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You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> D'Aloia v Persons Unknown Category A & Ors [2024] EWHC 2342 (Ch) (12 September 2024) URL: https://www.bailii.org/ew/cases/EWHC/Ch/2024/2342.html Cite as: [2024] EWHC 2342 (Ch), [2025] WLR 821, [2025] 1 WLR 821, [2024] WLR(D) 417 |
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BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
BUSINESS LIST (ChD)
Fetter Lane London EC4A 1NL |
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B e f o r e :
(sitting as a Deputy Judge of the Chancery Division)
____________________
FABRIZIO ![]() | Claimant |
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- and - |
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(1) PERSONS UNKNOWN CATEGORY A (2) BINANCE HOLDINGS LIMITED (3) POLO DIGITAL ASSETS INC (4) GATE TECHNOLOGY CORP (5) AUX CAYES FINTECH CO LTD (6) BITKUB ONLINE CO LTD (7) PERSONS UNKNOWN CATEGORY B |
Defendants |
____________________
Darragh Connell and Eoin MacLachlan (instructed by Quillon Law LLP) for the Sixth Defendant
Hearing dates: 6-7, 10-11 and 14 June 2024
____________________
Crown Copyright ©
Richard Farnhill (sitting as a Deputy High Court Judge of the Chancery Division):
The issues
What is the pleaded basis for Bitkub's alleged liability to the Claimant?
i) What is the pleaded basis for the Claimant's allegation that he can identify his "Identifiable Cryptocurrency" and his related contention that his "Identifiable Cryptocurrency" is comprised within the USDT 400,000 that was transferred to the 82e6 Wallet held with Bitkub on 21 February 2022? For the avoidance of doubt, this sub-issue turns on the pleading point: whether the Claimant pleaded that he has relied upon following or tracing. The statements of case adequately plead a claim premised on tracing USDT to the 82e6 wallet. There is, of course, a separate question of whether the alleged flow of assets is adequately evidenced.
ii) What is the pleaded basis for the Claimant's allegation that Bitkub holds the Claimant's "Identifiable Cryptocurrency" on constructive trust and that Bitkub is liable to the Claimant as a constructive trustee? Paragraph 30 of the Re-Amended Reply asserts, in terms, a constructive trust imposed on Bitkub. Paragraphs 40-41 of the Re-Amended Particulars of Claim and paragraph 37 of the Re-Amended Reply set out the basis (and, for the avoidance of doubt, the only basis) on which that constructive trust is said to arise: that the assets were subject to a constructive trust imposed on the First and Seventh Defendants by virtue of their fraud and as a consequence the Sixth Defendant could not acquire the beneficial title, alternatively it held the assets on constructive trust.
iii) What are the matters on which the Claimant's allegation that Bitkub "did not act in a commercially acceptable way" can be permissibly advanced with reference to the Claimant's pleadings? The allegation goes to, and only goes to, the defences of good faith purchase for value without notice, change of position and ministerial receipt (paragraphs 17, 23 and 28(j) of the Re-Amended Reply).
iv) What are the matters on which the Claimant's allegation that Bitkub "unconscionably received" the Claimant's "Identifiable Cryptocurrency" can be permissibly advanced with reference to the Claimant's pleading? The Claimant can refer to the matters pleaded as regards KYC, albeit there is no expert evidence against which to assess them. He can also refer to the systems and controls of Bitkub and Bitkub's application of them in the present case. The unconscionable receipt claim is an aspect of the constructive trust claim set out at (ii), above.
USDT as property
Expert evidence
Following / Tracing
i) Is tracing at common law possible through a mixed fund? In my view it is not. As such, tracing is only available to the Claimant in respect of his equitable claims, where tracing through a mixed fund is possible.
ii) Was it possible to follow the USDT to the 82e6 wallet? This was expressly part of the agreed issue, although I was not addressed in any detail on it. To my mind it turns on two linked issues. The first is whether in principle the property interest in USDT is, for these purposes, more akin to a chose in action or a chose in possession. If it is to be equated to a chose in action the correct analysis seems to me to be that it cannot be followed because once it passed through a mixed fund it ceased to be identifiable. If it can be equated to a chose in possession, it could, in principle, be followed provided it remained identifiable. That leads to the second question: can USDT in fact be followed through a mixture? Mr Moore's evidence, in passing, suggested that Tether Ltd (the organisation that administers USDT) itself had the records necessary to carry out that exercise. Tether Ltd's own documentation supports that. However, even assuming that was correct there was no evidence before me to suggest that any form of following based on those records had been attempted in this case. Accordingly, on the basis of that limited evidence, I conclude that at law USDT could have been followed but MrD'Aloia's
USDT in this case was not successfully followed as a matter of fact.
iii) Are the first in first out (FIFO), pari passu distribution and rolling charge methods described in Charity Commission for England and Wales v Framjee [2014] EWHC 2507 (Ch) the only approaches open to a party as a matter of law? In my view the law is not so limited and other methods, if methodologically sound and properly evidenced, are available to a party seeking to trace assets, at least in the context of claims arising out of fraud.
Unjust enrichment
i) Evaluate the Seventh Defendants' / Ms Hlangpan's AML/KYC risk? To be clear, there is no suggestion that Bitkub had any obligation to consider AML or KYC in respect of parties other than its customers; the only such customer relevant to this trial was Ms Hlangpan. That is the case for each of these sub-issues. Again, there was no proper evidence of Thai law or practice, so neither party has established compliance / non-compliance with it. However, the evidence does show that Bitkub had policies in place to police suspicious account activity, that those policies were linked to AML concerns, that those policies were repeatedly breached by Ms Hlangpan and that she was repeatedly permitted, by Bitkub, to do so. In that sense, Bitkub was on notice of a money laundering risk and failed to take steps in response.
ii) Monitor the Seventh Defendants' / Ms Hlangpan's customer account for AML/KYC risk purposes? This is another aspect of the previous point. Compliance / non-compliance with Thai law has not been shown by either party; on the facts there was suspicious account activity and Bitkub did not take steps to address those concerns.
iii) Impose the appropriate account withdrawal limit to the Seventh Defendants' / Ms Hlangpan's User Account in accordance with its AML/KYC and corporate governance duties? Bitkub failed to impose its own limits for withdrawals in respect of Ms Hlangpan. On the balance of probabilities, the purpose of those limits was connected to concerns over money laundering; there is no reason to think it was connected to KYC since KYC would typically be conducted before an account became active.
iv) Move the Seventh Defendants / Ms Hlangpan from level 1 to level 2? This would have required an application from Ms Hlangpan and no such application was made. Accordingly, this was not a failure on Bitkub's part.
Constructive trust issues
The case as pleaded and the case as advanced at trial
i) To enable the other side to know the case it has to meet.
ii) To ensure the parties can properly prepare for trial.
iii) It serves as a "critical audit" for both sides to ensure they are advancing a complete cause of action or defence.
While it is good sense not to be pernickety about pleadings, the basic requirement that material facts should be pleaded is there for a good reason so that the other side can respond to the pleaded case by way of admission or denial of facts, thereby defining the issues for decision for the benefit of the parties and the court. Proper pleading of the material facts is essential for the orderly progress of the case and for its sound determination. The definition of the issues has an impact on such important matters as the disclosure of relevant documents and the relevant oral evidence to be adduced at trial.
The witnesses
(1) The fundamental issue is one of fairness to witnesses and to the parties.
(2) Usually fairness will require that when a witness gives evidence as to a specific factual matter and the court will be asked to disbelieve him or her, he or she should be challenged on it so as to have an opportunity of affirming or commenting on the challenge.
(3) But this is not an inflexible rule. There may be cases in which there will be no unfairness because, looked at more generally, the procedures adopted in the litigation mean that a party and the relevant witness(es) have had ample opportunity to comment on the other side's case. It may also be the case that a particular matter does not have to be specifically put to the witness because it is obvious from other evidence which he or she has given as to what his or her response will be. Furthermore, the extent to which there needs to be cross-examination may depend on the procedures which have been adopted by the court (for example in setting time limits for cross-examination).
Q. And what you have said in response to the defendant's question was the figure that you're following for the claimant's identifiable cryptocurrency needed to be reduced from 65,022 by 18,700-odd to get a figure of 46,291; correct?
A. Yes.
Q. There is no conceptual coherence, I am suggesting to you, or principled basis upon which that deduction comes from the claimant's identifiable cryptocurrency, or perhaps explain to me why that deduction needs to be made from the claimant's 65,022.
A. As an overarching aim, I'm trying to find as many avenues as I can to unmask again, the initial mission is to identify who these people are.
Q. On the identifying as many angles as I can, I am going to suggest to you that when you approach your task as a blockchain tracing expert, in following down false leads, you are not properly carrying out your task in providing a very clear, impartial view on what happens in a blockchain in terms of the transactions.
A. Sorry, what do you mean by false leads?
Q. So you say you will follow down different avenues of inquiry and I am suggesting to you that those different avenues of enquiry lead you down false roads of enquiry because you are not following a principled blockchain analysis.
A. I think you are taking out of context here what these addresses here. This is purely one giant washing machine. These are not legitimate addresses that are moving these funds.
Q. If we turn over the page you provided a graphical representation of the flow of funds I think in relation to this. And, as I say, we do not accept that you correctly applied any proper methodology to end up at the 82e6 wallet. It is our position, Mr Moore.
