Insurer obtains freezing order against bitcoin exchange operator

In October 2019, the First and Second Defendants (all persons unknown) infiltrated the firewall of a Canadian insurance company and installed malware that encrypted the company’s computer systems. The First Defendant demanded Bitcoin in the value of USD1.2m to decrypt the Applicant’s systems. The company notified its UK insurance provider (the Applicant) who, following negotiations, paid a ransom of Bitcoin worth USD950,000. The money was transferred into a Bitcoin account controlled by persons unknown (the Second Defendant) and linked to a Bitcoin exchange operated by the Third and Fourth Defendants (the Exchange Defendants).

Having paid the ransom on behalf of its customer, the Applicant exercised its rights of subrogation to bring proceedings against the Defendants, in connection with which it also brought various ex parte applications. These included applications for orders to require the Exchange Defendants to disclose information about an account controlled by persons unknown (which were adjourned in light of uncertainty over the court's jurisdiction to impose such orders on parties outside of this jurisdiction). The Applicant also sought, and was granted, a proprietary freezing order in respect of the Bitcoin it had paid in ransom.

Cryptocurrencies as property

In order for a proprietary injunction to be granted, the court had to be willing to classify the Bitcoin as a form of property despite it not falling within the traditional legal understanding of property as either physical things capable of being possessed (choses in possession) or legal rights capable of being enforced by action (choses in action).

However, consistent with the court’s approach to other recent requests for proprietary orders in respect of cryptocurrency (notably, Robertson v Others and Vorotyntseva v Money-4 Limited), Bryan J was willing to depart from the traditional definition of property and instead followed the analysis in the UK Jurisdictional Task Force’s (UKJT) November 2019 Legal Statement on Crypto-Assets and Smart Contracts. This statement concluded that cryptocurrencies are a form of property on the basis that they meet the following criteria: (i) they are definable; (ii) they are identifiable by third parties; (iii) they are capable in their nature of assumption by third parties; and (iv) they have some degree of permanence. In the first example of the High Court expressly endorsing this analysis, which he described as “compelling”, Bryan J found that Bitcoin could be the subject of a proprietary injunction and (other tests, including as to serious issue to be tried and risk of dissipation, being met) granted this order against the four defendants in respect of the Bitcoin.

Hearing in private

The court heard the applications in private on the grounds that a public hearing may have encouraged the dissipation of the Bitcoin or encouraged further revenge cyberattacks, and the matter involved information confidential to the Applicant and its customer. The Applicant was also anonymised for the same reasons.

Comment

This is not the first decision in the High Court to classify cryptocurrencies as property but this is the first to make a definitive statement endorsing the analysis in the UKJT Legal Statement, which has status only as judicial guidance at present (and with no clear sign of statutory intervention on the horizon). It is notable – and reassuring – that, to date, there has been consistency in the judicial treatment of these applications for proprietary injunctions over cryptocurrency.

We still await the first full trial in which the court will have to confront the substantive legal question of exactly what form of property cryptocurrency takes. In the meantime we can expect further new, or previously unreported, interim decisions to emerge as this area continues to develop.

Further information

This case summary is part of the Allen & Overy Litigation and Dispute Resolution Review, a monthly publication.  If you wish to receive this publication, please contact Amy Edwards, amy.edwards@allenovery.com