Cryptocurrencies and Cryptoassets: Freezing Orders, Disclosure Orders and the Instruction of Experts – Family Law Week

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Andrzej Bojarski of 36 Family and Byron James of Expatriate Law.

Introduction

Cryptocurrencies and cryptoassets are radically different from other forms of property. Indeed, some have questioned whether they are properly to be defined as 'property' at all. Take for example the most well-known cryptocurrency: Bitcoin.

A Bitcoin is based on cryptographic code (capable of being expressed and recorded as a long line of letters and numbers) which has been created (or rather 'mined' in the jargon) by powerful computers. The code forms a 'blockchain', which is a form of cryptography based on distributed ledger technology.

The 'distributed ledger' refers to the fact that the blockchain code and each alteration to it are recorded on numerous computers around the world. By reason of being distributed in this way the record of the blockchain is made definite and immutable, but without the need for any central 'official' ledger to confirm ownership as is the case with many other forms of property, including bank accounts. The ledger is definitive because it is recorded independently by numerous machines: hence the 'ledger' is 'distributed'.

At heart, therefore, a Bitcoin is merely data. There is no tangible asset as with real property or tangible assets. Nor is there any reciprocal obligation as with a chose in action (for example, a share or a bond carries certain rights with it, and money deposited in a bank is a debt owed by the bank to the customer).

The fact that a cryptocurrency is essentially a form of data has practical important practical implications which family lawyers need to grasp. Access to and control of the data which forms the cryptoasset is fundamental to the control, use and tracing of the asset itself. Without control of the data there is no access to the asset. If the data is lost, the asset is lost.

In fact, the blockchain on which Bitcoin and most other cryptoassets is built consist not of one single line of code, but two. Each is called a key. The 'public key' is visible to anyone who views the Bitcoin blockchain. The corresponding 'private key', however, is not publicly visible by anyone. The linking of the public key to a private key is how an individual proves ownership and control of the relevant number of units of Bitcoin. The private key can be stored anywhere convenient. The place it is stored is known in the jargon as a 'wallet', but that wallet might be in any one of many varied forms. It might just be a piece of paper with the key written on it, but more likely it will be stored in digital form on a computer or USB device, or where the crypto-currency is bought via an online exchange that exchange may itself provide facilities for storing the private key in an online wallet. Similarly, there may be many copies of the private key, but anyone who has a copy of the key can deal with the Bitcoin.

Once a transaction has occurred on the blockchain it is immutable and irreversible. It may be impossible to trace the wallet into which a new private key which related to that cryptoasset has been placed. All this makes it unusually important to ensure that appropriate steps are taken to control this novel class of assets.

The question of whether cryptoassets are 'property' is of more than academic jurisprudential interest. It has practical implications for lawyers who need to preserve, trace or otherwise deal with cryptoassets. The standard form of freezing order is in many ways inadequate to properly prevent dealings with cryptoassets. Likewise, conventional approaches to obtaining disclosure of assets and the instruction of experts need to be adapted to take into account the unconventional nature of cryptoassets.

This article

In this article we consider some of the areas where the conventional freezing order precedent needs to be adapted to deal with cryptoassets. Lawyers may also need to be prepared to deal with the prospect of making orders against 'persons unknown' in cases where the identity of a person to whom control of Bitcoin has been transferred is not known. We also propose precedents for directions dealing with disclosure and expert evidence relating to cryptoassets.

Readers will find precedent orders in the appendices as follows:

-Appendix 1: Freezing order in respect of cryptocurrency;

-Appendix 2: Disclosure/Preservation order in relation to cryptoassets and the devices which contain the 'keys' to such assets;

-Appendix 3: Order for instruction of an expert to analyse cryptoasset 'wallets' and to trace transactions in cryptoassets.

In order to put those precedent orders into their proper context, it is necessary to consider a number of jurisprudential questions which apply to cryptoassets.

Is Cryptocurrency a legally recognizable form of 'property'?

The following features render cryptocurrency different in nature to other 'traditional' assets (e.g. fiat currency):

oThey are not a chose in possession, because they are virtual and not tangible. It is not possible to possess the asset itself but rather only possess access to it via a key to a wallet which could be stored, arguably, on any storage type device (AA et al [2019] EWHC 3556, para 55);

oThey are not a chose in action, because they do not contain or provide or entitle any enforceable right to the bearer (Ibid).

