Introduction
For several years now there has been a steady stream of good news coming out of the English High Court for victims of crypto-enabled frauds.
One has followed the other including the case of Ion Science Ltd and another v. Persons Unknown [2020] where a Judge granted every conceivable remedy to the victim. Through legal action Ion Science was even able to recover its stolen funds from a frozen account on the Binance and Kraken Exchanges.
The number of positive decisions (which collectively show beyond doubt that the English judiciary get crypto, if proof be needed) was eclipsed only by the number of lawyers who breathlessly spread the good news.
And against this glorious backdrop – enter Binance.
Piroozzadeh v Persons Unknown
Be-helmeted and heavy-breathing Binance, swooping down with its army of legal stormtroopers to upset the status quo. After what seems like quite a few years of being on the receiving end of judicial & regulatory light-sabering, a Judge has finally sided with Binance in the recent case of Piroozzadeh v Persons Unknown [2023] EWHC 1024.
The case itself follows a familiar pattern: it was a socially-engineered, online confidence trick in which a victim was convinced to transfer crypto assets to people who intended to simply steal it, and did so. In making off with the stolen cryptoassets (Tether in this case) the fraudsters transferred them into Binance and out again. (Professional frauds are inherently pre-meditated, and the fraudsters probably knew that this move was enough to effectively render the Tether legally untraceable.)
Realising his situation the victim instructed lawyers, and an analytics company to provide a tracing report, before obtaining a freezing order against various parties involved in the transfers including Binance. However, crucially, the victim had not notified Binance of its intention to seek an order against it before attending Court—a situation where a victim has a duty to be as transparent as possible with the Court. This duty extends to the point that claimants even have to make the Court aware of the arguments that could be made against the grant of a freezing order by parties that are not present.
Binance was having none of this; after being served, they went to Court to make a point. In doing so they argued that a freezing order should never have been made against it in the first place – and successfully overturned the freezing order.
In doing so they have laid bare something that we lawyers have feared for a while. This positive run of cases that we love to refer to may have been built on shaky foundations and the exchanges may have escaped the tractor beam of freezing cryptoassets.
It is often very difficult to obtain technically detailed judgments in relation to crypto cases, many of which are not contested in any meaningful way. And those judgments that are available never fully detail the tracing reports that have convinced a Judge to make their decision.
Mr Piroozzadeh obtained a report which explained that the stolen Tether went through Binance, however, his application to court did not sufficiently detail what happened after the Tether arrived there. Binance subsequently explained that funds are sent by its customers to deposit addresses linked to their accounts, which is periodically swept into a Binance’s own central pool of funds – rendering effective tracing impossible – something that should have been, but wasn’t, sufficiently explained to the original Judge that granted the freezing order at first instance.
Other important factors deemed by the Judge ruled not to have been sufficiently drawn to the attention of the Court when the application was first made included the fact that, much like a bank, a depositor’s relationship with Binance gave it a claim to receive the same assets back in the future, rather than a form of locked-box arrangement where a depositor could open and retrieve the exact same assets that it had deposited. For Binance, your assets are very much fungible tokens (VMFTs).
Commentary
The question now for all of us is whether, in striking down the previously glorious status quo, Binance has made that status quo more powerful than it could possibly imagine? Well, no.
Unless of course the nerves which result from this decision motivate either: (a) the judiciary to publish detailed guidance as to what they expect to see from a blockchain tracing report in an application for a freezing order in these circumstances; or (b) the reputable crypto exchanges to voluntarily adopt a standard code of practice for dealing with scenarios in which victims of crypto-enabled fraud come to them asking for help – a step which could potentially remove the need for applications to even be made against those exchanges.
There has been a disturbance in the run of cases and the recent case of Piroozzadeh could be a new hope for crypto exchanges.
How we can help
Rosenblatt advises on all aspects of crypto assets and regulatory law. For enquiries, please contact Dispute Resolution Legal Director Tom Spiller OBE at Tom.Spiller@rosenblatt.co.uk or Dispute Resolution Solicitor George Kestel at George.Kestel@rosenblatt.co.uk.
Disclaimer: We at Rosenblatt (and our parent company RBG Holdings plc) support and encourage free/independent thinking in relation to issues which are sometimes considered to be controversial subject matters. However, the views and opinions of the authors do not necessarily reflect the opinions, views, practices and policies of either Rosenblatt or RBG Holdings plc.
