The High Court in D’Aloia v Persons Unknown Category A & Ors [2024] EWHC 2342 (Ch) (full judgment available here), has recently dismissed claims brought by a Claimant, who was the object of a complex crypto based fraud, against Bitkub, a cryptocurrency exchange located in Thailand. Bitkub had allegedly received the Claimant’s Tether, a ‘stablecoin’ which essentially pegs its value to the US Dollar and is backed by reserves (USDT).

The Claimant alleged that Bitkub held USDT which he had initially transferred to fraudsters (the First Defendants and persons unknown), having believed he was making legitimate transfers to a regulated brokerage. The USDT, according to the Claimant’s expert witness, was subsequently dissipated by way of numerous transfers (or ‘hops’ as they were called in the proceedings) to various accounts. A proportion of the USDT allegedly ended up in an account referred to as the ‘82e6 Wallet’, which was operated by Bitkub and held by the Seventh Defendant, who was later identified as Ms Hlangpan. Ms Hlangpan then withdrew the USDT from the 82e6 Wallet and converted it into Thai baht, which was then withdrawn.

This judgment of 12 September 2024 dealt principally with the claims against Bitkub, with other claims against the other defendants (including the popular exchange, Binance) having been either previously settled, struck out, or been made subject to a summary judgment application. This recent judgment also comes after the widely publicised interim decision from the High Court on 24 June 2022, which allowed the Claimant to serve the proceedings on the unknown defendants and exchange defendants via NFT (judgment available here: D’Aloia v Persons Unknown & Others [2022] EWHC 1723 (Ch).

Following the recent trial, the Court found that the initial fraudsters (the First Defendants and peoples unknown) had held the USDT on constructive trust for Mr D’Aloia from the point the USDT was transferred to them, but that Bitkub had not similarly held the USDT on constructive trust for Mr D’Aloia. The constructive trust claim against Bitkub primarily failed on the basis that the Court could not find, as a matter of fact, that the USDT in the 82e6 Wallet had come from the Claimant. The Court was very critical of the methodologies used by the Claimant’s expert witness as part of his tracing exercise which led him to the 82e6 Wallet. This was essentially fatal to Mr D’Aloia’s claims against Bitkub.

The Claimant sought to argue (by way of a non-pleaded claim which arose at trial) that the constructive trust over USDT held by Bitkub, was essentially premised on the fact that Bitkub had failed to implement its own anti-money laundering (AML) procedures. The significant withdrawal and conversion of the USDT to Thai baht occurred amidst a backdrop of clearly suspicious account activity which Bitkub was aware of. This, the Claimant alleged, therefore provided the foundation for the finding of a constructive trust. The Court rejected this argument, partly on the basis that it had not been advanced prior to trial and that a previous application to adduce Thai law evidence as to Bitkub’s compliance with contemporary AML practices in Thailand (again made close to the start of the trial), had been rejected.

In dismissing the constructive trust claim, the Court noted that even if a trust could have been established, it would not have been in favour of Mr D’Aloia. This was despite the Court agreeing, amongst other points, (i) that Bitkub had fallen short of its own due diligence procedures which operated to prevent money laundering, by failing to impose a ‘block’ on Ms Hlangpan’s account when significant withdrawals which far exceeded the daily limits contractually placed on her by Bitkub were made, and (ii) that Ms Hlangpan’s Bitkub account was being used to launder the proceeds of fraud and that the transaction volumes could not have originated from her legitimate income.

The Claimant also brought a claim in unjust enrichment against Bitkub. However, whilst the Court accepted that USDT had been held in the 82e6 Wallet and that Bitkub had arguably been enriched, this was not an enrichment which could be proven to have been at the expense of the Claimant, as the Court was not convinced that the 82e6 Wallet specifically held the Claimant’s USDT. This claim therefore failed on the same factual basis as the constructive trust claim.

Despite the Claimant being unsuccessful at trial, the case is significant, and potentially helpful for similar victims of crypto fraud, for the following key reasons:

1. Many of the issues and recent Court decisions involving crypto fraud, have not been made following a trial and therefore have arguably been of limited use as a matter of binding precedent. The D’Aloia case is the first of its nature to be made following a trial and has given credence to many of the findings outlined in previous ‘interim’ judgments. In turn, this has provided greater certainty for victims of crypto fraud as to how their claims might be dealt with by the English Courts, which are evidently willing to tackle the complex legal and factual issues involved.
2. The Court maintained that tracing through a mixed fund is not possible at common law, but is available in equitable claims and went onto accept that “in principle the USDT in this case could have been followed”. This is relevant in circumstances where cryptocurrencies are mixed in a ‘hot wallet’ by an exchange. The Court indirectly accepted that Tether Ltd (the entity that administers USDT) would likely have had the records necessary to follow the Claimant’s USDT successfully. Relevant to this, the D’Aloia judgment carefully considered the underlying nature of USDT as a class of cryptocurrency and in referring specifically to Tether Ltd’s white paper, noted that Tether Ltd has the power to create and destroy USDT. No evidence from Tether Ltd as to the Claimant’s USDT had been put before the Court, so it was unable to use such records to find that the USDT previously held in the 82e6 Wallet was indeed the Claimant’s. Accordingly, the Court indicated that such an information gathering exercise could be utilised by similar victims in future cases – a point which is likely to be extremely helpful to those seeking to follow and recover USDT specifically.
3. Through the Court’s extensive criticisms of the Claimant’s expert witness, it emphasised the vital importance of a robust and clearly explained tracing/following exercise and identified pitfalls that need to be avoided when carrying out such an exercise in the future.
4. The Court’s rejection of the Claimant’s constructive trust claim, which relied on Bitkub’s AML failings (which had not previously been pleaded), was not premised on the claim in theory being objectionable. Aside from the lack of convincing factual evidence that the Claimant’s USDT was held by Bitkub, the Court felt bound by the previous judge’s decision that the Claimant’s prior applications to make this argument by way of amended particulars of claim and adduce additional evidence in respect of it, had been rejected. Therefore, in circumstances where the internal AML procedures of an exchange have been manifestly inadequate, victims could in theory look to rely on these inadequacies in order to impose duties on exchanges as trustees – provided that the underlying trust claim is clearly pleaded and appropriate evidence adduced in good time.
5. The Court confirmed that a variety of defences, typically available to recipients of fraudulently appropriated funds, could in theory be available to an entity in receipt of fraudulently appropriated cryptocurrency (such as Bitkub)^[1].The Court also indicated that these defences may not be available in contexts where the recipient’s AML procedures were insufficient, as was the case with Bitkub.

The Court definitively confirmed that USDT is property^[2], with proprietary rights attaching to the USDT itself, rather than the right to control it (for example, by way of private key). This classification is vital in ensuring effective proprietary claims and remedies are available to victims of crypto-based fraud.

[1] including the defences of a good faith change of position, a bona fide purchaser for value without notice (specifically in relation to Tether) and ministerial receipt.

[2] Despite not being a chose in possession or a chose in action, it satisfied the test outlined in National Provincial Bank Ltd v Ainsworth [1965] 5 WLUK 32.