Top Five Crypto Cases of 2022: LMN v. Bitflyer Holdings Inc. and others

As the digital bites settle on a turbulent 2022, Roman Kubiak discusses what he sees as the top five legal cases in the crypto and digital asset space of 2022. In the latest episode of the Lawyers on the Block podcast, Roman and his colleague Kieran Forsyth discuss these cases in more detail.

Court permits service out of jurisdiction under new service gateway and clarifies position of Norwich Pharmacal orders when serving abroad

This claim was heard towards the end of 2022 with the decision being handed down on 29 November of that year.

It was brought by LMN, a cryptocurrency exchange operating in England and Wales, against six other cryptocurrency exchanges – Bitflyer, Binance (the exchange whose “dumping” of the FTX token was arguably the single biggest catalyst for the downfall of the FTX trading platform and the subsequent criminal investigation into its founder Sam Bankman-Fried (something we look at in more detail in an episode of our Lawyers on the Block podcast), Payward, Luno PTE, Coinbase and Huobi, the platform which also featured in the Jones v. Persons Unknown case.

Like a conventional bank, LMN’s position was that it holds cryptocurrencies in its own name on the basis of a personal obligation to pay the appropriate amount(s) to its customers. This is in contrast to holding those cryptocurrencies on trust for customers, in which case LMN would, in that analogy, effectively act as legal guardian of those funds.

LMN’s claim was for information orders against the other exchanges to bring to light details to allow it to trace millions of dollars’ worth of cryptocurrencies including Bitcoin, Ripple, Tether, Ethereum, ZCash and Ethereum Classic which it alleged had been stolen by hackers. After having exhausted criminal avenues, LMN was advised to pursue matters through the civil courts.

LMN accordingly instructed a digital tracing expert who was able to trace the stolen funds to the defendant exchanges. In turn, therefore, LMN wanted disclosure from those exchanges of its “Know Your Client” (KYC) and Anti-Money Laundering (AML) information as well as other key information to help it identify the perpetrators and recover the stolen cryptocurrencies.

To avoid tipping off the perpetrators, the hearings of LMN’s applications to serve the defendants outside of the jurisdiction and to serve them by alternative means were heard in private. However, the judge ordered that notice of the application to seek information orders should be given to the defendants. As such, the hearing of that latter application was heard separately to the applications relating to service.

In relation to the service applications, the court first needed to consider three factors, which were summarised in the Privy Council decision of Altimo Holdings and Investment Ltd v. Kyrgyz Mobil Tel Ltd [2011] UKPC 7, namely:

1. Was there a serious issue to be tried?
2. Was there a good arguable case that the case fell within one of the service gateways set out in paragraph 3.1 of Practice Direction 6B of the Civil Procedure Rules?
3. Was England and Wales the appropriate forum in which the claim should be tried?

In dealing with each, Mr Justice Butcher found as follows:

1. LMN did have a good arguable case and the order sought was justifiable with reference to two lines of authority; first, Norwich Pharmacal Co v. Comrs of Customs and Excise [1974] AC 133 which lends its name to the eponymous Norwich Pharmacal order, an order which allows a person to seek disclosure of relevant information to identify a wrongdoer from a third party who themselves must be shown to have in some way (i) facilitated the wrongdoing and (ii) have the information necessary to identify the wrongdoer(s). The second authority is found in Bankers Trust Co v. Shapira [1980] 1 WLR 1274 and, like the Norwich Pharmacal case, lends its name to the eponymous Bankers Trust order which, until LMN, were very much the order du jour in crypto litigation (as we saw in Osbourne v. Persons Unknown and Others [2022] EWHC 1021 (Comm)). Bankers Trust orders are arguably the more effective tool and can provide for disclosure of key, and potentially confidential, information to allow victims of fraud to locate the whereabouts of stolen assets and to prevent disposal of those assets.

In one of the key passages from the judgment, which arguably resolves the apparent dichotomy noted by HHJ Pelling KC in Osbourne, Mr Justice Butcher said:

“I considered that there was a good arguable case on the merits of a claim under the Bankers Trust jurisdiction. I should add that, given that there seems no doubt that the Ds were ‘mixed up’ in the fraud (in the relevant sense, which does not involve any fraud or wrongdoing on their part), I consider that these considerations also show that there was a good arguable case that relief should be granted under the Norwich Pharmacal jurisdiction.”

1. Finding that there was a good arguable case, Mr Justice Butcher was quick to adopt the new service gateway at paragraph 3.1(25) of Practice Direction 6B of the Civil Procedure Rules which had been introduced just a month before the decision and which applies where a claim or application is made:
   1. for information regarding “the true identity of a defendant or a potential defendant and/or what has become of the property of a claimant or applicant”; and
   2. where provision is made in the Civil Procedure Rules to effect service.
2. Finally, the judge had no difficulty in finding that England and Wales was the appropriate forum on the basis that:
   1. LMN is an English company
   2. there was a good basis to suggest that the “situs” of the stolen cryptocurrencies was in England
   3. the key documents were in England; and
   4. Anglo Welsh law arguably governed the proprietary claim

It is no surprise therefore that, in finding the above, Mr Justice Butcher also permitted service by alternative means, namely by email and, in one case, by posting a link to the relevant documents on an online contact form on one of the defendants’ website pages and that he granted LMN the orders ought under the Bankers Trust jurisdiction.

The fifth and final case I will talk about is Tulip Trading Limited v. van der Laan & Ors [2023] EWCA Civ 83, where the Court of Appeal upholds appeal for permission by claimant seeking to sue software developers on the basis that they owe fiduciary or tortious duties to cryptocurrency hack victim.