A. Okay, I understand your position.
i) He had changed his methodology from FIFO to something else.
ii) His new basis was not principled and lacked conceptual coherence.
iii) He was invited to explain how his methodology applied to a specific example.
iv) His objective was not tracing or following as such but the uncovering of potential perpetrators of the fraud.
v) He had pursued false avenues.
Cryptocurrency and the operation of the Bitkub exchange
What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party. Transactions that are computationally impractical to reverse would protect sellers from fraud, and routine escrow mechanisms could easily be implemented to protect buyers. In this paper, we propose a solution to the double-spending problem using a peer-to-peer distributed timestamp server to generate computational proof of the chronological order of transactions. The system is secure as long as honest nodes collectively control more CPU power than any cooperating group of attacker nodes.
21. In the bitcoin scheme transactions are recorded in a ledger or database known as a blockchain, with each network having its own ledger. The blockchain constitutes a public registry recording every transaction. A given amount of bitcoin is simply a number held at a certain digital address. A transaction simply involves reducing the value at one address and correspondingly increasing it at another. Whether new addresses are created in this process does not matter for present purposes, as different cryptocurrencies work in different ways. The amounts held at every address are public, but the identity of the parties is not. The blockchain does not reveal the relationship between the digital addresses and any persons.
22. Each digital address is associated with a pair of public and private cryptographic keys. The public key identifies the address on the network. The relevant private key is the means by which bitcoin can be dealt with. The holder of the private key uses it to cryptographically sign a record of the transaction moving bitcoin from one address to another. The record is called a cryptographic hash. The public/private key pair means that the person signing with the private key is proving that they are associated with the public key (and so the address), without revealing the private key itself. The hash ensures that any attempt to alter the record would be noticeable, because even the smallest change would alter the hash.
23. For each network there are devices on the network that undertake "mining". This is the means whereby transactions are validated. The latest transactions are gathered together into a block, which also includes a hash of the previous block (hence each block is chained to its predecessor, making a "blockchain"). The miners work in competition with each other to produce an appropriate hash of this new block. The competition is to find a unique "number used once" or nonce, which causes the hash of the new block to have certain defined characteristics. This is called a "proof of work". Blocks that have been validated this way are broadcast to the network and incorporated into further work. Miners receive both transaction fees and new bitcoin.
24. The signing of the hashed transaction record with users' private keys in the first place, and the incorporation of these records into a hashed chain of blocks produced by the proof of work, solves the double spending problem. This characteristic of bitcoin does not emerge as a matter of law or convention, it is a characteristic which arises as a matter of fact from the way the software works. As a result it is meaningful to describe bitcoin not merely as something which is transferable but as "rivalrous" (see the Law Commission's recent Digital Assets: Consultation Paper [Law Com No 256]). For a transferable thing to be rivalrous, the holding of it by one person necessarily prevents another from holding that very thing at the same time. Because the holder cannot double spend their bitcoin, such that it is rivalrous, the cryptoasset can be said to be capable of assumption by a third party (see the definition of property in National Provincial Bank v Ainsworth [1965] 1 AC 65 ). Thus, as Bryan J held in AA v Persons Unknown [2019] EWHC (Comm) 3556 paras 55-61 citing Ainsworth, a cryptoasset such as bitcoin is property.
25. In a sense the token which is the bitcoin analogue of a real coin is the chain of cryptographically signed and validated transactions relating to the relevant entry in the ledger. Since every transaction relating to that token adds to its chain, some would say a fresh piece of property is created every time bitcoin is transferred, but there is no need on this appeal to get into that debate.
Asset-backed token issuers and other market participants can take advantage of blockchain technology, along with embedded consensus systems, to transact in familiar, less volatile currencies and assets. In order to maintain accountability and to ensure stability in exchange price, we propose a method to maintain a one-to-one reserve ratio between a cryptocurrency token, called tethers, and its associated real-world assets, fiat currency. This method uses the Bitcoin blockchain, Proof of Reserves, and other audit methods to prove that issued tokens are fully backed and reserved at all times.
Each tether unit issued into circulation is backed in a one-to-one ratio (i.e. one Tether USDT is one US dollar) by the corresponding fiat currency unit held in deposit by Hong Kong based Tether Limited. Tethers may be redeemable/exchangeable for the underlying fiat currency pursuant to Tether Limited's terms of service or, if the holder prefer, the equivalent spot value in Bitcoin.
The alleged fraud
Hop | From | To |
Date | Transfer Amount (USDT) | Amount traced by Mr Moore (USDT) |
1 | Mr ![]() | 1dDA | 10 January 2022, 7:29pm | 999,987.1 | 999,987.1 |
2 | 1dDA | dcEO | 17 February 2022, 8:22am | 326,868 | 326,868 |
3 | dcEO | 3209 | 17 February 2022, 8:24am | 323,613 | 323,613 |
4 | 3209 | 98EB | 17 February 2022, 8:50am | 183,089 | 96,022 |
5 | 98EB | 3180 | 17 February 2022, 9:15am | 183,000 | 96,022 |
6 | 3180 | 6E52 | 17 February 2022, 9:18am | 183,000 | 96,022 |
7 | 6E52 | 966d | 18 February 2022, 4:58am | 400,000 | 46,291 |
8 | 966d | A1C3 | 18 February 2022, 4:58am | 400,000 | 46,291 |
9 | A1C3 | 322B | 18 February 2022, 5:14am | 333,801 | 46,291 |
10 | 322B | 6947 | 18 February 2022, 5:37am | 388,273 | 46,291 |
11 | 6947 | 6F95 | 18 February 2022, 6:29am | 351,294 | 46,291 |
12 | 6F95 | 4e72 | 18 February 2022, 6:50am | 581,000 | 46,291 |
13 | 4e72 | 237f | 18 February 2022, 7:07am | 500,591 | 46,291 |
14 | 237f | 82e6 (Ms Hlangpan) | 21 February 2022, 5:18am | 400,000 | 46,291 |
It is convenient to describe at this stage what happens to crypto assets held at a deposit address with the eighth defendant as explained in its evidence. The uncontradicted evidence adduced by the eighth defendant is that the user does not retain any property in the Tether deposited with the exchange. As it is put in Mr Quest's skeleton argument, the user's account is credited with the amount of the deposit and they are then permitted to draw against any credit balance as in a conventional banking arrangement. The Tether, like other crypto assets, are then swept into a central unsegregated pool address known as a "hot wallet" where they are treated as part of the eighth defendant's general assets. They are not specifically segregated to be held for the sole benefit of the user from whose account they have been transferred. This is what happened in the present case. All of the Tether deposited in the three user addresses held at the eighth defendant were swept into one of two hot wallets. Since that exercise was carried out, there have been hundreds of transactions an hour passing through each of the hot wallets which operate as a central pool. It is evident that, in those circumstances, any attempt to trace the Tether swept into the pool from the three user accounts at the eighth defendant would have been as at the time of the order made by Sir Anthony Mann over nine months later an essentially futile and close to impossible and possibly impossible exercise.
We well understand how the Recorder's suspicions were aroused. However, in the absence of good reason a Judge ought to be extremely cautious before making conclusive findings of fraud unless the person concerned has at least had the opportunity to give evidence to rebut the allegations. This is a matter of elementary fairness.
i) MrD'Aloia
first experienced issues with his td-finan account on 2 February 2021 when all his open trades were closed. While Mr
D'Aloia
was very specific about this date in his witness statement he was much vaguer in his oral evidence before me. It seems to me likely that this was something that did not cause him undue concern; systems have glitches and as someone experienced with online platforms (albeit not necessarily cryptoassets) Mr
D'Aloia
would understand that.
ii) By 29 March MrD'Aloia
had decided to test td-finan's systems and submitted a withdrawal request for $1,000. His account was blocked. An email exchange followed with someone purporting to be a broker, who convinced Mr
D'Aloia
that the issue arose from him using two different bank accounts from which to transfer funds to td-finan. He further persuaded Mr
D'Aloia
that to remedy the situation Mr
D'Aloia
needed to pay a "security deposit" of US$229,400, which was 5% of his current balance, to address concerns that Mr
D'Aloia
was not laundering money. On 13 April 2022 Mr
D'Aloia
paid the requested sum.
iii) MrD'Aloia's
account was unlocked but he remained unable to make withdrawals. In a further exchange with td-finan he was informed that because his account had been blocked for suspected money laundering, restrictions had been imposed on it. He was advised by td-finan that he should upgrade to a VIP account for a payment of US$60,000. On 21 April 2022 Mr
D'Aloia
paid the requested amount.
iv) MrD'Aloia's
account was blocked again shortly thereafter, however. This time he was told that it was to do with suspicions of insider trading; he was asked for proof of address, his social security number and a further security deposit of $198,335, which was 4% of his account balance.
v) On 27 April 2022 MrD'Aloia
transferred $198,330, the shortfall being due to currency fluctuations. Mr
D'Aloia
transferred a further $50 to make good the shortfall but td-finan refused to unblock his account, instead demanding a further US$50,107.52. Mr
D'Aloia
made that payment on 3 May 2022; his account remained blocked, td-finan demanding a further $200,000 as a security deposit.
vi) On 11 May 2022 MrD'Aloia
paid the latest demand and asked that all his trades be closed within three days and all sums in his account be transferred to him. Instead, td-finan told him that he needed to pay a profit tax of 30% of the profits made on his trades, the tax being said to amount to US$211,431.81.
vii) It was not clear from his evidence whether MrD'Aloia
paid that sum, but it seems likely that he did because on 26 May 2022 td-finan told him that his withdrawal request had been successful. Mr
D'Aloia
requested the return of the security deposit.
viii) In fact, MrD'Aloia
received nothing and so contacted td-finan again the following day. He was told he had to pay a US offshore tax at a rate of 3% of the funds withdrawn, which amounted to £109,844.20. He paid the sum on 30 May 2022 and submitted a further withdrawal request. He did not, and has not subsequently, received any of his funds.
