Hot on the heels of the Digital Assets Bill (in fact just one day afterwards – on 12 September 2024) the High Court of England & Wales handed down judgment in D’Aloia v Persons Unknown [2024] EWHC 2342 (Ch). This is the first full trial case in this jurisdiction to decide that cryptocurrency is capable of attracting property rights for the purposes of English law.
In England and Wales there is already a well-reasoned and persuasive body of case law recognising that certain digital assets should be treated as assets attracting property rights (see our previous insight here). The decisions until this point have all arisen from interim applications (requests made to court for an order or directions before a trial or substantive hearing takes place). This latest judgment brought the question of whether cryptocurrencies constitute property under English law to a contested trial with final determination, adding authority to the growing line of precedent case law on the subject.
Mr D’Aloia was the victim of a cryptocurrency scam and brought proceedings against various defendants seeking to recover what he lost. In total Mr D’Aloia alleged a loss of around £2.5 million although not all of that was the subject of this trial (which proceeded against just one defendant, the claims against the others having been either settled, struck out or subject to other applications). This trial’s primary purpose was to decide issues between Mr D’Aloia and Bitkub, one of the cryptocurrency exchanges implicated in the fraud.
The circumstances surrounding the claimant’s transfer of bitcoin, Tether (USDT) to td-finan (a website he took to be associated with a regulated US brokerage, but which transpired to be a scam) were examined by the court. The focus was on cryptocurrency pleaded to belong to the claimant and its alleged inclusion within a transfer of USDT 400,000 to a specific Bitkub wallet, such transfer forming one “hop” in the series of relevant blockchain transactions.
Various factual and legal sub-issues arose in relation to the flow of transactions and whether the claimant could legally follow or trace the assets, and in relation to his claims in unjust enrichment and constructive trusts. Interestingly, and perhaps of use in future cases, the judge concluded that:
(a) USDT could be “followed” as a matter of law through a mixed fund (and suggested based on the evidence before him that Tether Ltd may have the evidence to allow that exercise to be undertaken) although it had not been undertaken in Mr D’Aloia’s case; and
(b) a constructive trust could arise against at least one defendant on the basis of either the fraudulent act or the rescission of a transaction contract; but that the defence of a “bona fide purchaser for value without notice” remains available in the context of a transfer of cryptoassets.
Neither party in this case argued that the stablecoin, Tether (USDT), could not be considered property: it would not have been in Mr D’Aloia’s interests to do so given that he was seeking to recover cryptoassets. And Bitkub’s business model, being a cryptoasset exchange, is premised on its platform fulfilling that function. The judge, following authorities, agreed that the parties were correct in acknowledging that USDT attracts property rights under English law. It is neither a chose in action nor a chose in possession, but rather a distinct form of property not premised on an underlying legal right.
Reflecting the progressive approach of the courts, and following in the vein of the Law Commission’s recent Final Report on digital assets which concluded that the common law has already moved on further from the question as to the proprietary status of some digital assets, the judge commented,
“Courts determine disputes, not hypotheticals, and there is argument for saying the point should be left for another day. On balance, however, I do not believe that I can. Central to this case are issues of tracing and following of assets. Addressing those issues depends not just on the USDT being property, but the nature of the property rights associated with them.”
He went on to say, having reflected on some of the recent cases in which it had already been accepted that cryptoassets should be treated as property for the purposes of English law, and the proposed categorisation of cryptoassets as a new “third category of thing” to which personal property rights can relate, that “cryptoassets have a conceptual existence that is independent of the legal system and of their individual users”.
The court decided in this case that not only does stablecoin Tether (USDT) attract property rights under English law (noting that the rights attach to the USDT itself, and not to the right to control it by way of, for example, the private key) but that it can be the subject of tracing and can constitute trust property in the same way as other property.
Mr D’Aloia’s claims were ultimately dismissed however because he had not been able to provide reliable evidence that his funds reached Bitkub’s wallet.
The next question then for legal representatives, forensic experts and courts alike: how best, in practice, now that the legal principles have been considered in such detail, to trace digital funds across blockchain and how to produce sufficient evidence where funds are transferred through multiple blockchain wallets, and cryptocurrency is co-mingled with other funds? Given the rise in adoption of this technology and the vast increase in recent years of resources being directed into cryptoassets, it is unlikely to be long before we see new cases testing that proposition.
About the author(s)
Louise is a Knowledge Lawyer in the Commercial Litigation Group.
Sean Adams is a commercial disputes partner, primarily based in Birmingham. He has a broad commercial practice, with significant experience in a variety of sectors (including within the automotive, aerospace, financial services and renewable energy sectors).
Patrick Arben helps clients to investigate and resolve their disputes and manage risk quickly, commercially and cost-effectively.
Catherine Naylor has a broad corporate commercial litigation practice, helping her clients to resolve the full range of disputes, both domestic and international, especially offshore. She has particular expertise in post-M&A and company disputes, fraud and asset recovery work, contentious insolvency and trusts litigation across a range of sectors (including financial services, energy, mining and healthcare).