As part of our series looking at the potential impact of recent cases on future decisions by courts in the Cayman Islands, the British Virgin Islands and Bermuda in relation to crypto assets, we consider the English decision of LMN v. Bitflyer Holdings Inc et al. [2022] EWHC 2954 (communication)and specifically whether victims of cryptocurrency fraud can obtain Bankers confidence Orders to force cryptocurrency exchanges to disclose sensitive information to help recover embezzled cryptocurrency.
The applicant in LMN vs. Bitflyer and others was a cryptocurrency exchange (the “Applicant“), which was the victim of a hack in which millions of dollars worth of cryptocurrency was stolen. In preparing to initiate proceedings to recover the cryptocurrency, the Applicant instructed an expert to trace the stolen cryptocurrency. The expert was able to trace the initial dissipation from the Applicant as such transactions came from ‘Hot Wallets’ (i.e., internet-connected wallets) and therefore the transfers were recorded on the relevant cryptocurrency blockchains.However, when the cryptocurrency was transferred to an address/wallet held by a cryptocurrency exchange, this complicated the tracing exercise, as the crediting of cryptocurrency to the client’s account held by the exchange takes place “off-chain” (i.e. via an internal accounting exercise in which said cryptocurrency is commingled in an “omnibus wallet” used to service many clients). The cryptocurrency processed by the exchanges became untraceable, making it necessary for the requesting Ap to seek information from the relevant exchanges to continue the tracing exercise and determine who was behind the relevant transactions.
In this case, the Court considered that the evidence to obtain a Bankers confidence the order was fulfilled, namely that:
- the embezzled cryptocurrency about which information was sought belonged to the Applicant, as the Court found that there was a good moot case that whoever had the cryptocurrency or traceable substitutes did so as a constructive trustee for the Applicant;
- there was a real possibility that the information sought would lead to the location or preservation of the assets, as the information sought concerned the identity of the account holders associated with the transfer of the embezzled cryptocurrency and the destination of the transfers; Y
- Applicant’s interest in obtaining the order outweighed any potential harm to the exchanges in complying with the order, as Applicant agreed to costs and damages and restrictions were placed on the collateral use of any disclosed information.
Courts in the Cayman Islands, the British Virgin Islands and Bermuda have followed in the footsteps of the English courts in making Bankers Trust orders and we believe they are likely to be equally willing to help victims of theft and fraud in a crypto context where victims seek information to help recover embezzled crypto assets. Furthermore, this decision affirms previous decisions that classify cryptocurrencies as property and therefore subject to property appeals and, crucially, serves as a timely reminder to cryptocurrency exchanges to ensure they comply with applicable KYC requirements. , since they may be forced to produce such information when they do so. assists in the recovery of embezzled crypto assets. If they cannot comply with such orders, there would have to be a very good reason to avoid being in contempt of Court.