Are cryptocurrencies property?
Cryptoassets as property
I consider that cryptoassets such as Bitcoin are property. They meet the four criteria set out in Lord Wilberforce's classic definition of property in National Provincial Bank v Ainsworth [1965] 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 unusual factual feature of the present case is that literally all there is, is software. A physical coin has properties which exist outside the minds of people who use it and in that sense is tangible. Bitcoin is similar. It also has properties which exist outside the minds of individuals, but those properties only exist inside computers as a consequence of the bitcoin software. There is nothing else.
In England and Wales, across the common law world, and in other jurisdictions, there is now a persuasive, clear, and well-reasoned body of case law that concludes that certain digital assets are capable of being objects of personal property rights. Much of the reasoning in that case law relies on analysis that supports or is consistent with our approach that recognises there is a third category of thing to which personal property rights can relate. As such, our conclusion and recommendation that the law of England and Wales either does recognise, or should explicitly recognise, such a category is intended to be confirmatory only. We conclude that the common law has already moved on from the question as to the proprietary status of certain digital assets, and how best to categorise them.
Those things [crypto-tokens] do not exist as rights or claims in themselves (they instead exist independently). They also can be used and enjoyed independently of whether any rights or claims in relation to them are enforceable by action.
The arguments against
"Choses in possession" refers to rights in relation to things that are capable of being possessed (i.e. rights to tables, chairs, and mobile phones etc). Such rights are, of course, also capable of being vindicated through court actions.
The term "choses in action" does not however naturally cover transferable privileges and immunities. This is a historical accident: the common law when the terms arose did not recognise, for example, transferable waste management licences which are the modern creation of legislation. However, all forms of "property" in the patrimonial sense must still be a transferable legally recognised right, whether as (ordinarily) a Hohfeldian claim-right or power, or (exceptionally) a privilege or immunity.
One of the great hindrances to the clear understanding, the incisive statement, and the true solution of legal problems frequently arises from the express or tacit assumption that all legal relations may be reduced to "rights" and "duties," and that these latter categories are therefore adequate for the purposes of analyzing even the most complex legal interests, such as trusts, options, escrows, "future" interests, corporate interests, etc. Even if the difficulty related merely to inadequacy and ambiguity of terminology, its seriousness would nevertheless be worthy of definite recognition and persistent effort toward improvement; for in any closely reasoned problem, whether legal or non-legal, chameleon-hued words are a peril both to clear thought and to lucid expression. As a matter of fact, however, the above mentioned inadequacy and ambiguity of terms unfortunately reflect, all too often, corresponding paucity and confusion as regards actual legal conceptions.
A right is one's affirmative claim against another, and a privilege is one's freedom from the right or claim of another. Similarly, a power is one's affirmative "control" over a given legal relation against another; whereas an immunity is one's freedom from the legal power or "control" of another as regards some legal relation.
If a man died possessing nothing but French or Italian bonds no one would say that he had died without any property. Such bonds are not choses in action in the ordinary sense, and that cannot be the definition of property. The mere fact that you cannot sue for the thing does not make it not "property". I am not going to attempt to define "property", that would be too dangerous. But there can be no doubt that these foreign bonds, both in common language and in the language of lawyers, are "property". Nor can I doubt that if a man had a bond for £10,000 of the British Government it would be "property". The annuities which were granted by the kings of England in former days, charged on the tonnage and poundage dues, were always dealt with as property, and they formed the subject of numerous decisions of the courts. But you would not sue the Crown for them, and they could not even be made the subject of a petition of right, because they were granted out of the voluntary bounty of the Crown. But still they were property and they were assignable.
It would be strange indeed if something which is freely bought and sold and which may clearly be the subject of dishonest dealing which deprives the owner of the benefit it confers were not capable of being stolen. Their Lordships have no hesitation in concluding that export quotas in Hong Kong although not "things in action" are a form of "other intangible property".
It appears to me that these cases indicate the salient features which are likely to be found if there is to be conferred on an exemption from some wider statutory prohibition the status of property. First, there must be a statutory framework conferring an entitlement on one who satisfies certain conditions even though there is some element of discretion exercisable within that framework Second the exemption must be transferable Third the exemption or licence will have value.
The respondents submit that it is not by its nature capable of forming the subject matter of a trust. They say this follows because it is not a free standing and freely marketable asset. Because it is merely an exemption from a levy and must be attached to a producer's holding, it cannot be held by a producer on trust.
I reject those submissions. Quota has commercial value and a legal effect. Merely because there are limitations on how it may be held or conveyed is not a reason for equity to refuse to impose a trust where conscience so requires.
EUAs are entirely electronic. They only exist online in national registries. There is no title document or other physical evidence of their existence. However, each EUA has its own individual number and is easily identifiable. If an EUA is sold, it is simply removed from the registry account of one operator or trader and added to that of another operator or trader.
It is definable, as being the sum total of rights and entitlements conferred on the holder pursuant to the ETS. It is identifiable by third parties; it has a unique reference number. It is capable of assumption by third parties, as under the ETS, an EUA is transferable. It has permanence and stability, since it continues to exist in a registry account until it is transferred out either for submission or sale and is capable of subsisting from year to year.
In my judgment, strictly an EUA is not a chose in action in the narrow sense, as it cannot be claimed or enforced by action. However to the extent that the concept encompasses wider matters of property, then it could be so described.
On the other hand, there is force in Mr Grant's comment that "unenforceable contract" has an "oxymoronic quality". If, Mr Grant asked, rhetorically, a contract is unenforceable from the outset, what right can there be to payment under the contract? In a contractual context, one would normally expect a "right" to connote an ability to mount a legal claim. The maxim "ubi ius ibi remedium" encapsulates the idea that, wherever there is a right, there is a remedy. Turning that round, one may wonder whether there can be a true legal right in the absence of a remedy.
A barrister had more than a mere moral claim to such fees and more than just a hope (or "spes") that he would receive them. If needs be, the barrister could invoke the Bar Council's Withdrawal of Credit Scheme, and a solicitor's failure to pay a fee could potentially amount to professional misconduct. The highly unusual character of a barrister's fee is also manifest in the client's inability to revoke his solicitor's authority to pay counsel and the solicitor's right to reimbursement. The law recognised that, notwithstanding the absence of a contract, payment of an outstanding fee was not to be regarded as voluntary. In practice, a barrister would normally be paid.
i) Choses in action relate to a right only capable of being enforced through proceedings, a Hohfeldian claim-right.
ii) Accordingly, when the courts recognised the existence of property rights in respect of Hohfeldian privileges and immunities they were recognising, to the extent that it had not been done before, a different category of property right. Cases such as Celtic Extraction, Dairywise and Armstrong can be understood in such Hohfeldian terms (and indeed the interest in Armstrong was described in those terms). Up to that point I accept Professor Stevens' analysis.
iii) As Huggins, Nai-Keung and Gwinnutt make clear, however, an expectation not based on a legal right, power, immunity or privilege may also be something to which property rights can attach, provided that expectation was clear and well founded. Professor Stevens' argument cannot, in my view, explain those cases. I do not read those cases as laying down an approach only in respect of the statutory regime under which they arose; they are of general application. I recognise, of course, that Nai-Keung was applied in some of the "Hohfeldian" cases, so plainly analogies can be drawn, but I see the distinction as a significant one, at least in principle. I am therefore cautious about the terminology of a "third category" used in the Final Report, as it combines things that are potentially quite different, as the Final Report itself recognises at 4.26(4). One could simply subdivide the third category, but for the reasons given in the Final Report at 3.36-3.37 in respect of subdividing the category of choses in action that seems to me potentially undesirable. Professor Hohfeld's concern that "chameleon-hued words are a peril both to clear thought and to lucid expression" applies equally here. That is not to say that things such as carbon credits are not property; as Armstrong makes clear, carbon credits in fact are property. It is simply that I would not seek to bracket all assets that are neither choses in action nor choses in possession under a single category of property for all purposes. I note that this is consistent with the approach proposed in the Law Commission's draft Property (Digital Assets etc) Bill.
iv) The starting point is the test in National and Provincial Bank v Ainsworth; that will also, often, be the end point.
But to see the asset as mere data would ignore its larger functionality, just as we would fail to appreciate the full economic or legal significance of a coin by treating it as a mere metal disc. If the law is to recognise digital assets as property for private law purposes, then it would benefit from analysing them as composite things. The asset is more than mere data. It is a set of transactional functionalities. The most important of these is the capacity of the person who holds the private key to effect new transactions which will be recognised as valid by the rules of the system. Analysed in this way, the asset can be viewed as a specific transactional power over unique data entries on the ledger.
Rivalrousness is by definition an absolute concept, and in property law terms relates not to an object per se, but to control of the said object. Possession is rivalrous because A's possession of an object ipso facto means B is not in possession and vice versa. That it is the form of control that is protected rather than the object per se can be seen from the absence of any conception of trespass by merely viewing something. All forms of control are imperfect A may be dispossessed by B but their imperfection has no impact on the rivalrousness of possession as a form of control. When dispossessed, B is in possession of the object and by definition A is not. The Law Commission appears to have fallen into the mistake of concluding that just because possession is an imperfect and rivalrous form of control that other imperfect forms of control (such as via a private key in a decentralised system) can also be regarded as rivalrous.
