Analysis: English High Court holds crypto-wallet provider a constructive trustee of stolen funds
A&L Goodbody partner Dario Dagostino and solicitor Aisling Ennis provide an update on developments in crypto-asset compliance.
In a recent judgment, the English High Court made a number of findings which, going forward, may provide significant assistance to victims of crypto-fraud in recuperating their stolen crypto-assets. Equally, the judgment will have considerable implications for the custodians of crypto-assets such as the operators of crypto-wallets.
The key findings in the judgment in the case of Jones v Persons Unknown  EWHC 2543 (which was delivered as an uncontested summary judgment) include:
- the imposition of a constructive trust between (a) a crypto-wallet provider operating a wallet containing stolen crypto-assets and (b) the victim of a crypto-fraud
- the making of an order against both the perpetrators of the fraud and the crypto-wallet provider to deliver up the stolen crypto-assets
- the granting of permission for the judgment to be served on the perpetrators of the fraud by means of non-fungible token (NFT) airdrop directly into the crypto-wallet
The claimant was a victim of a cyber-fraud perpetrated by fraudsters overseas. The fraudsters targeted the claimant through a fake online crypto investment platform which promised high returns. The claimant was encouraged to set up a trading account and transfer his cryptocurrency to the fake crypto investment platform. Over the course of a year, the claimant bought and transferred approximately 89.6 bitcoin (valued at £1.54m on the date of the judgment) to the fake investment platform. Following several failed attempts to access his funds, the claimant engaged the services of a cyber-investigation consultancy, who successfully traced his bitcoin to a crypto-wallet held by Huobi Global Limited, a Seychelles-based crypto exchange platform (Huobi).
In order to prevent the dissipation of the stolen assets, the claimant sought and obtained an interim worldwide freezing injunction against the persons involved in the perpetration of the fraud, and a proprietary injunction against them as well as Huobi itself. In seeking to recover his stolen bitcoin, the claimant issued proceedings for deceit and unjust enrichment against the persons involved in the perpetration of the fraud. The claimant also issued proceedings against Huobi seeking the imposition of a constructive trust in respect of the stolen bitcoin held in the crypto-wallet operated by Huobi. A summary judgment was made in respect of these claims as the defendants did not engage with the proceedings.
Imposition of a constructive trust
The Court found that Huobi should be treated as a constructive trustee in respect of the stolen bitcoin held in the crypto-wallet operated by Huobi. This was on the basis that (a) it controlled the bitcoin held in the wallet it operated; and (b) there was no evidence that any other person had any proprietary interest in respect of the claimant’s bitcoin, which would override the claimant’s beneficial interest in that property.
An important element in the success of the claim to have Huobi deemed a constructive trustee (a proprietary claim in equity) was the finding in the earlier English case of AA v Persons Unknown  EWHC 3556 (Comm) that crypto-assets are in fact “property” for relevant purposes. The UK court also referred to what it described as a well-established principle of property or money stolen or obtained by fraud being traceable in equity, and under which a claimant’s proprietary interest can be enforced by way of the imposition of a constructive trust.
Order to “deliver up” the Bitcoin
Following the Court’s decision to find Huobi as constructive trustee, the Court acknowledged the claimant’s entitlement to restitution and granted an order against both the perpetrators of the fraud and Huobi to “deliver up” the bitcoin.
Service by NFT Airdrop
In a further example of the High Court’s innovative application of civil procedure, the Court granted permission for the judgment to be served on the defendants by way a NFT ‘airdrop’ delivered directly to the crypto-wallet being accessed by the fraudsters. In granting this permission, the Court acknowledged that this was the most efficient means of bringing the proceedings to their attention.
Implications for crypto-wallet providers operating in Ireland
In light of the increasing prevalence of crypto-fraud, there is a real possibility that crypto-wallet providers based in Ireland may be impacted by similar claims seeking to render them constructive trustees of allegedly stolen assets held in wallets, which they may operate from this jurisdiction.
In considering whether the Irish courts might follow suit in imposing a constructive trust in comparable circumstances, it is worth noting that the Irish courts have been open to the imposition of ‘remedial’ constructive trusts, imposed by the courts to ensure an adequate remedy in equity, in previous cases (see Biehler, “Equity and the Law of Trusts in Ireland” (7th ed.), 317). This is despite the fact that, traditionally, a constructive trust is considered institutional in nature and is generally imposed only in specific defined circumstances. It is therefore possible that Irish courts may take a similar approach as the English High Court in this case.
Crypto-wallet providers, in anticipation of defending such claims in the future, should be mindful to ensure they are performing the requisite due diligence to satisfy themselves that the assets in their custody are not the proceeds of fraud or other crimes.
- Dario Dagostino is a partner and Aisling Ennis is a solicitor at A&L Goodbody LLP.