19 January 2023
Disputes Quick Read – 25 of 87 Insights
Disputes Quick Read: extensive information orders granted against crypto exchanges following hack
The significant judgment of Mr Justice Butcher in LMN v Bitflyer Holdings Inc and others further demonstrates the ability of the English courts to assist victims of crypto fraud. It is also the first example of English courts granting permission for information orders to be served outside of the jurisdiction under the Civil Procedure Rules' (CPR) new service gateway. It also provides helpful guidance as to when the English court will have jurisdiction over crypto disputes.
Background
LMN, a crypto exchange, was subject to a hack which resulted in millions of dollars' worth of crypto currency being transferred out of its wallets.
LMN's expert was able to trace the transactions on the relevant blockchains up to the point at which the transactions reached exchange addresses at a number of crypto exchanges. LMN argued that they needed information from the crypto exchanges, which were based out of the jurisdiction, to further trace and recover the cryptocurrency.
Information orders
LMN made an application for Bankers Trust orders to be made against the exchanges. Bankers Trust orders are third party information orders which are usually sought where there has been a fraud and the applicant seeks information from a third party to assist it with identifying the wrongdoer and/or tracing assets.
LMN was unable to identify the specific entities which controlled the exchanges, and so its application was brought against the companies it believed to be the holding companies for each exchange based on public records.
Mr Justice Butcher granted extensive information orders requiring the exchanges to provide information obtained for the accounts for KYC purposes and information regarding the activity of certain accounts. The orders were granted on the basis that there was a good arguable case that whoever held the cryptocurrency following the hack did so as a constructive trustee for LMN.
Jurisdiction
Service out of the jurisdiction
In order to obtain permission to serve the Claim Form out of the jurisdiction, LMN needed to show that: (i) there was a serious issue to be tried on the merits, (ii) there was a good arguable case that the claim fell within one of the "gateways" under the CPR, and (iii) England and Wales was the appropriate forum for the claim to be tried.
The court granted LMN permission to serve the information orders on the exchanges on the basis that these requirements were satisfied including the new CPR gateway for service which is specifically aimed to assist in this kind of case (paragraph 3.1 of Practice Direction 6B of the CPR). This allows service out of the jurisdiction where a claim or application is made for disclosure in order to obtain information regarding: (i) the true identity of a defendant or a potential defendant; and/or (ii) what has become of the property of a claimant or applicant.
England as the appropriate forum
Mr Justice Butcher held that there was a good arguable case that law of England and Wales was the applicable law on the basis that, at the time of the hack, LMN was resident in England & Wales and carried out its business here. LMN also suffered damage (or loss) in England & Wales as the cryptocurrency was taken from its control there. England was also found to be the proper place for an action to be brought taking into account the connection with England.
This approach to jurisdiction is consistent with the approach taken in earlier crypto cases such as Tulip Trading.
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