However immune to suit the creators and operators of the data system may be to legal suit, it seems fairly obvious that a legal system with jurisdiction should conclude of a functioning cryptoasset system that each holder of the cryptoasset defined by a public key has the legal right as against all parties outside the system to use the corresponding private key in order to cause the data system to recognise a new transaction involving the cryptoasset. That right is a species of intangible property.
This is so whether or not the private key remains secret; it is the right to cause the system to operate, not the key, that is the property.
Given Parliament is typically silent across much of tort law and yet courts are required to decide the cases before them, courts proceed, even if sometimes tentatively, to identify and articulate the content of the developing common law. In doing so, they act as interpreters of society and its values. Parliament virtually always acquiesces in the judgments arrived at by courts, our democratically elected representatives accepting that courts have adequate, if not ideal, institutional competence to identify developments in tort law.
Following and tracing
The distinction between following and tracing
These are both exercises in locating assets which are or may be taken to represent an asset belonging to the plaintiffs and to which they assert ownership. The processes of following and tracing are, however, distinct. Following is the process of following the same asset as it moves from hand to hand. Tracing is the process of identifying a new asset as the substitute for the old. Where one asset is exchanged for another, a claimant can elect whether to follow the original asset in the hands of the new owner or to trace its value into the new asset in the hands of the same owner. In practice this choice is often dictated by the circumstances.
i) Paragraph 30 of the Re-Amended Reply asserts a claim over the "substitute(s) or proceeds" of MrD'Aloia's
USDT.
ii) In connection with the legal proprietary claim, paragraph 13 of the Re-Amended Reply provides that: "In so far as the Sixth Defendant has converted the 65,022 USDT into choses in action and/or substitute assets; the Claimant asserts its legal title in those choses in action and/or substitute assets."
Strictly tracing is the process whereby the claimant locates a substituted asset in which he claims a beneficial interest, whereas following is the process whereby the claimant locates the original asset in the hands of a stranger. But both are commonly referred to as tracing, and I have no doubt that Hoffmann LJ [in El Ajou v Dollar Land Holdings plc [1994] 2 All ER 685 at 700] was using tracing in that combined sense as including following in the passage under consideration.
The legal test for tracing
We speak of money at the bank, and of money passing into and out of a bank account. But of course the account holder has no money at the bank. Money paid into a bank account belongs legally and beneficially to the bank and not to the account holder. The bank gives value for it, and it is accordingly not usually possible to make the money itself the subject of an adverse claim. Instead a claimant normally sues the account holder rather than the bank and lays claim to the proceeds of the money in his hands. These consist of the debt or part of the debt due to him from the bank. We speak of tracing money into and out of the account, but there is no money in the account. There is merely a single debt of an amount equal to the final balance standing to the credit of the account holder. No money passes from paying bank to receiving bank or through the clearing system (where the money flows may be in the opposite direction). There is simply a series of debits and credits which are causally and transactionally linked. We also speak of tracing one asset into another, but this too is inaccurate. The original asset still exists in the hands of the new owner, or it may have become untraceable. The claimant claims the new asset because it was acquired in whole or in part with the original asset. What he traces, therefore, is not the physical asset itself but the value inherent in it.
Tracing is thus neither a claim nor a remedy. It is merely the process by which a claimant demonstrates what has happened to his property, identifies its proceeds and the persons who have handled or received them, and justifies his claim that the proceeds can properly be regarded as representing his property. Tracing is also distinct from claiming. It identifies the traceable proceeds of the claimant's property. It enables the claimant to substitute the traceable proceeds for the original asset as the subject matter of his claim. But it does not affect or establish his claim.
Given its nature, there is nothing inherently legal or equitable about the tracing exercise. There is thus no sense in maintaining different rules for tracing at law and in equity. The existence of two has never formed part of the law in the United States: see Scott on Trusts, 4th ed (1989), section 515, at pp 605-609. There is certainly no logical justification for allowing any distinction between them to produce capricious results in cases of mixed substitutions by insisting on the existence of a fiduciary relationship as a precondition for applying equity's tracing rules. The existence of such a relationship may be relevant to the nature of the claim which the plaintiff can maintain, whether personal or proprietary, but that is a different matter. I agree with the passages which my noble and learned friend, Lord Steyn, has cited from Professor Birks's essay "The Necessity of a Unitary Law of Tracing", and with Dr Lionel Smith's exposition in his comprehensive monograph The Law of Tracing (1997): see particularly pp 120-130, 277-279 and 342-347.
This is not, however, the occasion to explore these matters further, for the present is a straightforward case of a trustee who wrongfully misappropriated trust money, mixed it with his own, and used it to pay for an asset for the benefit of his children. Even on the traditional approach, the equitable tracing rules are available to the plaintiffs.
Where a trustee wrongfully uses trust money to provide part of the cost of acquiring an asset, the beneficiary is entitled at his option either to claim a proportionate share of the asset or to enforce a lien upon it to secure his personal claim against the trustee for the amount of the misapplied money. It does not matter whether the trustee mixed the trust money with his own in a single fund before using it to acquire the asset, or made separate payments (whether simultaneously or sequentially) out of the differently owned funds to acquire a single asset.
Innocent contributors, however, must be treated equally inter se. Where the beneficiary's claim is in competition with the claims of other innocent contributors, there is no basis upon which any of the claims can be subordinated to any of the others. Where the fund is deficient, the beneficiary is not entitled to enforce a lien for his contributions; all must share rateably in the fund.
Can the Claimant trace at common law through a mixed fund?
The law in this area is settled. Tracing through mixed funds (included those created by international banking transfers of the type present in this case) is impermissible at common law. The correct approach is that set out in Agip (Africa) Limited v Jackson [1991] Ch 547.
In truth tracing is a process of identifying assets: it belongs to the realm of evidence. It tells us nothing about legal or equitable rights to the assets traced.
I regard this explanation as correct. It is consistent with orthodox principle. It clarifies the correct approach to so-called tracing claims. It explains what tracing is about without providing answers to controversies about legal or equitable rights to assets so traced.
An examination of the history of this idea [separate rules of tracing in law and equity] shows that it must be regarded not only as illogical, but also as unsupported by authority. All of the cases commonly cited in support of it are not concerned to impose prerequisites to the exercise of tracing, but rather to the ability of a plaintiff to assert equitable proprietary rights in the traceable proceeds of the plaintiff's value.
These objections to the traditional view are now of subsidiary importance, however, following Foskett v McKeown, where Lord Steyn and Lord Millett both said that there is now only one set of tracing rules in English law, applicable to common law and equitable claims alike. Their comments on this point were obiter, but it seems likely that they will be followed in future cases. Developing the law in this way would certainly be desirable in principle. In the past, the courts have discovered fiduciary relationships between the parties to litigation, not because their relationship was of the sort that would normally attract the imposition of fiduciary duties, but because the courts have wished to let the claimant take advantage of the "equitable" tracing rules. Instrumental findings of this sort debase the currency of the fiduciary concept.
Lord Millett explained that tracing is neither a claim nor a remedy. Rather it is the process by which the law treats one asset as the substitute for another. The equitable tracing rules have traditionally been understood to be less restrictive than the common law tracing rules (e.g. in permitting tracing into a mixed fund) albeit that, not least because tracing is merely a process, drawing that distinction between common law and equitable tracing is hard to defend in principle (as was recognised in obiter dicta of Lord Millett and Lord Steyn in Foskett, pp 113, 128129).
But, however unsound the historical basis for the difference between common law and equitable tracing may have been exposed to be, it does not follow that we now have fused tracing rules. Too much water has since passed under the bridge including, relatively recently, the Court of Appeal in Agip (Africa) Ltd v Jackson and the House of Lords in Lipkin Gorman v Karpnale Ltd for one to be able to assert that the most accurate interpretation of the law is that there is no difference between common law and equitable tracing.
Was it possible to follow the USDT into the 82e6 wallet?
The common law has always been able to follow a physical asset from one recipient to another. Its ability to follow an asset in the same hands into a changed form was established in Taylor v. Plumer 3 M&S 562. In following the plaintiff's money into an asset purchased exclusively with it, no distinction is drawn between a chose in action such as the debt of a bank to its customer and any other asset: In re Diplock [1948] Ch 466, 519. But it can only follow a physical asset, such as a cheque or its proceeds, from one person to another. It can follow money but not a chose in action. Money can be followed at common law into and out of a bank account and into the hands of a subsequent transferee, provided that it does not cease to be identifiable by being mixed with other money in the bank account derived from some other source: Banque Belge pour l'Etranger v Hambrouck [1921] 1 KB 321.
Q. Just to be absolutely clear, once the funds are mixed in the 200,000 so in this example, 200,000 is what you are following on to, but your original sum was 99,987, you are saying that 99,987 are captured within the 200,000 USDT.
