Fraudsters’ paradise

Crypto fraud has sharply increased in the past two years, according to data from Action Fraud UK[1] and the UK Financial Conduct Authority,[2] both of which recorded rises in the number of victims, as well as the total sums lost. The trend is unlikely to come as a surprise to English and Welsh civil fraud lawyers,[3] who have seen a steep rise in fraud cases pursued through the English courts in the same period. In its 2023 report on crypto crime,[4] blockchain analysis company Chainalysis identified romance scams as the most prevalent form of crypto scam, with high levels of impersonation and investment scams also recorded.

Investments into digital assets are often carried out by individuals without the assistance of professional advisors and this has created a target-rich field for fraudsters. This is particularly the case for those investing in digital assets for the first time or with a very limited resource pool, such as a pension pot.

Romance scams rely on the pretence of a romantic or friendly relationship being developed by the scammer with a victim, who is then persuaded to send money to purchase digital assets. Investment scams rely on sophisticated fake websites and platforms to draw in potential investors, who then send fiat or digital currency with the intent of purchasing crypto-assets, only for the funds to be deposited directly into the wallets of fraudsters.

Attempting recovery

Victims of crypto fraud will be faced with a series of hurdles in order to try to recoup their losses. Criminal proceedings are particularly complex because most scams are international, with anonymous scammers beyond the reach of national law enforcement. Even where there is a defendant to arrest, charge and prosecute, the aim of the proceedings is generally not to recover assets for a victim.

Others who have suffered losses will turn to fraud lawyers. Seeking remedies (or threatening proceedings) through the courts can be a successful way to obtain information or recover assets but, in some cases, the expense will put those steps beyond the reach of victims.

In many respects, attempts to recover digital assets bear little difference from more traditional forms of fraud. Delay can be catastrophic. Identifying enforcement prospects and locating the stolen assets is often a first step before proceedings for recovery or damages may commence.

However, even with the transparency of transactions on the blockchain, the pseudonymous nature of the technology means that tracking transfers is easier than identifying the fraudsters. Following or tracing funds is likely to require a robust and costly blockchain analysis and report, especially where a victim’s digital assets have been mixed with others in the course of a series of ‘hops’ through digital wallets.

Evolving landscape

Common-law courts have proved willing to grant orders in aid of recovery efforts, including disclosure orders under Norwich Pharmacal v Customs and Excise Commissioners[5] and Bankers Trust jurisdictions, and freezing injunctions to prevent the dissipation of assets within an identified digital wallet. Early cases required courts to engage with fundamental concepts such as whether cryptocurrency is capable of amounting to property or being held, subject to a constructive trust.

Although the merits of those arguments have been accepted numerous times (albeit in interim proceedings), there are likely to be cases over the next few years that continue to advance the jurisprudence specific to crypto fraud.

Further, as judges have gained in experience with digital assets, applications have already been met with increased scrutiny. For example, where worldwide freezing orders might have been granted quite easily by English courts in early applications, the recent case of Piroozzadeh v Persons Unknown and Others[6] made it abundantly clear that the ordinary, rigorous duties on applicants and legal advisors relating to ‘full and frank disclosure and fair presentation’ apply in these cases.

The legal landscape for the recovery of stolen digital assets has evolved quickly and much more so than the regulatory framework. However, the road to recovery for victims is still a bumpy one.