For cryptocurrency to be properly defined therefore, in English law terms, as capable of being termed 'property' it is perhaps required to either extend the definition of a chose in action or create a third classification of intangible property.

One of the earliest judicial recognitions of cryptocurrency as 'property' in a common law jurisdiction is believed to be in the case of B2C2 v Quoine Pty (2019) from the Singapore International Commercial Court, which established both that cryptocurrencies are capable of being determined as property and also can be held within a trust.

In the course of making a freezing injunction in respect of a number of Bitcoin obtained by unknown individuals in a ransomware attack in AA et al (Ibid) Bryan J found, that cryptocurrencies

"meet the four criteria set out in Lord Wilberforce's classic definition of property in National Provincial Bank v Ainsworth [1965] 1 AC 1175 as being definable, identifiable by third parties, capable in their nature of assumption by third parties, and having some degree of permanence. That too, was the conclusion of the Singapore International Commercial Court in B2C2 Limited v Quoine PTC Limited [2019] SGHC (I) 03 [142]."

In Vorotyntseva v Money-4 Limited [2018] EWHC 2596 (Ch), para 13Birss J held that

"there [is not] any suggestion that cryptocurrency cannot be a form of property or that a party amenable to the court's jurisdiction cannot be enjoined from dealing in or disposing of it. I am satisfied that the court can make such an order, if it is otherwise appropriate."

Whilst there is no known Family Division authority dealing with the status of cryptocurrency as property, it should now be considered that the courts in England and Wales will consider it to be a form of property capable of being subject to a proprietary freezing injunction.

Form of freezing order

Practitioners are required to use a standard form of wording in the precedent for a proprietary freezing injunction when seeking to restrict the use of specified assets. Indeed, in UL v BK (Freezing Orders: Safeguards: Standard Examples) [2013] EWHC 1735 (Fam) at [48] Mostyn J cited with approval the requirement stated in the White Book that "any departure from the standard wording must be drawn to the attention of the judge hearing the without notice application".

The standard precedent for a freezing order contained in the suite of standard family orders as "3.1 Order" and the operative parts of the order feature in paragraphs 19 and 20 of the precedent:

Until the return date or further order of the court, the respondent must not remove from England and Wales or in any way dispose of, deal with or diminish the value of the following assets which are in England and Wales, namely:- [specify in detail]

If the total value free of charges or other securities ('unencumbered value') of the respondent's assets in England and Wales restrained by the preceding paragraph exceeds [amount], the respondent may remove any of those assets from England and Wales or may dispose of or deal with them so long as the total unencumbered value of the assets restrained by the preceding paragraph remains above [amount].

The content of these paragraphs are worthy of further thought in the context of the special nature of cryptoassets.

Proving ownership of the relevant cryptoasset is vital. In Vorotyntseva evidence was produced on the morning of the hearing to demonstrate the relevant cryptocurrency was in the possession or control of the proposed respondent. This produced by "that was provided during the morning in the form of e-mails with screenshots from a computer screen" (para 6, inter alia).

Thought must be given however to how a cryptoasset can be 'possessed' or 'within someone's control' in view of the fact that the asset has no physical form and consists entirely of cryptographic code, i.e data.

The most important point to grasp is that there is no centralised register of ownership for the cryptoasset, unlike money in a bank account where both the amount of money and the name of the account holder are held by the bank. Instead, the private key which allows control of a cryptoasset is stored somewhere; probably, but not necessarily, in digital form. It therefore must be established where and via what method is the cryptocurrency stored.

Control of the cryptoasset lies with anyone in possession of the private key. It is the private key which links to the public key in the blockchain and allows a person to deal with the asset, for example by transferring all or part of it to another person as payment for a service or for other goods. Such a transfer results in a new private key being created for the new holder of the cryptoasset. The old key ceases to function and the cryptoasset is now capable of being controlled by the anyone in possession of the new key.

