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CRYPTOCURRENCY IS PROPERTY: AA v PERSONS UNKNOWN

11th February 2020

In a significant recent decision, the High Court has acknowledged the finding of the UK Jurisdiction Taskforce (“UKJT”) in its Legal Statement on Cryptoassets and Smart Contracts that cryptocurrency is property. 

The interim proprietary injunction ordered in AA v Persons Unknown & Ors [2019] EWHC 3665 (Comm) (13 December 2019) followed the application of an English insurer (AA) of a Canadian company which had fallen victim to the BitPaymer ransomware virus. The claimant had paid a ransom on behalf its insured customer by buying 109.25 bitcoins (then approximately US$950,000) and transferring them to a bitcoin address provided by the anonymous attackers.

Byran J was satisfied that CPR r. 39.2(3)(a), (c), (e) and (g) applied in this case. Publicity would defeat the purpose of the application for relief as it could tip-off the wrongdoers holding the Bitcoin, which could lead to dissipation of the cryptoassets. The application also involved confidential information concerning the insurer’s processes and its customer’s systems in circumstances where the vulnerability of those systems formed the basis of the blackmail and extortion. There was also a risk of reprisal or copycat cyber-attacks on the claimant (or its customer) by persons unknown. Ground (e) was also found to apply as it was a hearing of an application made without notice and it would be unjust for any respondent to be referred to in a public hearing. The judge was satisfied that in all the circumstances it would be necessary to sit in private so as to secure the proper administration of justice.

The application had initially been framed to include a Bankers Trust/Norwich Pharmacal order but in the event the claimant narrowed the application to only seek a proprietary injunction against all four defendants pending the return date at which the other applications could be pursued.

Background

AA is an insurance company that had paid a ransom on behalf of one of its insured customers to secure access and use of that customer’s systems which had been disabled using malware called BitPaymer. The effect of the malware was that all of the insured customer’s computer systems were encrypted, the malware having bypassed the system’s firewalls and antivirus software. The insured customer received notes left on the encrypted system by the wrongdoers (the first defendant, Persons Unknown) demanding payment. Given the importance of access to the insured customer’s systems, AA paid a ransom of approximately USD$950,000 in Bitcoin in exchange for a decryption tool. On transfer of the Bitcoin, the decryption tool was provided and access was restored. Once the files had been recovered, the claimant sought to recover the ransom. Investigators were able to trace 96 Bitcoin to an address (owned/controlled by the Second Defendant) linked to the cryptocurrency exchange known as Bitfinex and operated by two BVI companies (the Third and Fourth Defendants). The remainder of the Bitcoin had been transferred into fiat currency.

The purpose of the application was to assist the insurer in its recovery of the Bitcoin. It sought a proprietary injunction based on claims of restitution and/or constructive trust.

Key Takeaway

The significant question for the Court in the context of a proprietary injunction was whether the Bitcoins constituted “property”. This has been a question which the courts and legal commentators have previously grappled with, the traditional English law position being that cryptocurrencies are neither choses in possession nor choses in action. They are not choses in possession because they are virtual, intangible, and cannot be possessed. They are not choses in action because they do not embody any right capable of being enforced by action.

Bryan J considered the UKJT’s Legal Statement on Cryptoassets and Smart Contracts as well as case law on the definition of property and the evolution of that definition. Bryan J found that the Statement, though not a statement of law, is a “detailed and careful consideration” of the matter, and its analysis was “compelling”. The Court concluded that cryptocurrencies, such as Bitcoin, are property, and that they meet the four criteria set out in Lord Wilberforce’s definition of property in National Provincial Bank v Ainsworth [1965] 1 AC 1175 as being definable, identifiable by third parties, capable in their nature of assumption by third parties, and having some degree of permanence. The decision cites in full paragraphs 71 to 84 of the Statement.

The Court also noted two English authorities where cryptocurrencies had been treated as property (although those authorities do not consider the issue in depth): Vorotyntseva v Money -4 Limited t/a as Nebeus .com, the decision of Birss J, where the Court granted a worldwide freezing order in respect of a substantial quantity of Bitcoin and Ethereum, and Liam David Robertson v Persons Unknown, CL-2019-000444, unreported (15 July 2019), where Moulder J granted an asset preservation order over cryptocurrencies.

Bryan J concluded that cryptocurrencies were a form of property capable of being the subject of a proprietary injunction. This decision represents the first example of judicial recognition of the UKJT’s analysis. It should be noted, however, that the decision was on an interim application without notice, so it was only necessary for the claimant to show that there was a serious issue to be tried. The decision also highlights the readiness of the court in these circumstances to grant a private hearing and for the insurer and insured to be anonymised to minimise the possibility of copycat cyber-attacks or revenge attacks or the revealing of sensitive information about the insurer and insured customer’s systems and processes. The judge was also satisfied that alternative service was appropriate given the urgency and need to preserve the cryptoassets, and that the application was made properly without notice.


This commentary is provided for information purposes only and does not constitute legal advice. Professional legal advice should always be obtained before taking or refraining from any action. 


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