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The BVI Court’s approach to claims relating to digital assets

Jayesh Chatlani, litigation partner, Harneys, 07/02/2023

Jayesh Chatlani, Harneys

The rise of digital assets and cryptocurrencies has been an exciting new development in global finance, with the British Virgin Islands (BVI) emerging as a very popular jurisdiction for entities and individuals wishing to operate in the digital assets space.

In particular, the jurisdiction has attracted a large number of cryptocurrency exchanges, token issuers, crypto-funds and other entities providing blockchain services, encouraged by the BVI’s friendly regulatory framework, which is buttressed by a support network of experienced lawyers, accountants and other professionals with extensive knowledge of blockchain technology and digital assets.

However, the burgeoning and relatively quick growth of digital assets and cryptocurrencies as an investment class, coupled with the intangible and innovative characteristics of these assets, has given rise to a slew of scams, frauds and cybercrime.

The BVI has, therefore, in recent years had to deal with several cases were digital assets have been stolen or misappropriated. It is a credit to the jurisdiction’s judiciary and strong legal framework that it has successfully adapted existing traditional tools, and embraced new ones to facilitate the tracing and recovery of digital assets. 

To address the fact that often times the perpetrator of a cybercrime is someone unknown to the victim, the BVI Court has followed the precedent set by the English courts in permitting proceedings against “persons unknown” and has expressed a willingness to grant freezing orders and tracing relief, including disclosure orders against such individuals.

Such an order was granted by the BVI Commercial Court in the recent case of Chainswap Limited v Persons Unknown, et al (BVIHC (COM) 2022/0031) where the Court granted freezing orders as against pseudonymous identities (i.e. holders of known digital wallet addresses and email addresses). The BVI Court also clarified that it would be willing to grant a proprietary injunction in appropriate cases where a proprietary claim has been made. 

 

With appropriate freezing orders and proprietary relief, a victim is provided with the needed framework to trace and prospectively seize misappropriated cryptoassets should they be transferred to a cryptocurrency exchange, or converted into centrally issued stablecoins.

In addition, the BVI Court has a long history of granting disclosure orders (in particular Norwich Pharmacal and Bankers Trust Orders). Where it can be shown that information is held by an innocent third party caught up in the wrongdoing of others and where it is necessary for the information to be provided in order to identify the wrongdoer, the Court will typically order that order that third party to disclose such information. 

In many cases of misappropriation, a proprietary claim may be established, in which case it may be appropriate to seek a Bankers Trust Order for information to establish the identity of the wrongdoer as well as further details that may be necessary to trace the misappropriated assets (as was the case in disclosure sought against Binance Holdings Limited in Fetch.AI v Unknown Persons [2021] EWHC 2254 (Comm)). Given the large number of exchanges and custodians based in the BVI, this is likely to be a powerful interim remedy for victims of cybercrime.

In addition to relief that may be available by recourse to the Court, it bears mentioning that many of the exchanges, issuers, custodians and operators in the digital asset space are in fact responsible actors and will take steps to mitigate the risk of fraud or harm to innocent victims. It can often therefore be worth corresponding directly with exchanges and other third parties who inadvertently become caught up in the wrongdoing and seeking their urgent assistance to freeze digital assets or to mark them as suspicious so that other operators in the digital assets space are aware that there is a prospective issue with those identified assets.

Many exchanges and issuers will self-regulate in appropriate circumstances, and it is often important that legal advice is sought quickly once assets have been misappropriated so swift action can be taken to safeguard assets. This is often the difference between whether assets can be recovered or not.

These are simply examples of how the BVI Court and practitioners have adapted the existing tool kit to facilitate pragmatic and innovate solutions to address the changing landscape of fraud and the speed at which digital assets may be transferred. The jurisdiction has shown a willingness to build, innovate and grow in its approach to the legal disputes arising out of the growth of digital assets. 

The issues that arise from the recovery and tracing of digital assets can be complex, and should it be needed, appropriate jurisdiction-specific legal advice should be sought to assist in navigating the fast evolving landscape.

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