The private key to the cryptoasset key is a set of numbers and letters. It can be held in a number of ways. In theory it could be written on a piece of paper or even memorised without being recorded in physical form anywhere, in the same way as a pin for an ATM or password for online banking (although it would be an impressive feat of memory). More commonly, however it is kept in digital form in a 'wallet'. This wallet can take many forms, from the third-party company holding it within an online trading account to a USB storage device which is kept in a pocket.

It may not be enough to specify in an order that the asset to be frozen is "X Bitcoin". Just as importantly, the private key which controls the cryptoasset (or more precisely the device which contains the wallet holding the private key) needs to be frozen.

The order may also need to prevent use of the private key which confirms control of those Bitcoin.

Accordingly, consideration should be given to specifically preserving any computer, USB device or other form of device where the private keys to the crypto currency may be recorded and held.

"the respondent must not"

Once it is established where the private key is stored, one then needs to determine how it is accessed. As noted above, each transaction with the asset on the blockchain results in a new key being generated. As we have noted above, conceivably, there could be no written record of this key and it may simply be memorised. More likely it will be held in digital form.

Often the cryptocurrency keys are held on an online exchange. Most retail investors in cryptocurrencies buy and sell via such online exchanges. In those cases the 'wallet' containing the private keys will be held by the online service. In such a case consideration needs to be given to ensuring the exchange is also bound by the terms of the order. Therefore, the "respondent must not" needs to be considered more widely. Are there other third parties that need to be considered as relevant parties and served with the order?

However, anyone who holds cryptocurrency which they wish to keep secret or untraceable is unlikely to use an online exchange. Such a person is more likely to wish to use a 'cold-storage' location which means the key is stored offline on a USB drive or similar device. If an online exchange is analogous to a bank, and cold-storage location is analogous to money stuffed under the floorboards or kept in a home safe.

In such a case taking control of the device which contains the wallet becomes fundamentally important. An order for delivery up and preservation of the device is likely to be required. There may be situations which make an Anton Piller Search Order appropriate. Accordingly, it become important to establish at an early stage whether there is an item, such as a USB stick or laptop computer, that requires physical possession as the starting point for protection.

"remove from England and Wales"

The international transfer aspect of a cryptocurrency is arguably of less relevance given the decentralised aspect of cryptoassets. A Bitcoin is held on the blockchain which is itself based on a distributed ledger spread across computers based all around the world. By its very definition, a cryptocurrency is not located in any single jurisdiction or any single place. It exists by the very fact that the blockchain ledger is distributed universally around the world. What is important is the location of the wallet holding the private key.

A private key can be emailed across the world in a matter of seconds. A transaction with a cryptoasset can be carried out without knowing the identity of the recipient. The whereabouts of the new private key held by the new holder of the cryptoasset may not be possible to determine from any publically available resource.

However, note the importance in the Liam David Robertson case of wallet being held with Coinbase in the UK. This created a far easier form of enforcement.

A transfer of the asset from one cryptofinancier in the UK to one based abroad could create further enforcement issues. Therefore, there is an importance of restricting the online transfer of the keys to the digital asset.

There is also arguably an importance in keeping a physical storage device within the jurisdiction, lest that then also becomes subject to further enforcement hurdles to overcome.

"or in any way dispose of, deal with or diminish the value..."

The concern differs on how the cryptoasset is held. If via a wallet held by an online third-party company, the issue is then onward transfer or sale, potentially to a company based abroad or an exchange into fiat money (as in the Liam David Robertson case). These actions would arguably be caught by the current drafting of the freezing order, but where an offline location for the wallet is being used the order needs to be considered further.

When faced with such a situation it is not sufficient to simply require there to be no disposal or dealing with the storage device to provide adequate protection. There are restrictive actions you can seek, such as not moving the cryptoasset keys from one storage device to another or preventing changing the key, both of which would potentially undermine the purpose of the order but arguably not fall within dispose, deal or diminish.

There are also positive actions that could be required too, absent a delivery up or Anton Piller order, there needs to be some form of preservation of the asset. If the cryptoasset on a USB stick is just left in an office drawer and then subsequently removed, how are you to prove that the respondent was responsible? The respondent themselves could have moved the USB stick to an unknown safe deposit box, arrange for a third party to do it or a third party could simply take it themselves. Whilst in the latter, this would only be of use if they had the key in addition, but it would still render the cryptoasset vanished and unavailable, even if also not available to the person who took it.