A. Correct.
Q. You are not in a position to distinguish within the 200,000 where the 99-
A. No.
Q. - are located.
A. No. The only people who can do that, for example, is Tether themselves.
Methods of tracing
In principle, there are three techniques which could be applied in order to determine how the shortfall in the notional blended fund should be borne by the ultimate recipients, all of whom are equally blameless for the mismanagement of the Dove Trust which has led to the shortfall. The first technique is to apply the rule in Devaynes v Noble; Clayton's Case (1816) 1 Mer 572 whereby payments out of an account are attributed to payments into the account in the order in which the payments in were made, or in other words on a "first in, first out" basis. The second technique is to divide the remaining money between the recipients in proportion to the amounts which they are owed. This solution, where distribution is made on a rateable, or pari passu, basis, has frequently been adopted in recent years where the claimants on the fund are all the victims of a common misfortune. It also has the great advantage of being simple and inexpensive to implement. The third technique, which has been considered in a number of English authorities but never yet applied in practice in this jurisdiction, is to apply the "rolling charge" or "North American" methodology, which combines the pari passu approach with the lowest intermediate balance principle. Its effect is that the position has to be analysed whenever a payment is made out of the fund, and no contributor can be paid more than his rateable share of the lowest intermediate balance while his money remained in the fund.
The development of increasingly sophisticated and elaborate methods of money laundering, often involving a web of credits and debits between intermediaries, makes it particularly important that a court should not allow a camouflage of interconnected transactions to obscure its vision of their true overall purpose and effect. If the court is satisfied that the various steps are part of a co-ordinated scheme, it should not matter that, either as a deliberate part of the choreography or possibly because of the incidents of the banking system, a debit appears in the bank account of an intermediary before a reciprocal credit entry. The Board agrees with Sir Richard Scott VC's observation in Foskett v McKeown [1998] Ch 265, 283 that the availability of equitable remedies ought to depend on the substance of the transaction in question and not on the strict order in which associated events occur.
I accept Mr Salter's submission that the intention of Mr Gorecia would not be enough in itself to make the Intertrade payment substituted property for the purposes of the tracing rules. However, intention can be relevant as a factor in the basket of factors from which the judge may draw an inference that it is in fact a substitution.
i) The Mitmark Report was part of an investigation, carried out by Mr Moore, to identify those behind td-finan and to determine where MrD'Aloia's
funds appeared to have gone. The Arrowsgate Report was a report prepared for trial in support of claims Mr
D'Aloia
wished to advance against the defendants, including Bitkub, and purported to trace exact sums to individual parties.
ii) While at Mitmark, Mr Moore principally used blockchain analysis software called TRM Labs. However, he was not permitted to use the TRM Labs' output in court for reasons connected to the licensing agreement, so he also used other systems including Crystal Blockchain, Etherscan and Ethplorer; at Arrowsgate he only used Crystal Blockchain. Although both TRM Labs and Crystal Blockchain are aimed at the same end, they obviously work in different ways because when it was put to Mr Moore that the amount he claimed to trace to the 82e6 wallet had fallen significantly between the Mitmark and Arrowsgate Reports, he identified the initial use of TRM Labs as a key factor behind the need to change his conclusions.
iii) The Mitmark Report was not intended to be (and was not) compliant with CPR 35; the Arrowsgate Report was intended to be CPR compliant.
So as I have stated to you, I'm not a forensic accountant and my understanding of the FIFO methodology is you know, in terms, accountancy terms, is incorrect. My I'm understanding of the FIFO (inaudible) when I wrote the report is the first in were the client's funds and the first out of the client's funds is what I have not put in the report and I have described the FIFO side of things. I have then, before and after, in section 11 of my report, laid out my methodology, the examples that you have just gone through.
3. The Claimant relies on the evidence of Mr Robert Moore who used the industry recognised methodology of First In First Out (FIFO). The FIFO methodology makes certain that Mr Robert Moore maintained visibility of the Claimant's funds throughout the tracing exercise. The methods of movement of the Claimant's stolen USDT was via a criminal network of laundering, using addresses to attempt to obfuscate the origins and destinations.
4. Mr Robert Moore has already previously addressed the issue of whether any pre-existing balances in the intermediate public addresses or intervening transfers of USDT into or out of the intermediate public address prior to the alleged transfer out of the Claimant's USDT. [sic] Irrespective of the starting/finishing balances of the intermediary addresses, they are all directly linked to stolen funds from the Claimant.
The challenge of unmasking individuals behind anonymous cryptocurrency transactions, especially when mixing services are involved, is a critical aspect of financial investigations related to organised crime groups (OCGs). The First-In-First-Out (FIFO) methodology plays a pivotal role in this process, particularly in identifying 'last hops' where cryptocurrencies are converted to cash.
Legal and Forensic Strength: FIFO is not only an established accounting principle but also holds forensic value in financial investigations. Courts and regulatory bodies often recognise FIFO-based findings due to its logical and methodical approach.
The FIFO methodology is crucial in tracing cryptocurrency transactions through mixing services to last hops, where the conversion to cash or other assets occurs. This approach not only simplifies the complex tracing process but also provides a legally and forensically sound basis for identifying individuals behind anonymous crypto addresses. As the digital financial landscape evolves, the application of FIFO in conjunction with other investigative methods remains an essential tool in the fight against cryptocurrency-based money laundering by OCGs.
But when Anderson mentioned this problem in January to David Fox, a professor of law at Edinburgh Law School, Fox pointed out that British law already provides a solution: An 1816 precedent known as Clayton's Case, which dealt with who should be paid back from the remaining funds of a bankrupted financial firm. The answer, according to the presiding judge, was that whoever put their money in first should take it out first. The resulting first-in-first-outor FIFOrule became the standard way under British law to identify whose money is whose in mixed-up assets, whether to resolve debts or reclaim stolen property.
So Anderson and his team of researchers started to consider what that rule would look like applied to Bitcoin's blockchain. Mix up a dirty coin and nine clean ones in a laundry address or exchange, and all 10 coins that came out would be defined by the same order they went ineven if that order was just a millisecond's difference in which transaction was written to the blockchain's record first. If the first bitcoin to go into the mix were stolen, the first to come out of the mix would be considered that same coin, and thus still stolen. "It allows us to see through the great majority of the algorithms people use to try and mix and obscure the origins of bitcoin transactions," says Anderson.
And doesn't that essentially make bitcoin laundries into reverse lottery systems, where an arbitrarily chosen person ends up holding a stolen coin that might be claimed back by a theft victim? Anderson argues that the principle has worked for centuries as part of British law. And if innocent users end up having their coins claimed as stolen property, they'll quickly learn to stay away from Bitcoin laundries and shady exchanges. "One unlucky person is going to end up holding the stolen bitcoin," Anderson says. "If you're not the person who went in with the stolen bitcoin in the first place, you're never going to play that game."
The legal basis for FIFO, particularly in the US, also isn't quite as simple as the Cambridge researchers describe, says University of Texas law professor Andrew Kull. In some cases, judges instead use pro rata tracing the haircut approach in which all the mixed accounts hold a proportional amount of the tainted assets or a technique called "Jessel's Bag," which takes money from guilty parties before innocent ones.
And how ownership tracing works in practice can depend on myriad factors like the statutes of a particular state, the decisions of a judge, and whether the asset is defined as money or as a commodity, which is hardly a simple question in the case of Bitcoin. FIFO is "just a convention. It doesn't have any inner logic to it at all," Kull points out. "It's arbitrary, but it's as good as anything else between two people who are innocent."
Arbitrary as it may be, FIFO does have hundreds of years of legal history behind it, the Cambridge researchers argue. And given how powerful it may be as a mechanism for sorting out mixed-up bitcoins, it could be only a matter of time until someone applies that precedent to try to claim their stolen stash.
The next transaction out is identified as the highly probable route the misappropriated funds take. Once I have identified an inbound payment, such as that in green, I have assessed that the following outbound transaction I see, in chronological order, is that cryptocurrency which was paid in.
Quite often, there will be a delay by the mixing service before funds are sent to the following address in the chain. Funds will then stack up, from other unknown sources, before the next outbound transaction. In this scenario, the next outbound transaction that is the same or more is followed. Examples of these follows will be shown on the coming pages in this report. These delays maybe by design when run automatically (pre scripted), or due to the mixing addresses being controlled manually.
Upon meetings between Mr Moore and Mr Pinto, before drafting the Arrowsgate Report, the FIFO methodology was refined, hence the difference between the Mitmark Report and the Arrowsgate Report in the amount of USDT followed to the Bitkub wallet ending 82e6.
After the exchange of the Expert Reports in December 2023, there was additional correspondence and meetings between the Experts, whereby the application of the FIFO methodology was further refined.
8. Mr Moore has explained on several occasions that a "strict FIFO" approach is not possible in this case. He usually traces the funds by applying the following procedure, as demonstrated in the Joint Rubin/Moore statement:
i. He does not take account of opening balances.
ii. He does not take account of intermediate incoming transactions.
iii. He ignores outgoing transactions of 1,000 USDT or less.
iv. He looks for the largest outgoing transaction next in time rather than the next in time transaction.
