19 novembre 2021
The latest high-profile cryptoasset fraud involving the "Squid Game coin" has demonstrated at least two things: firstly, that there is an ever growing appetite to invest in cryptoassets and, secondly, that efforts to provide a suitable regulatory structure for the emerging asset class needs to be accelerated, as fraud continues to be a problem. We take a closer look at the Squid coin fraud and consider the latest legal cases in this area together with a summary of the tools available to fight fraud and recover cryptoassets.
In an apparent bid to capitalise on the popularity of the Netflix show, Squid Game, a new cryptocurrency, named after (but not affiliated with) the show was launched in late October 2021. It was advertised as a "play-to-earn" cryptocurrency following the concept of the show. Thousands of retail investors flocked to buy the coin which saw its price rocket from $0.01 to $2,800 in the space of a week. To put that into perspective, an investment of $10 at the initial price would be worth $2.8 million at its peak. However, as the saying goes, "if something seems too good to be true, it usually is". The warning signs should have been obvious from the start as investors were unable to sell the coin to realise their profits. On the 1 November, the creators of the coin initiated a scam known as a "rug-pull", abandoning the project, cashing out their coins and taking off with the investors' money (around US$3.3 million) leaving the cryptocurrency worthless. It appears that the team behind the fraud took various steps to ensure the task of tracing them will be very difficult, including using proxies and a transaction mixing service designed to scramble transactions and ensure user anonymity. So how will the law keep up and what can be done to trace and recover cryptoassets?
One of the features which makes cryptocurrencies attractive is their decentralised status, and their use of distributed ledger systems such as Blockchain to record and verify transactions, which has the potential to increase transparency and reduce fraud. However, cryptoassets continue to be a magnet for fraud, money laundering and black-market activity, but the scams being used are ones we have all seen before – Ponzi schemes, phishing scams, confidence tricks and hacking being some of the main strategies employed.
Cryptoassets and institutions are under increasing scrutiny from regulators who are wrestling with the right way to approach regulation, but in the meantime the English courts have demonstrated that they are prepared to assist in protecting victims of cryptocurrency fraud, and that the tools traditionally employed in fraud and asset recovery cases (such as freezing and disclosure orders) are still applicable, albeit that there are potentially greater challenges following and locating assets and identifying the perpetrators. The two most recent cases have illustrated some of the tools and challenges and are summarised below.
On the recommendation of a Swiss investment firm, the sole shareholder and director of Ion Science (the Applicant) invested 64.35 bitcoins (valued at £600,000 at the time) into two initial coin offerings (ICOs) promising excellent returns. It transpired that the investment firm was not legitimate (the Swiss financial services regulator had issued a warning about the firm) and they had absconded with the bitcoin. The Applicant was faced with the task of tracking down the perpetrators of the fraud, the identity of whom was unknown.
The Commercial Court granted a proprietary injunction, a worldwide freezing order, ancillary disclosure orders and orders for alternative service against the persons unknown. The court also made a Bankers' Trust Order against the parent companies of two crypto exchanges – expert evidence having shown that a significant portion of the Applicant's cryptoassets had been transferred into accounts hosted on those exchanges. The case was also significant for its consideration of the lex situs of cryptocurrency (which was considered in the context of determining the governing law and jurisdiction of the claim, with the court determining that the lex situs is the place where the person who owns the asset is domiciled).
The case demonstrates that the English court is prepared to assist victims of crypto fraud in the same way it will assist victims of other frauds, but that there are a unique set of challenges facing victims and new legal questions arising to be determined. The case also provides further confirmation that cryptoassets can be treated as property (which has been considered in a number of cases, most notably AA v Persons Unknown  EWHC 3556 (Comm), and the UK Jurisdiction Task Force statement on Cryptoassets and Smart Contracts).
Fetch AI, an English company, alleged that its crypto accounts were accessed by fraudsters who traded various crypto assets at an undervalue to a third party (inferred to be involved in the fraud) causing losses of c.$2.6 million.
The relief sought was similar to that sought in Ion Science and considered and approved that decision with regards to the ability to seek disclosure from exchanges, including where they are located outside of the jurisdiction. The claims brought were for breach of confidence (on the basis that the crypto wallet private key was confidential information), unjust enrichment and an equitable proprietary claim.
The Court considered the question of categories of "persons unknown including whether this would capture any user who possessed any of the stolen assets - that was deemed to be too wide a definition, and would capture innocent individuals who didn't know they possessed stolen assets. The definition was limited to those who knew or ought to have known the cryptocurrencies belonged to the claimants.
These cases demonstrate that the English legal system continues to be able to adapt to technological changes and the challenges that can bring, and that existing tools such as injunctive relief and disclosure orders can and will be granted to assist victims of fraud. However, cryptoassets present a unique set of challenges, and as crypto assets continue to evolve and become more mainstream, there is no doubt that new legal issues will arise which will require the cooperation of lawmakers and regulators alike, and that we will see many more disputes arising.
Our team are experienced in advising on crypto disputes. Should you have any questions or would like to discuss these issues further please reach out to a member of our Disputes & Investigations team.
Additional support was provided by Osama Altikriti.