As digital currencies gain prominence globally, it was only a matter of time before they would have to be taken into account in the courts of England and Wales. While cryptocurrencies have been around for over a decade, their recognition as an asset in English courts has only recently come under serious judicial consideration.
In this blog, we will explore how cryptocurrencies, particularly Bitcoin and Ethereum, are treated as assets in the English legal system, focusing on the landmark case of D’Aloia v Persons Unknown Category A and others. This decision, although not without limitations, offers important insights into the evolving status of cryptocurrencies as proprietary assets.
What is Cryptocurrency?
To understand how cryptocurrency fits within English law, it’s important to clarify what cryptocurrency actually is. In its simplest form, cryptocurrency is a type of digital or virtual currency that operates on decentralised blockchain technology.
Unlike traditional currencies, it is not regulated by any central authority, such as a government or financial institution. This decentralisation is often seen as one of cryptocurrency’s greatest strengths, as it allows for peer-to-peer transactions without the need for a bank to act as an intermediary.
However, this feature also makes cryptocurrency vulnerable to fraud, and the ability to trace and recover stolen assets remains a considerable challenge. This difficulty has led to an ongoing debate regarding its recognition as a formal asset in English law.
Cryptocurrency as an Asset in the English Legal System
Historically, the recognition of cryptocurrency as a proprietary asset in England and Wales has been uncertain. There is no specific legislation that explicitly confirms the status of digital currencies as legal assets.
Nevertheless, several cases in recent years have suggested that cryptocurrencies could be treated as property, allowing claimants to assert ownership rights over them.
The D’Aloia case marks the first time an English court has scrutinised the ownership and ability to trace cryptocurrency in a fully defended case. This case has been pivotal in setting the stage for future disputes involving cryptocurrency.
The D’Aloia Case: Setting the Precedent
The D’Aloia case involved a claimant deceived into transferring a significant sum of cryptocurrency to what he believed to be a reputable brokerage firm. When the claimant realised that he had been defrauded, he sought the help of a cryptocurrency tracing expert. The expert traced the stolen assets to an account held by a customer of Bitkub Online Co Ltd, a cryptocurrency exchange based in Thailand.
The claimant filed a legal claim against Bitkub, seeking to recover his cryptocurrency under the principles of unjust enrichment and constructive trusts. It is important to note that Bitkub was not accused of knowingly assisting in the fraud. Instead, the argument was that they had notice of suspicious account activity and failed to take commercially reasonable action to prevent further transfers.
Bitkub defended the case, arguing that there had been a legitimate change in position with respect to the cryptocurrency, and they had acted as a bona fide purchaser for value without notice of the fraud.
Court’s Ruling and Its Implications
One of the main issues before the court was whether the cryptocurrency held by Bitkub’s customer could be traced back to the claimant. The court carefully reviewed the expert’s evidence but ultimately found it to be inconclusive.
The main issue was that the funds had been “mixed” with other cryptocurrencies at least once, making it impossible to establish, with certainty, that the cryptocurrency held by Bitkub’s customer was indeed the claimant’s.
Additionally, the court held that even if the cryptocurrency had been traced back to the claimant, any claim for the assets would likely be against the unknown fraudsters rather than Bitkub. As a result, the claimant’s case was dismissed.
Despite this, the D’Aloia case is a significant step forward in terms of the legal recognition of cryptocurrency. While the claimant was unsuccessful, the court’s willingness to consider cryptocurrency as a proprietary asset offers some reassurance to individuals who have invested in digital assets.
This ruling indicates that cryptocurrency can be treated similarly to other types of assets in English law, allowing claimants to seek ownership rights over their digital holdings.
Challenges in Tracing and Recovering Cryptocurrency
While the D’Aloia case represents progress, it also highlights the challenges of tracing and recovering cryptocurrency. Due to the nature of blockchain technology and the pseudonymous nature of most cryptocurrency transactions, once digital assets have been transferred, they can be difficult, if not impossible, to trace and recover.
In traditional asset recovery cases, ownership can often be established through documentation or a clear chain of title. However, with cryptocurrencies, transactions are recorded on a blockchain, which does not contain personal identifying information. As a result, when assets are mixed in digital wallets, it becomes challenging for claimants to prove ownership or even locate the stolen assets.
For claimants who have been defrauded of cryptocurrency, this can be deeply frustrating. It’s one of the reasons why engaging with experts who specialise in tracing cryptocurrency is essential. As the technology and understanding of digital assets evolve, we may see advancements in the tools available for tracing digital transactions. However, for now, claimants should be aware that the process can be complex, and that success is not guaranteed.
What Does This Mean for Cryptocurrency Holders?
For those who hold cryptocurrency, the D’Aloia case provides important lessons. First, it confirms that English courts are willing to treat cryptocurrency as an asset, which means individuals can pursue claims over their digital holdings. This is particularly important for those who may have been defrauded or whose cryptocurrency has been stolen.
However, the case also serves as a warning. The ability to recover stolen or fraudulently transferred cryptocurrency remains limited, particularly when the funds have been mixed with other assets. As such, individuals should take extra precautions to protect their digital assets, such as using reputable exchanges and keeping a detailed record of their transactions.
How Can We Help?
At Slater Heelis, our Dispute Resolution team is experienced in handling complex cases involving a wide variety of assets, including cryptocurrencies.
If you need advice on a potential dispute, please reach out to us by filling out our online contact form or giving us a call on 0330 111 3131.