9. This is the procedure taught by Crystal in the use of its software. There is, we understand, no commercial tracing software that applies a strict FIFO approach. Mr Rubin [Binance's expert in these proceedings] did his work manually and he was able to complete the task as the wallets concerned had few transactions. In most cases involving fraudulent cryptocurrency transactions, as in the case of Bitkub, the wallets have had many months of transactions, and in some cases years, and the transactions can run to thousands. It is not feasible, in such circumstances, to obtain or work from opening balances and intermediate incoming and outgoing transactions.
i) The 1dDA wallet is treated as having a zero balance prior to Hop 1. I note at the outset that this is a somewhat odd assumption to my mind, in that the bulk of the funds in that wallet seem to have come from MrD'Aloia's
Coinbase account, or at least from the same Coinbase counterparty address as was used to transfer the USDT 999,987.1. The fact that other funds in that wallet came from Mr
D'Aloia
seemed to be the rationale advanced for Mr Moore's approach in Giambrone & Partners' 16 November 2023 letter, albeit if that was the case they were wrong, in that some funds come from other sources. In any event, whatever the rationale was, on 10 January 2022 the 1dDA wallet received USDT 999,987.1 from Mr
D'Aloia
which, for the purposes of Mr Moore's methodology, became the wallet balance.
ii) You ignore incoming transfers (and again, I note that some but not all of these seem to have come from the Coinbase account associated with MrD'Aloia).
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iii) You also ignore outgoing transfers of less than USDT 1,000 (of which there were none).
iv) The next stage is unclear because, as I have said, there are different, contradictory iterations of it. None of them work:
a) The largest outgoing transaction next in time is the USDT 510,000 on 22 January 2022. Giambrone & Partners' letter (and so in turn Mr Moore's evidence in cross-examination) is not clear about what happens to the remaining funds still sitting in the 1dDA wallet.
b) The closest single match to the amounts lost by MrD'Aloia
is also USDT 510,000. A combination of the three payments on 21 and 22 January 2022 (totalling USDT 920,000) is significantly closer and the process of combining payments out is consistent with the Arrowsgate Report at 22.5, which states that "The next 5 transactions out were followed to get closely [sic] as possible to the total combined amount of these serials." It is not wholly clear whether Mr Moore's reference to "these serials" is to just the USDT 999,987.1 or to that amount and the further payments of USDT 100,714.46 and USDT 99,945.03 (a total of USDT 1,200,646.49), but nor does it matter. The next four transactions out total more than the USDT 999,987.1 paid in and the next five total 1,258,121. The USDT 326,868 that was traced was the sixth payment out so should not have been traced, at least for these purposes, in any event.
c) No outbound transaction is the same as or more than MrD'Aloia's
payment in (and very obviously, USDT 326,868 is not the same as or more than USDT 999,987.1).
Unjust Enrichment
i) Has the defendant been benefitted, in the sense of being enriched?
ii) Was the enrichment at the expense of the claimant?
iii) Was the retention of the enrichment unjust?
iv) Are there any defences?
41. Lord Steyn's four questions are no more than broad headings for ease of exposition. They are intended to ensure a structured approach to the analysis of unjust enrichment, by identifying the essential elements in broad terms. If they are not separately considered and answered, there is a risk that courts will resort to an unstructured approach driven by perceptions of fairness, with consequent uncertainty and unpredictability. At the same time, the questions are not themselves legal tests, but are signposts towards areas of inquiry involving a number of distinct legal requirements. In particular, the words "at the expense of" do not express a legal test; and a test cannot be derived by exegesis of those words, as if they were the words of a statute.
42 The structured approach provided by the four questions does not, therefore, dispense with the necessity for a careful legal analysis of individual cases. In carrying out that analysis, it is important to have at the forefront of one's mind the purpose of the law of unjust enrichment. As was recognised in [Menelaou v Bank of Cyprus [2015] UKSC 66] (para 23), it is designed to correct normatively defective transfers of value, usually by restoring the parties to their pre-transfer positions. It reflects an Aristotelian conception of justice as the restoration of a balance or equilibrium which has been disrupted. That is why restitution is usually the appropriate remedy.
Enrichment
46. Situations in which the defendant has received a benefit from the claimant, and the claimant has incurred a loss through the provision of that benefit, usually arise where the parties have dealt directly with one another, or with one another's property. Common examples are the gratuitous payment of money, or provision of goods or services, by the claimant to the defendant, where there was no intention of donation. In such a situation, if the enrichment of the defendant is unjust if, in other words, the transfer of value is defective in a sense recognised by the law of unjust enrichment then the claimant is prima facie entitled to have the enrichment reversed.
47. There are, however, situations in which the parties have not dealt directly with one another, or with one another's property, but in which the defendant has nevertheless received a benefit from the claimant, and the claimant has incurred a loss through the provision of that benefit. These are generally situations in which the difference from the direct provision of a benefit by the claimant to the defendant is more apparent than real.
48. One such situation is where the agent of one of the parties is interposed between them. In that situation, the agent is the proxy of his principal, by virtue of the law of agency. The series of transactions between the claimant and the agent, and between the agent and the defendant, is therefore legally equivalent to a transaction directly between the claimant and the defendant. Similarly, where the right to restitution is assigned, as in Equuscorp Pty Ltd v Haxton [2012] HCA 7; 246 CLR 498; 86 AJLR 296, the claimant stands in the shoes of the assignor, and is therefore treated as if he had been a party to the relevant transaction, and the defendant's enrichment had been directly at his expense. Another situation is where, as in [Relfo v Varsani], an intervening transaction is found to be a sham (para 121). Since the sham is created precisely in order to conceal the connection between the claimant and the defendant, it is disregarded when deciding whether the latter was enriched at the former's expense. So, in Relfo, Gloster and Floyd LJJ described the arrangements in question as being "equivalent to a direct payment" (paras 103 and 115). There have also been cases, discussed below, in which a set of co-ordinated transactions has been treated as forming a single scheme or transaction for the purpose of the "at the expense of" inquiry, on the basis that to consider each individual transaction separately would be unrealistic. There are also situations where the defendant receives property from a third party into which the claimant can trace an interest. Since the property is, in law, the equivalent of the claimant's property, the defendant is therefore treated as if he had received the claimant's property.
The intermediate arrangements were therefore an elaborate faηade to conceal what was in truth intended and arranged to be a payment for the benefit of Bhimji Varsani. There was however more than mere intention involved. The structure put in place by Mr Gorecia made it inevitable that the payment would be effected to Bhimji Varsani. There was no other purpose in the interim arrangements other than to conceal the true nature of the transaction. Mr Gorecia and the Varsanis were closely connected. There was no question of any intervening act of free will. There was no question of any of the intervening entities doing anything other than the bidding of Mr Gorecia.
i) Mr Moore says that his approach better reflects the practices of organised crime gangs, but as he acknowledges that those practices are unknown and unknowable.
ii) As I have noted, because Mr Moore's approach ignores "intermediate" incoming transfers, his answer depends on the party for whom he is acting. In this case, between Hop 6 and Hop 7 he ignored a receipt of USDT 500,000 and concluded that MrD'Aloia's
funds were captured in Hop 7. If he had been acting for the victim seeking to recover the USDT 500,000, he would have ignored Mr
D'Aloia's
funds (as part of the opening balance) and concluded that Hop 7 comprised somebody else's money. At the risk of stating the obvious, the modus operandi of organised crime groups is not, in reality, affected by the party for whom Mr Moore is acting.
iii) As I have also noted, step (iv) of Mr Moore's methodology has been framed in multiple different ways and produces multiple different outcomes.
iv) Mr Moore's methodology is said to be based on techniques taught by Crystal Blockchain and TRM Labs. For the reasons I have given, it is hard to see how it can be both, given that they gave different results.
Unjust factor
(iii) the enrichment was unjust as the USDT and USDC/Identifiable Cryptocurrency was misappropriated by the Persons Unknown without the Claimant's knowledge or consent; and
(iv) the Defendants' enrichment was at the expense of the Claimant who has been deprived of possession and enjoyment of his USDT and USDC, and at the expense of his legal title, making the enrichment unjust.
The Sixth Defendant was enriched as it received legal title to the 65,022 USDT at the expense of the Claimant's lost title, making the enrichment unjust in all the circumstances.
i) The payment was unauthorised, relying on High Commissioner for Pakistan v Prince Muffakham Jah [2019] EWHC 2551 (Ch) at [271].
ii) It is unjust for the recipient to retain money where the payer would not have paid had they known the true position, relying on Kleinwort Benson Ltd v Lincoln CC [1999] 2 AC 349 at 399C-D.
Defences
Good faith change of position
I do not think that it is desirable to attempt to define the limits of good faith; it is a broad concept, the definition of which, insofar as it is capable of definition at all, will have to be worked out through the cases. In my view it is capable of embracing a failure to act in a commercially acceptable way and sharp practice of a kind that falls short of outright dishonesty as well as dishonesty itself. The factors which will determine whether it is inequitable to allow the claimant to obtain restitution in a case of mistaken payment will vary from case to case, but where the payee has voluntarily parted with the money much is likely to depend on the circumstances in which he did so and the extent of his knowledge about how the payment came to be made. Where he knows that the payment he has received was made by mistake, the position is quite straightforward: he must return it. This applies as much to a banker who receives a payment for the account of his customer as to any other person: see, for example, the comment of Lord Mersey in Kerrison v Glyn, Mills, Currie & Co (1912) 81 LJKB 465 (HL) at page 472. Greater difficulty may arise, however, in cases where the payee has grounds for believing that the payment may have been made by mistake, but cannot be sure. In such cases good faith may well dictate that an enquiry be made of the payer. The nature and extent of the enquiry called for will, of course, depend on the circumstances of the case, but I do not think that a person who has, or thinks he has, good reason to believe that the payment was made by mistake will often be found to have acted in good faith if he pays the money away without first making enquiries of the person from whom he received it.
