Background
Nancy Carol Smithers and Angelina Kostyantynivna Usanova, the Claimants, were victims of a sophisticated cryptoasset fraud, losing approximately £10.5 million. They were induced to invest with a purported cryptoasset trading business, Raliplen (later Servelius), by individuals who presented themselves as expert traders. The fraud involved transferring significant sums in both fiat currency and various cryptoassets, including Bitcoin, USD Coin, and Ethereum, which were subsequently misappropriated.
The Claimants sought to recover their losses from two groups of defendants: those who perpetrated the fraud (primarily “Persons Unknown Category 1”) and those who received the stolen cryptoassets (“Persons Unknown Category 2” and “Category 3”). Specialist investigators were engaged to trace the flow of the cryptoassets to specific addresses. Service on the defendants was effected through alternative means, including emails to the fraudsters and, for the recipients, via non-fungible tokens (NFTs) or OP_RETURN messages containing links to court documents sent to the blockchain addresses.
While the application for summary judgment against the alleged fraudsters was not pursued due to concerns regarding the efficacy of service, the court proceeded with the application against the recipients of the cryptoassets. Some identified individuals among the recipients provided exculpatory explanations, and summary judgment was not sought against them. However, the majority of the defendants in both groups failed to acknowledge service or respond to the claims, leading the court to hear the application in their absence.
The Court’s Holding
Mr. Justice Bright granted summary judgment in favour of the Claimants, Nancy Carol Smithers and Angelina Kostyantynivna Usanova, against the non-responding “Persons Unknown” defendants in the second group (the recipients of the cryptoassets). The court was satisfied that the Claimants had a strong claim, primarily in deceit (fraudulent misrepresentation), and that the alternative methods of service on these defendants were valid.
A key aspect of the ruling was the distinction drawn between different types of cryptoassets regarding their fungibility. The court held that Bitcoin transaction outputs are not akin to liquid funds that irreversibly mix; rather, they remain discrete and identifiable units. Consequently, the specific Bitcoin assets fraudulently taken from the Claimants were deemed to remain their property, and the court ordered their return from any defendants found in possession of them.
Conversely, for fungible cryptoassets such as USD Coin and Ethereum, the court determined that they would have lost their individual identity upon transfer and receipt by the defendants’ addresses. As such, it was not possible to order the return of the exact same assets. For these fungible assets, the court awarded a compensatory remedy, expressed in fiat currency, noting that for USD Coin (which is pegged to the US Dollar), this made little practical difference to the Claimants. The Claimants were also awarded costs on an indemnity basis.
Key Takeaways
- UK courts can grant summary judgment against “Persons Unknown” in cryptoasset fraud, particularly against recipients of stolen assets, utilizing alternative service methods like blockchain-based notifications.
- The High Court distinguished between non-fungible (e.g., Bitcoin transaction outputs) and fungible (e.g., USD Coin, Ethereum) cryptoassets, ordering specific return for the former and compensatory damages for the latter.
- This decision reinforces the principle that fraudulently obtained cryptoassets remain the property of the victim, provided they can be specifically identified and traced.
- The ruling highlights the critical role of specialist investigators in tracing cryptoassets and the court’s willingness to adapt procedural rules to the evolving landscape of digital asset litigation.
Why It Matters
This judgment is a significant development in UK cryptoasset jurisprudence, offering clarity and a robust pathway for victims of crypto fraud to pursue recovery. By affirming the use of alternative service methods directly to blockchain addresses, the court has provided a vital tool for claimants dealing with anonymous or unidentifiable defendants common in crypto-related crimes. This demonstrates the High Court’s adaptive approach to novel legal challenges posed by digital assets, ensuring that traditional legal remedies can be applied effectively in the digital realm.
Moreover, the nuanced distinction between fungible and non-fungible cryptoassets for remedial purposes sets a crucial precedent. This differentiation provides a legal framework for determining appropriate remedies—specific performance for traceable, non-fungible assets like Bitcoin, and monetary compensation for fungible ones. This approach will be highly influential for legal practitioners, investors, and exchanges in understanding the legal character of various digital assets and the potential for recovery in cases of fraud. The decision ultimately strengthens investor confidence and bolsters the UK’s position as a jurisdiction capable of handling complex cryptoasset disputes.