Fabrizio D'Aloia v Persons Unknown Category A

Hearing dates: 6–7, 10–11 and 14 June 2024

Richard Farnhill(sitting as a Deputy High Court Judge of the Chancery Division):

In these proceedings the Claimant, Mr D'Aloia, alleges that he is the victim of a cryptocurrency scam. His claim against the Second Defendant ( Binance) has settled and his claim against the Fifth Defendant ( Aux Cayes Fintech) was struck out. He has issued a separate application seeking summary judgment against the First Defendants, the Third Defendant ( Polo), the Fourth Defendant ( Gate) and the Seventh Defendants. The trial before me principally concerned the issues between Mr D'Aloia and the Sixth Defendant ( Bitkub).

Broadly, Mr D'Aloia alleges that a fraud was perpetrated on him by the First Defendants in which he was induced to hand over cryptocurrency in the form of Circle (which is not relevant for this trial) and Tether ( USDT) totalling around £2.5m. The First Defendants then passed that cryptocurrency through a number of blockchain wallets before it was withdrawn as fiat currency by the Seventh Defendants. Polo, Gate and Bitkub (the Exchange Defendants) were the cryptocurrency exchanges with whom the Seventh Defendants are said to have held their various accounts.

The issues

The parties summarised the issues for determination before me by way of an updated List of Issues. This is a lengthy and, perhaps inevitably, rather technical judgment. Parties quite legitimately are generally more concerned about the end destination than the legal route. I therefore start with a brief summary of the issues and my findings.

What is the pleaded basis for Bitkub's alleged liability to the Claimant?

The pleading issue comprised a number of sub-issues:

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

Whether the Claimant and Bitkub are correct in acknowledging that the stablecoin, USDT, that forms the subject matter of the Claimant's claim against Bitkub, is considered property under the law of England and Wales and if so, what is the nature of the property in question and what is the effect of the same on the Claimant's claim?USDT attract property rights under English law. It is neither a chose in action nor a chose in possession, but rather a distinct form of property not premised on an underlying legal right. It can be the subject of tracing and can constitute trust property in the same way as other property.

Expert evidence

Whether the Claimant can establish, as a matter of fact, with reference to expert blockchain analysis, that his “ Identifiable Cryptocurrency” reached the 82e6 wallet for which the Bitkub holds the private key.The Claimant has failed to show that any of his funds were received in the 82e6 wallet.

Following / Tracing

Whether the Claimant can establish, as a matter of law, that USDT 46,291 of his allegedly “ Identifiable Cryptocurrency” reached the 82e6 wallet, for which Bitkub holds the private key by reference to the principles of following or, if pleaded, tracing. Specifically, which methods were legally open to the Claimant to follow/trace the allegedly “ Identifiable Cryptocurrency” to the 82e6 wallet.This issue raises a number of sub-issues:

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 Mr D'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 inCharity 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

Has Bitkub been “ enriched/received a benefit by obtaining possession and/or control” of the relevant portion of the “Identifiable Cryptocurrency” that was allegedly comprised within the USDT 400,000 which entered the 82e6 Wallet on 21 February 2022?The receipt of the USDT 400,000 was a benefit to / enrichment of Bitkub. However, the Claimant has failed to show that any portion of his funds entered the 82e6 wallet, so the enrichment was not at the Claimant's expense.

Whether the Claimant can establish the alleged enrichment of Bitkub is unjust on the basis that the Claimant “ has been deprived of possession and enjoyment of his USDT and USDC, and at the expense of his legal title” as asserted in paragraph 37(iv) of the Re-Amended Particulars of Claim.This does not seem to have been pursued as an unjust factor. Rather, the Claimant relies on unauthorised payment and money paid under a mistake, both of which are recognised unjust factors and both of which are adequately pleaded (and, for the avoidance of doubt, have been established on the facts).

If so, whether Bitkub's enrichment has been at the expense of the Claimant.See above: the Claimant has failed to show that any of his funds reached the 82e6 wallet, so cannot show that Bitkub was enriched at his expense.

Whether Bitkub acted in a commercially unacceptable way with regards to its provision of User Accounts to the Seventh Defendants / Ms Hlangpan (the account holder of the 82e6 wallet).This is not a pleaded allegation said to found any claim but is relevant for the purposes of certain defences advanced by Bitkub. No evidence was advanced in respect of the Seventh Defendants other than Ms Hlangpan ever having Bitkub accounts, so this issue...