In Ion Sciences, the English courts take a traditional approach to determining governing law and jurisdiction in a dispute relating to cryptoassets

https://www.linklaters.com/en/insights/blogs/fintechlinks/2021/march/the-english-courts-take-a-traditional-approach-to-determining-governing-law-and-jurisdiction
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In a recent decision of the English Commercial Court, Mr Justice Butcher granted a proprietary injunction in respect of Bitcoin, recognising that it may amount to “property”. The judgment indicates that the English Courts are likely to treat questions of governing law or jurisdiction arising out of claims over cryptoassets in broadly the same way as other forms of property. 

Transfer of Bitcoin in the context of a crypto ICO fraud

In Ion Sciences vs Persons Unknown and Others (unreported) 21 December 2020 (Commercial Court), Ion Sciences and its sole director, Duncan Johns, were victims of alleged initial coin offering (ICO) fraud. They claimed to have been induced by persons unknown to transfer Bitcoin in the belief that they were investing in legitimate cryptocurrency products, but later discovered that the recipient was not legitimate.

Expert evidence suggested that the transferred Bitcoin or their traceable proceeds were deposited in accounts held by the Binance and Kraken cryptocurrency exchanges. Ion Sciences and Mr Johns therefore applied for (and were granted):

  • a proprietary injunction and a worldwide freezing order against persons unknown to preserve the transferred Bitcoin or their traceable proceeds and an ancillary disclosure order to identify the alleged fraudsters; and
  • disclosure orders aimed at the cryptocurrency exchanges in the form of a “Bankers Trust Order” (an order to disclose confidential documents to support a proprietary claim in fraud cases) and/or an order under CPR 25.1(g) to trace the transferred Bitcoin or their proceeds that were the subject of the proprietary injunction.

The judgment of Mr Justice Butcher on these applications touches on whether Bitcoin constitutes property, and how the courts should approach the questions of governing law and jurisdiction arising out of claims relating to cryptoassets; which we summarise as follows.

Cryptoassets as property

Consistent with the decision of the Commercial Court in AA v Persons Unknown [2019] EWHC 3556 (Comm), which adopted the reasoning of the UK Jurisdiction Task Force’s Legal Statement on Cryptoassets and Smart Contracts, Butcher J concluded that “there is at least a serious issue to be tried” that Bitcoin and other cryptoassets are property under English common law.

Governing law and jurisdiction for claims relating to cryptoassets

In England and Wales, jurisdiction for the claimants’ claims is based on valid service. The English courts can permit service on a defendant outside of the jurisdiction, such as on “persons unknown” provided that there is a good arguable case connecting the claim to the jurisdiction, that the claim has reasonable prospects of success and that the court is satisfied that England is the proper forum.

In assessing these factors, Butcher J held that there is at least a serious issue to be tried that English law should apply to the claimants’ claims given that England was the place where the damage occurred or because the relevant Bitcoin were located in England. In his judgment, Butcher J stated that a cryptoasset is situated in “the place where the person or company who owns it is domiciled.” He remarked that there are no decided cases in England on this question.

Butcher J held that the claimants could serve persons unknown outside of the jurisdiction. In coming to this conclusion, he considered the following factors, among others:

  • the representations to Mr Johns were made, and relied on, in England.
  • the account that funded the Bitcoin was English.
  • the assets were taken from the claimants’ control in England.
  • the computer used to purchase the cryptocurrency products was in England.
  • the relevant Bitcoin were located in England and Wales before their transfer.
Comment on the traditional approach

This judgment is further evidence that the English courts will recognise cryptoassets as “property”. However, the trickier question that Butcher J grappled with is: what is the right law to apply to claims relating to cryptoassets? Generally, this depends on the nature of the claim. The English courts have traditionally applied the law of the place where the damage occurred for tortious claims and the law where the property is located for proprietary claims.

Whether this is the right approach for cryptoassets is an open question; the judgment in Ion Sciences is an interim decision, rather than a final decision on the merits, but still gives a good indication of how courts will answer this question going forward.

As the Joint Taskforce’s Legal Statement recognised “there is very little reason to try to allocate a location to an asset which is specifically designed to have none because it is wholly decentralised”. Yet, in the absence of internationally coordinated legislation to come up with a new approach – a proposal made by the Joint Taskforce – the courts can only answer the question using the traditional approach.

As Professor Andrew Dickinson states in Cryptocurrencies in Public and Private Law (OUP 2019) – a text cited in the judgment – just because the courts are grappling with cryptoassets does not mean that there is any need to “panic and throw the existing toolbox away”. Therefore, unless dedicated legislation is enacted, it appears that the English Courts will continue to answer the question of governing law (and jurisdiction) of a cryptoasset in the same way they would with respect to any other property.

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See our other coverage on this topic, including:

https://www.linklaters.com/en/insights/blogs/fintechlinks/2021/march/the-english-courts-take-a-traditional-approach-to-determining-governing-law-and-jurisdiction