Will Bitcoin's Popularity Attract Fraud?
Regulators and central banks might not like it, but Bitcoin's recent trillion-dollar market valuation and Tesla’s $1.5 billion purchase of Bitcoin have made big headlines in 2021. As the biggest single investor by far, Elon Musk has joined a worldwide army of Bitcoin holders that is now estimated at 30 million worldwide.
These investors have been attracted by Bitcoin's sharp price rise and the accompanying blitz of media coverage about it. However, while Bitcoin may have been the first cryptocurrency , the use of others for example Ethereum, XRP and Litecoin is rapidly growing too. All of these are built on blockchain, or distributed ledger technology .
However, despite increased appetite to invest in cryptocurrencies and increasing institutional acceptance, such as JP Morgan's newly announced “Cryptocurrency Exposure Basket”, cryptocurrencies are still regarded as highly volatile and controversial. This really is mainly due to their opaque ownership structure, which is built into investments underpinned by DLT.
Lack of transparency and regulation paving the way in which for crypto-fraud
Governments and regulators are keen to aid the use and expansion of DLT because it has numerous potential applications, including the secure sharing of medical data, cross-border payments, logistics and logistics monitoring, real estate processing and voting mechanisms.
Central banks are also looking at future opportunities for digital currencies that they issue and regulate . The Bank for International Settlements and seven central banks have published a report laying out the important thing requirements for CBDCs, indicating that they consider that CBDCs have real possibility to operate as an alternative to fiat currencies, which at the moment give these banks control over how much cash is printed and in circulation.
However, there remains deficiencies in regulation in this space on the global level. Current regulatory powers are insufficient to control how crypto asset companies conduct their business and how cryptocurrencies are used in society, providing opportunities for misuse by fraudsters and criminals.
The lack of transparency is also a major concern. Without having to be susceptible to either government or central bank control, the united states Treasury Secretary Janet Yellen recently detailed using cryptocurrencies both in terrorist financing and money laundering. Meanwhile the president from the European Central Bank, Christine Lagarde, said that Bitcoin continues to be involved with “some interesting and totally reprehensible money laundering activity.” In the UK, there's been some reluctance to regulate crypto-assets in the same manner as other jurisdictions . However, the FCA’s announcement that from 10 January 2021 all crypto-asset businesses continuing activity in the UK should be registered suggests that change is originating.
Another principal concern is crypto fraud. One of the most high profile global crypto frauds up to now are cryptocurrency Ponzi schemes, for example PlusToken and WoToken . Other forms of crypto fraud include hacking, unregulated or fake brokers and wholesale fraudulent crypto-currency exchange platforms. In 2021 in the UK alone, around lb113 million was lost as a result of fraudulent cryptocurrency investments having a further lb14.3 million lost in January 2021.
How are the English courts dealing with novel issues arising from cryptocurrency litigation?
The English courts are seeing a rise in litigation involving cryptocurrencies, which is a trend that we expect to continue. This requires the courts to cope with some novel legal issues. Usefully, the English courts possess a range of interim and enforcement powers at their disposal, that they are deploying to assist claimants in recovering crypto-assets lost to fraud. For instance, the High Court has followed the united kingdom Jurisdiction Taskforce’s statement that crypto-assets, including cryptocurrencies like Bitcoin, are property, and has granted proprietary injunctions to prevent further dealing whilst proceedings are ongoing ).
Further, the Commercial Court in London recently heard its first initial coin offering fraud case: Ion Science Limited & Duncan Johns v Persons Unknown unreported), 21 December 2021 ICO’s are essentially the crypto-equivalent of IPOs, and in this case the fraudster induced the applicants to transfer Bitcoin in the thought that these were purchasing legitimate crypto-assets. Again, the court held that crypto-assets were property under common law and granted proprietary injunctions towards the applicants.
The judgment is important as the applicants required permission to serve out of the jurisdiction against persons unknown. A legal court discovered that the lex situs was the place where the person or company owning the crypto-asset is domiciled.
Importantly in Ion Science, the Court also granted permission for everyone disclosure orders on two cryptocurrency exchanges through which the applicant’s stolen Bitcoin had been traced. The decision marked a lot vary from earlier authorities, because the exchanges under consideration were located outside of the jurisdiction of England and Wales. This decision, along with the powers from the court of Britain to buy proprietary injunctions with respect to crypto-assets, makes the jurisdiction an attractive forum for potential claimants.
What does the future hold?
Market expectation would be that the use of cryptocurrencies and crypto-assets continues to develop. It's not hard to see that the elevated trading and holding of crypto-assets will probably result in more crypto-related disputes. Looking forward to the next decade, we anticipate that crypto-asset claims will dominate fraud litigation in the English courts.
Encouragingly, the English court takes a proactive role within the global combat cyber and cryptocurrency fraud. Its willingness to evolve its traditional weapons to be used within this developing area shows that it is an effective forum in which to bring actions involving crypto-assets. As ICO and crypto-related disputes still increase, in addition using interim injunctions to help factual investigations and to protect assets underpinning the litigation. The AA v Persons Unknown and Ion Science judgments will probably act as a blueprint for future claims and, in a similar vein, we should anticipate seeing more innovative use of weapons within the Court’s toolkit against fraud.
