable of assumption by third parties, which in turn involves two aspects: that third parties must respect the rights of the owner in that asset, and that the asset must be potentially desirable. The fact that these two aspects are met by cryptocurrencies, is evidenced by the fact that many cryptocurrencies, certainly BTC [Bitcoin] and ETH [Ethereum], are the subject of active trading markets.

[Fourthly] the right and in turn, the asset, must have some degree of permanence or stability”… the blockchain methodology which cryptocurrency systems deploy provides stability to cryptocurrencies, and a particular cryptocurrency token stays fully recognised, in existence and stable unless and until it is spent through the use of the private key, which may never happen.

After examining the relevant legal authorities, in particular Ruscoe, the High Court held that the Stolen Cryptocurrency Assets satisfied the definition of a property right in Ainsworth. The Plaintiff was therefore able to prove a serious arguable case that the Stolen Cryptocurrency Assets were capable of giving rise to proprietary rights, which could be protected by a proprietary injunction.

On the second requirement, as set out in Bouvier, the balance of convenience would be “assessed by considering the potential prejudice that the applicant may suffer if the injunction is not granted, against the prejudice to the respondent in the event that the injunction is granted and the applicant’s hypothesis is refuted at the trial”.

In CLM, the High Court found that the balance of convenience was in favour of granting the proprietary injunction for the following reasons:

  • if the injunction was not granted, there was a real risk that the First Defendants would dissipate the Stolen Cryptocurrency Assets, thereby defeating the potential judgment in the Plaintiff’s favour; and
  • if the Plaintiff’s claim was subsequently refuted, the First Defendants could be compensated by way of damages for losses due to their inability to deal with the Stolen Cryptocurrency Assets.

As the Plaintiff had satisfied the two requirements in Bouvier, the High Court granted a proprietary injunction prohibiting the First Defendants from dealing with, disposing of, or diminishing the value of the Stolen Cryptocurrency Assets.

Issue 3: Whether a Mareva Injunction could be granted over cryptocurrency assets

To obtain a freezing injunction (also known as a Mareva injunction), the Plaintiff must first satisfy the High Court that (1) he has a good arguable case on the merits of his claim; and (2) there is a real risk that the defendant will dissipate the Plaintiff’s assets to frustrate the enforcement of an anticipated judgment of the court.

In granting a Mareva injunction, the Courts are also required to consider whether the defendant has sufficient assets within the jurisdiction to satisfy the potential judgment. In CLM, the High Court explained that the fewer the assets located within Singapore, the greater the necessity to take protective measures against the assets located outside Singapore.

In applying the above principles, the High Court found that:

  • the Plaintiff had a good arguable case on the merits of his claim because it is an established legal principle that where a person misappropriates the property of another without consent, a constructive trust arises by operation of law over the stolen assets;
  • there was a real risk of dissipation of the Stolen Cryptocurrency Assets to frustrate the enforcement of a judgment in the Plaintiff’s favour. Based on the evidence, the High Court found that the First Defendants had dissipated the Stolen Cryptocurrency Assets through a series of digital wallets and that the risk of dissipation was heightened as cryptocurrencies “are susceptible to being transferred by the click of a button, through digital wallets that may be completely anonymous and untraceable to the owner, and can be easily dissipated and hidden in cyberspace”; and
  • the First Defendants were unlikely to have sufficient assets in Singapore to satisfy an award of damages in the Plaintiff’s favour as only a portion of the Stolen Cryptocurrency Assets was known to have been transferred to digital wallets controlled by the Second and Third Defendants. The High Court also noted that it was unlikely that the First Defendants would hold “all of their remaining ill-gotten gains in Singapore”.

Accordingly, the High Court granted a worldwide freezing injunction restraining the First Defendants from dealing with, disposing of, or diminishing the value of, their assets up to the value of the Stolen Cryptocurrency Assets.

Disclosure orders against cryptocurrency exchanges

The High Court further held that it was just and convenient to grant the following ancillary disclosure orders sought by the Plaintiff as these orders would assist with asset tracing and facilitate the identification of the perpetrators involved. The High Court ordered the two cryptocurrency exchanges (i.e. the Second and Third Defendants) to disclose to the Plaintiff:

  • the current balances of the Second and Third Defendants’ respective accounts that were credited with the relevant portion of the Stolen Cryptocurrency Assets;
  • information and documents collected by the Second and Third Defendants in relation to the owners of the relevant accounts; and
  • the details of all transactions involving the relevant accounts from the dates on which the stolen assets were credited against the accounts.

Comments

The CLM case is significant as it is understood to be the first time the Singapore Courts have recognised cryptocurrencies as property that can be subjected to a proprietary injunction and a Mareva injunction even when the identities of the perpetrators of the theft are unknown. This will no doubt provide some degree of assurance to investors of cryptocurrency assets that there are legal avenues available to trace and recover stolen cryptocurrency assets in the event of cryptocurrency theft, hack, or fraud.

However, it is submitted by the writers that the effectiveness of any injunctive reliefs against stolen cryptocurrency assets will depend on the specific facts of each case. For example, if the stolen cryptocurrency assets are credited into a digital wallet on a decentralised cryptocurrency exchange, it may have been impossible to identify the owner of the wallet and the effective enforcement of such reliefs against such person would be challenging.

Given the increasing adoption of cryptocurrencies and the use of cryptocurrency exchanges by the Malaysian public, this decision in CLM may be highly persuasive if similar issues are brought before the Malaysian Courts.

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