"the following assets.."

The correct way to draft the relevant paragraph of the proprietary injunction is to prohibit the disposal of the relevant quantities of cryptocurrency but it should not seek to prevent disposal of the combined sterling equivalent as at the date of the order in the sum of a stated monetary sum in the alternative, as this would be inconsistent with it being a proprietary injunction (Vorotyntseva, para 14).

The use of monetary sums is also likely to be inappropriate in the context of cryptoassets which tend to have highly volatile and fluctuating values. Within the last 5 years alone, the value of a single Bitcoin has swung between a low at around $200 to a high of nearly $20,000

Can a freezing injunction be granted against an unknown person?

If the evidence suggests that a spouse has divested assets to a third party, the absence of a centralized ledger of ownership may make it impossible to determine the identity of the person who now holds it. In such circumstances the order may need to be made against a person or persons unknown. This is an unusual order and not readily granted by the court without proper justification.

In the unreported case of, Liam David Robertson v Persons unknown (2019) CL-2019-000444 per Molder J. Liam Robertson, CEO of Alphabit Fund was granted an asset preservation order over 80 Bitcoin (then c. 1,000,000) fraudulently obtained from him by an unknown person via a phishing attack. It was possible to trace a further transfer of the Bitcoin to a wallet held in the UK by Coinbase, a cryptocurrency retailer and depository. This trace was achieved by Chainalysis Inc, a blockchain investigations firm operating in New York, Washington DC, Copenhagen, and London.

A freezing injunction was sought in Liam David Robertson but refused. Moulder J stated "[w]e know nothing about this person who perpetrated the fraud. We do not know his identity. We do not know his assets. We do not know if a Freezing Order would achieve anything whatsoever" and therefore the 'balance of convenience' and 'risk of dissipation' requirements needed for freezing orders could not be met. An Asset Preservation Order was granted in the alternative as such requirements are not required.

It is not possible to identify someone from a cryptocurrency address alone. Therefore, the simple address or key reveals nothing of the owner. It is common however to use depositories or third party cryptofinanciers (Bitfinex, Coinbase, etc). This is important as those companies are required to maintain KYC ("know your client") documents about their account holders. This is therefore a useful route to information about the possible human owner of the wallet, held with a company, into which the cryptocurrency is held. Vorotyntseva.

In the case of AA v Persons Unknown however, the court considered it appropriate to grant an injunction against persons unknown after a ransomware attack. Although such orders are likely to be rarely sought in financial remedy proceedings, cryptoassets by their nature render it possible that they will be appropriate in a limited number of cases.

Preservation of Physical 'Wallets', Disclosure and Experts

The difficulties which the intangible and highly complex nature of cryptoassets present in the context of freezing orders also extend into orders which deal with disclosure and the instruction of experts. Identification of cryptoasset holdings relies on possession of the relevant keys relating to those assets, and therefore the physical possession and analysis of the devices which contain the relevant 'wallets' is critical.

It is also important to remember the importance of preserving the physical devices which store the cryptoasset 'wallet'. In many cases obtaining custody and/or preservation of the physical 'wallet' will be of more practical importance and utility than a conventional freezing order. An order for custody and preservation of such a device is sanctioned by rule 20.2(1)(c)(i) of the Family Procedure Rules 2010 (based on the statutory powers contained in s.34 of the Senior Courts Act 1981)

At appendix 2 we provide a specimen precedent for an order which deals with the disclosure of cryptoassets and the preservation of relevant devices used as wallets for the storage of the relevant keys. This order can be used in addition to or instead of a freezing order, as the circumstances of each case demand. Indeed, in many cases this order will be used in precedence to a more generalised freezing order.

At appendix 3 we set out a precedent to be used when seeking directions for the instruction of an expert to analyse the storage devices or online accounts which contain cryptoassets in order to verify the holdings and to trace dealings with cryptoassets. Once again, parts of this order can be combined with clauses from the freezing order precedent or the disclosure precedent as required in each case.

31.7.20

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Cryptocurrencies and Cryptoassets: Freezing Orders, Disclosure Orders and the Instruction of Experts - Family Law Week