The hypothesis is that the claimant has established a proprietary interest in the asset, and the question is whether the defendant has established such absence of notice as entitles him to assume that there are no adverse interests. The mere possibility that such interests exist cannot be enough to warrant inquiries. There must be something which the defendant actually knows (or would actually know if he had a reasonable appreciation of the meaning of the information in his hands) which calls for inquiry. The rule is that the defendant in this position cannot say that there might well have been an honest explanation, if he has not made the inquiries suggested by the facts at his disposal with a view to ascertaining whether there really is. I would eschew words like "possible", which set the bar too low, or "probable" which suggest something that would justify a forensic finding of fact. If even without inquiry or explanation the transaction appears to be a proper one, then there is no justification for requiring the defendant to make inquiries. He is without notice. But if there are features of the transaction such that if left unexplained they are indicative of wrongdoing, then an explanation must be sought before it can be assumed that there is none.
The Defendants do not benefit from the common law defence of change of position as (a) cryptoassets do not benefit from this defence and/or (b) the Defendants unconscionably received the USDT and/or USDC and/or the respective positions [sic] of the Identifiable Cryptocurrency, including the Exchange Defendants for the reason that they did not act in a commercially acceptable way.
it was imperative for [Bitkub] to seek an explanation as to the deposit of the 65,022 USDT, including by obtaining Know Your Client ("KYC") documentation from [Ms Hlangpan]. It did not seek these [sic] explanation and, as such, it was obvious by the absence of these explanation [sic] and documents that there was a possibility of impropriety and/or [sic] of the Claimant's interest.
i) As I noted when addressing the question of pleading more generally, Bitkub asserts positively in the Re-Amended Defence that it "was at all material times wholly ignorant of any facts alleged to affect its conscience" (Re-Amended Defence paragraph 7.6) "acted in good faith at all material times" (paragraph 8.6) and "relies on the defence of ministerial receipt" (paragraph 8.7).
ii) As set out above, there is the separate allegation in the Re-Amended Reply as to Bitkub's failure to make enquiries. The pleaded case relates to USDT 65,022, which was, at that time, the amount that Mr Moore had traced from MrD'Aloia
into the 82e6 wallet; for whatever reason that amount was not amended when Mr Moore's evidence changed. It seems to me, however, that the proper figure is the amount received by Bitkub USDT 400,000. Bitkub had no way of knowing what part of that might belong to Mr
D'Aloia;
indeed, it had no way of knowing about Mr
D'Aloia
individually at all.
The factual circumstances in which money might be paid away after a defendant has actual notice of a restitutionary claim fall across a wide spectrum. On the one hand a bank might acquire actual knowledge a matter of seconds before a wrongdoer pays away money and on the other actual knowledge might be acquired months before money is paid away.
i) The burden of proof in establishing the defence is on Bitkub. While Bitkub accepted that in principle, in its written closing, Bitkub essentially attempted to argue that the Claimant needed to show an absence of good faith either (a) to establish his constructive trust claims or (b) to show Bitkub was unable to rely on the change of position defence for reasons of commercially unacceptable conduct; he had failed to do so. To my mind that is wrong. The unjust enrichment claim in issue here does not require any showing of bad faith by Bitkub. If, as part of its defence to that claim, Bitkub wanted to show that its account monitoring practices were unusually stringent and so generated false positives, such that it was legitimate to ignore at least some of them, it needed to call evidence to show what was required and/or typical for a cryptoexchange in the Thai market. It did not do so.
ii) The relevant question is what a party knew, not how they came to know it. In Niru Battery it was stressed: "I do not think that a person who has, or thinks he has, good reason to believe that the payment was made by mistake will often be found to have acted in good faith if he pays the money away without first making enquiries of the person from whom he received it." Similarly, in Papadimitriou Lord Sumption referred to "a reasonable appreciation of the meaning of the information in his hands". The defendant may have come upon the information through pure chance provided the source was reliable they would have, or would think they had, good reason to believe it. Here, the source was absolutely reliable; it was Bitkub's own systems telling Bitkub that rules put in place to address money laundering concerns were being repeatedly breached. Once it became aware of that Bitkub could not simply ignore suspicious account activity that it thought was linked to a risk of money laundering even if it had discovered that activity through unusual diligence.
iii) Nor do I accept that I am unable to form a view on whether, objectively, Ms Hlangpan's account use was suspicious without expert evidence. First, in my view it was unusual and called for explanation that someone with an income of less than THB 30,000 per month in a single day had transaction volumes in excess of THB 13 million. It would have taken her around 36 years to earn that amount. Secondly, Miss Vijitpinyo's witness statement made clear that Bitkub was concerned to address the risk of money laundering, and I have found that the withdrawal limits that Ms Hlangpan breached were part of that AML policy, such that any breaches of the limits represented an AML concern from Bitkub's perspective.
42-072. In particular, "Inferences of knowledge are of particular importance where at trial the defendant elects to call no evidence (...). Indeed the court may infer actual knowledge if the claimant establishes the circumstances set out in types (4) or (5) of the Baden classification and the defendant does not give evidence or offer any explanation of his conduct. Thus proof of knowledge within types (4) or (5) of the Baden classification may shift the evidential burden to the defendant, and so, if that burden is not discharged, suffice to establish actual knowledge." [emphasis added], and see Eagle Trust Plc v S.B.C. Securities Ltd [1993] 1 W.L.R. 484 at 493.
Ministerial receipt
i) Prior to the receipt of the USDT 400,000 said to contain MrD'Aloia's
traced funds, the balance of Ms Hlangpan's account was THB 612,442.35.
ii) Following conversion of the USDT 400,000 to Thai baht, the balance of the account was THB 13,684,438.26.
iii) Over the course of 22 February 2022 Ms Hlangpan withdrew THB 13 million.
iv) On 24 February 2022 there was a further deposit of USDT 300,000, which again was converted to Thai baht taking the balance of the account to THB 10,544,095.28.
v) Almost immediately thereafter, Ms Hlangpan withdrew THB 9.7 million in a series of transactions.
The true rule is that where the plaintiff has paid money under (for example) a mistake to the agent of a third party, he may sue the principal whether or not the agent has accounted to him, for in contemplation of law the payment is made to the principal and not to his agent. If the agent still retains the money, however, the plaintiff may elect to sue either the principal or the agent, and the agent remains liable if he pays the money over to his principal after notice of the claim. If he wishes to protect himself, he should interplead. But once the agent has paid the money to his principal or to his order without notice of the claim, the plaintiff must sue the principal.
In my view, [ministerial receipt] is clearly established even in the period after 22 February 2010, when Mr Aplin first became aware that Martin was mistaken about the account into which Mr Saunders had arranged for the hotel receipts to be paid. At that stage, Mr Aplin still had no idea that Mr Saunders was committing a fraud against the Claimants, and NatWest had no good grounds to refuse to honour its contractual obligations to SEWL to pay out the money in the No. 1 and No. 2 accounts according to SEWL's instructions. In such circumstances, it would be unjust to impose any liability on NatWest in relation to its receipt of sums which it was then obliged to pay out again on SEWL's instructions.
Counter-restitution impossible
A claimant who seeks restitution of an unjust enrichment must make counter-restitution of benefits received from the defendant in exchange. If counter-restitution is impossible then the claim is barred.
Equitable Proprietary Claim
i) Applying Westdeutsche Landesbank Girozentrale v Islington Borough Council, where property is obtained by fraud equity imposes a constructive trust on the fraudulent recipient, such that the fraudulent recipient holds the legal title on constructive trust. Here, the alleged fraud was perpetrated by the First Defendants, so the First Defendants would be the constructive trustees and the trust arose if at all on the dates when MrD'Aloia
paid money over to the First Defendants.
ii) Applying Angove's Pty Ltd v Bailey [2016] UKSC 47, where the intention that led to the transfer was vitiated, a constructive trust could arise. Mr Bergin submitted that here the vitiating factor was that MrD'Aloia
transferred the assets as a result of a fundamental mistake he thought he was dealing with a reputable US financial institution when in fact he was dealing with a fraudster. The constructive trust must also be against the First Defendants and presumably again arose at the point of transfer of the assets.
iii) Commencement of proceedings rescinded the contract with td-finan and gave rise to a retrospective imposition of a constructive trust, again presumably as against the First Defendants. The Claimant's position is, I think, that the trust takes effect as if it had been back-dated to the point of transfer on the basis of Shalson v Russo at [127].
iv) Bitkub's failure to act in a commercially reasonable manner in failing to implement adequate KYC and anti-money laundering and failing to monitor Ms Hlangpan's account and to freeze it in light of the suspicious transaction volumes gives rise to a constructive trust. The constructive trustee here is said to be Bitkub; the trust cannot have arisen at any time before Bitkub received the USDT 400,000 on 21 February 2022.
The Westdeutsche trust
(i) Equity operates on the conscience of the owner of the legal interest. In the case of a trust, the conscience of the legal owner requires him to carry out the purposes for which the property was vested in him (express or implied trust) or which the law imposes on him by reason of his unconscionable conduct (constructive trust).
(ii) Since the equitable jurisdiction to enforce trusts depends upon the conscience of the holder of the legal interest being affected, he cannot be a trustee of the property if and so long as he is ignorant of the facts alleged to affect his conscience, i.e. until he is aware that he is intended to hold the property for the benefit of others in the case of an express or implied trust, or, in the case of a constructive trust, of the factors which are alleged to affect his conscience.
(iii) In order to establish a trust there must be identifiable trust property. The only apparent exception to this rule is a constructive trust imposed on a person who dishonestly assists in a breach of trust who may come under fiduciary duties even if he does not receive identifiable trust property.
