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AA v Persons Unknown and Others, Re Bitcoin

Posted on 26/05/2020 · Posted in Uncategorized

When is property not property? This case is interesting as it confirms and moves the definition of what can be considered “property” (and thereby be made subject to a proprietary court injunction), into the 21st century.

The case concerns a Canadian insurance company whose computer systems were hacked and encrypted with malware meaning that the company could not access any of its own or clients’ data. The company was sent notes by the first defendant (person or persons unknown) in October 2019 demanding a ransom:

Hello, to get your data back you have to pay $1,200,000 (one million two hundred thousand). You have to make the payment in Bitcoin.

The company was itself insured against cybercrime with an English insurance company (‘AA’). AA subrogated the claim and proceeded to carry out negotiations with the hackers.

Subrogation is a legal term which means that a party (often an insurance company) can be substituted to assume their insured’s right to an insurance or debt. A sum of $950,000 was agreed to be paid in Bitcoin in return for the decryption tool. The sum (109.25 Bitcoin) was paid despite AA being unable to identify the recipient (the second defendant). The decryption tool was put to work and it took 5 days for the insured company to decrypt and reinstate its 20 servers and a further 10 business days to decrypt its 1000 desktop computers.

AA hired a specialist company Chainalysis Inc. to track the ransom payment. This they did successfully and confirmed that 96 Bitcoin had been traced to a specific address linked to the cryptoasset exchange Bitfinex. Bitfinex was operated by iFinex and BFXWW Inc., the third and fourth defendants. The remainder had been transferred into fiat currency and dissipated. AA sought a proprietary injunction over the Bitcoin as a first step in recovering the ransom. AA commenced proceedings against four defendants based on claims of restitution and/or constructive trust. Two of the defendants operated the Bitfinex exchange on which the Bitcoins were being held, whilst the other defendants had made the ransom demand and now held some of the Bitcoin at the Bitfinex exchange address.

Nothing ever becomes real till it is experienced.”
John Keats

The fundamental issue facing the court was whether Cryptoassets could be defined as “property” and therefore capable of being the subject of a proprietary injunction. The English law has traditionally treated property as falling into two classes- either a “choses in possession” ie capable of tangible possession, or a “choses in action” ie a right capable of being enforced by a legal action. Cryptocurrencies are virtual and intangible assets which cannot be possessed, nor do they carry any rights capable of enforcement by legal action. Mr. Justice Bryan, hearing the application in the High Court, reviewed all previous case law in this area and noted that even though there had been two previous decisions in the English courts in 2018 and 2019 where cryptocurrency had been defined as property in order to obtain a worldwide freezing order and an asset preservation order, the court had not considered the issue in depth. He referred to the UK Jurisdictional Task Force (UKJT) Legal Statement on Cryptoassets and Smart Contracts, published in November 2019. This discussed the definition of property in detail including its evolution over time. Although not binding on the court, the Judge considered it to be “an accurate statement as to the position under English law” and “compelling“. He referred to two other previous cases “where the courts found no difficulty in treating novel kinds of intangible assets as property“. These were a finding that a milk quota could be the subject of a trust and an EU carbon emissions allowance be the subject of a tracing claim. These were neither a “thing in possession” nor a “thing in action“. He concluded that “the fact that a cryptoasset might not be a thing in action on a narrower definition of that term does not in itself mean that it cannot be treated as property.” They met the four criteria set out in Lord Wilberforce’s definition of property in NPB v Ainsworth 1965 in that they were definable identifiable by third parties, capable in their nature of assumption by third parties, and having some degree of permanence. Bryan J said it would be “fallacious to proceed on the basis that the English law of property recognises no forms of property other than choses in possession or choses in action“.

In granting the interim injunction, Mr. Justice Bryan also consented to ancillary orders to support the effectiveness and speed of the injunction. The court gave anonymity to the parties, heard the case in private and allowed service to be by email. All these concessions ensured that the risk of copycat crimes was reduced and that the defendants were not tipped off enabling them to dispose of the remaining Bitcoin.

Soon after the judgement, HMRC updated its guide “Cryptoassets: tax for individuals“. It includes a new section on the legal status of cryptocurrency exchange tokens and how they will be treated in relation to Inheritance and Capital Gains tax. Anyone holding these assets should ensure that their wills are drafted to reflect this new guidance.

AA v Persons Unknown and Others, Re Bitcoin [2019] EWHC 3556 (Comm).

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