(iv) Once a trust is established, as from the date of its establishment the beneficiary has, in equity, a proprietary interest in the trust property, which proprietary interest will be enforceable in equity against any subsequent holder of the property (whether the original property or substituted property into which it can be traced) other than a purchaser for value of the legal interest without notice.
The bank contended that where, under a pre-existing trust, B is entitled to an equitable interest in trust property, if the trust property comes into the hands of a third party, X (not being a purchaser for value of the legal interest without notice), B is entitled to enforce his equitable interest against the property in the hands of X because X is a trustee for B. In my view the third party, X, is not necessarily a trustee for B: B's equitable right is enforceable against the property in just the same way as any other specifically enforceable equitable right can be enforced against a third party. Even if the third party, X, is not aware that what he has received is trust property B is entitled to assert his title in that property. If X has the necessary degree of knowledge, X may himself become a constructive trustee for B on the basis of knowing receipt. But unless he has the requisite degree of knowledge he is not personally liable to account as trustee: In re Diplock; Diplock v. Wintle [1948] Ch. 465, 478; In re Montagu's Settlement Trusts [1987] Ch. 264.
Although it is difficult to find clear authority for the proposition, when property is obtained by fraud equity imposes a constructive trust on the fraudulent recipient: the property is recoverable and traceable in equity. Thus, an infant who has obtained property by fraud is bound in equity to restore it: Stocks v Wilson [1913] 2 KB 235, 244; R Leslie Ltd v Sheill [1914] 3 KB 607.
The observation of Lord Browne-Wilkinson in the Westdeutsche case only assists the plaintiffs if it is to be treated as a general statement of the law applicable to all cases of fraud. In my view it would be wrong so to treat it. It was a general statement of certain underlying principles instanced by examples two of which concerned transactions which are void, not voidable, and the third of which comes from the field of secret trusts where "fraud" is referred to in a special sense. I do not think that Lord Browne-Wilkinson can be taken to have been laying down a principle applicable to all cases of fraud when he did not deal with the reasoning in the other cases which I have mentioned.
Misrepresentation makes a transaction voidable not void. It gives the representee the right to elect whether to rescind or affirm the transaction. The representor cannot anticipate his decision. Unless and until the representee elects to rescind the representor remains fully bound. The defendant's misrepresentations merely gave the society the right to elect to withdraw from the transaction on discovering the truth. Since its instructions to the defendant were revocable in any case, this did not materially alter the position so far as he was concerned, though it may have strengthened the society's position in relation to the purchasers.
The right to rescind for misrepresentation is an equity. Until it is exercised the beneficial interest in any property transferred in reliance on the representation remains vested in the transferee.
45. The submission, as I understand it, is that this is not simply a case of a valid contract being induced by fraud; but that the fraud so infected the whole transaction that it had no legal effect at all. The "contracts" were in reality no more than devices to extract money by fraud; in Mr Dutton's words -
The "agreements" were fictitious contracts. They were as the judge found merely part of an elaborate charade (or mechanism) by which the loser was persuaded to part with his money."
The position, accordingly, is said to be "akin to theft". Where property is stolen, no beneficial interest passes to the thief. Mr Dutton submits that the same applies where money is extracted by fraud, otherwise than under a legally enforceable contract. He relies on Westdeutsche Bank v. Islington LBC [1996] AC 669 at 705C-D, 715H-716D (per Lord Browne-Wilkinson).
47. In this case, the contract has been held to be the instrument of fraud, and nothing else. The elaborate documentation was, in the words of the judge, "no more than a vehicle for obtaining money by false pretences" (para 119). Furthermore, the legal interest in the money passed to the escrow agent, but the beneficial interest remained with Toro, unless and until it passed to Tidal under the contract. In my view, the court is entitled to disregard the apparent effect of that fraudulent contract, and hold that the beneficial interest remained throughout with Toro.
48. In such a case, it is meaningless to impose a requirement for the fraudster to be notified of "rescission". From the fraudster's point of view there is nothing to rescind; for practical purposes, he has parted with nothing of value and incurred no obligations; the victim is left with some documents which, from the outset, were known and intended by the other party to be worthless. The "election" to which Potter LJ [in Twinsectra v Yardley] referred is not a real option. Although the case does not fit neatly into Potter LJ's binary classification, he was not dealing with these facts. Subject to any direct authority, I see no reason why it should not be regarded as a simple case of "property obtained by fraud", in Lord Browne-Wilkinson's terms.
Once one recognises that knowing receipt is an equitable proprietary wrong that depends on the claimant having a continuing equitable proprietary interest in the asset received, or retained, by the defendant, it becomes clear that the personal knowing receipt claim has the same essential proprietary basis as the equitable proprietary claim to the asset. So, if the defendant still retains the asset, in which the claimant has a continuing equitable proprietary interest, the claimant is entitled to an equitable proprietary remedy for the return of that asset. But if the defendant no longer retains the asset, the claimant still has a personal claim for knowing receipt provided the claimant had a continuing equitable proprietary interest, and the defendant had the requisite knowledge, at the time of the defendant's receipt or retention.
Knowing receipt is sometimes also called a form of ancillary liability, but it is not in my view ancillary to the liability of the trustee. Rather it is ancillary to the proprietary claim which will generally enable the continuing equitable beneficial owner to recover the trust property where it has passed into the hands of someone other than the trustee, without the equitable interest having been overreached or overridden. The personal remedy in knowing receipt comes to the rescue if the transferee then transfers, dissipates or destroys the property after learning of the breach of trust, so as to prevent the pursuit of a proprietary claim. In such a case the claimant's equitable interest still subsisted at the time when the transferee learned of the breach of trust, so that the later transfer, dissipation or destruction of the property was a breach of the restorative and custodial duty which then bound him.
The Angove trust
For present purposes it is enough to point out that where money is paid with the intention of transferring the entire beneficial interest to the payee, the least that must be shown in order to establish a constructive trust is (i) that that intention was vitiated, for example because the money was paid as a result of a fundamental mistake or pursuant to a contract which has been rescinded, or (ii) that irrespective of the intentions of the payer, in the eyes of equity the money has come into the wrong hands, as where it represents the fruits of a fraud, theft or breach of trust or fiduciary duty against a third party.
The rescission trust
should the Claimant's legal title to the Identifiable Cryptocurrency be deemed to have passed, the Defendants are liable to the Claimant as a [sic] constructive trustee in Equity in relation to the USDC and/or USDT and/or the respective portions of the Identifiable Cryptocurrency to which the Claimant has a beneficial interest.
The Claimant maintaining a beneficial interest in the Identifiable Cryptocurrency at all times for the reason that the contract between the Claimant and [td-finan] was not induced by fraud but was itself an instrument of fraud such that the contract was void ab initio meaning that the Claimant's beneficial title did not pass.
It follows that when the Exchange Defendants came into possession and/or control of the respective portions of the Identifiable Cryptocurrency, it was already subject to a constructive trust (by virtue of the contract being void and the wrongdoing / unconscionable conduct of the Persons Unknown Category A and Persons Unknown Category B) such that (a) the Exchange Defendants could not acquire beneficial title in it following the nemo dat principle and/or (b) it would be unconscionable for the Exchange Defendants to continue to hold the beneficial interest and/or (c) equity treats the Exchange Defendants as trustees holding the respective portions of the Identifiable Cryptocurrency for the Claimant's benefit.
Should the Claimant's legal title to the USDT and USDC be deemed to have passed, the Claimant seeks a declaration that the Sixth Defendant holds the 65,022 USDT, or the substitute(s) or proceeds for him on constructive trust.
122. Rescission is an act of the parties which, when validly effected, entitles the party rescinding to be put in the position he would have been in if no contract had been entered into in the first place. It involves a giving and taking back on both sides. If it is necessary to have recourse to an action in order to implement the rescission, the court will make such orders as are necessary to put both contracting parties into the position they were in before the contract was made. There is, however, also a line of authority supporting the proposition that, upon rescission of a contract for fraudulent misrepresentation, the beneficial title which passed to the representor under the contract revests in the representee. The representee then enjoys a sufficient proprietary title to enable him to trace, follow and recover what, by virtue of such revesting, can be regarded as having always been in equity his own property. This may be an essential means of achieving a proper restoration of the original position if the representor has in the meantime parted with the property and is ostensibly a man of straw unable to satisfy the court's orders for restoration of the original position.
concerned to circumvent the supposed rule that there must be a fiduciary relationship or retained beneficial interest before resort may be had to the equitable tracing rules. Until the equitable tracing rules are made available in support of the ordinary common law claim for money had and received some problems will remain incapable of sensible resolution.
But all that is by the way. Whether or not there is a retrospective vesting for tracing purposes it is clear that on rescission the equitable title does not revest retrospectively so as to cause an application of trust money which was properly authorised when made to be afterwards treated as a breach of trust.
On rescission by the claimant, the defendant holds his legal interest in the property on resulting trust. Since the trust arises only at that stage, the defendant cannot be taken to have owed duties qua trustee before then. Nor can any misapplication of money by the defendant be treated as a breach of trust until after rescission.
The Bitkub constructive trust
In transferring the USDT and USDC from the TD Finan Wallets, the Persons Unknown Category A have breached the constructive trust imposed by operation of law.
Defences
Conclusion
Note 1 I understand that both the concept and the network are considered proper nouns, so are capitalised, whereas the crypto-currency itself is not. [Back]