LMN v Bitflyer and Others
| Jurisdiction | England & Wales |
| Judge | Mr Justice Butcher |
| Judgment Date | 29 November 2022 |
| Neutral Citation | [2022] EWHC 2954 (Comm) |
| Docket Number | Case No: CL-2022-000517 |
| Court | Queen's Bench Division (Commercial Court) |
[2022] EWHC 2954 (Comm)
THE HON Mr Justice Butcher
Case No: CL-2022-000517
IN THE HIGH COURT OF JUSTICE
BUSINESS & PROPERTY COURTS OF
ENGLAND AND WALES
COMMERCIAL COURT (KBD)
Royal Courts of Justice
Strand, London, WC2A 2LL
Josephine Davies and Sam Goodman (instructed by Rahman Ravelli) for the Claimant
Nik Yeo (instructed by DLA Piper UK LLP) for the 5 th Defendant at the hearing on 11 November 2022
Hearing dates: 28 October, 11 November 2022
Approved Judgment
The present claim is made for information orders by LMN, which is a cryptocurrency exchange (‘C’) against six other cryptocurrency exchanges. I will refer to each of the Defendants as D1, D2 etc, respectively.
This judgment relates to two hearings. The first, on 28 October 2022, was an ex parte application made by C, without notice to any of the Defendants. I made certain orders, which are described below, and required that notice of the application for the substantive relief claimed should be given to the Defendants. A further hearing, on notice, occurred on 11 November 2022. At that hearing, D5 was represented by Mr Yeo and I am grateful to him for his helpful submissions. A representative of D1 was present at that hearing. The position of most of the other Defendants had also been made known to the court by that stage. I made further orders on that occasion. Again, I will refer to them below.
On each occasion, I indicated that I would provide my reasons for the orders made subsequently. These are those reasons.
Factual Background
The essential factual background to this case, as alleged by C, is as follows. C is a company incorporated in England and Wales. It operates a cryptocurrency exchange. Its analysis is that in doing so it does not hold the cryptocurrencies on trust. Rather, it holds cryptocurrency in its own name and, in a manner analogous to conventional banking, owes a personal obligation to pay the relevant amount to each customer.
A percentage of C's cryptocurrency reserves is accessible via the internet through what are called ‘Hot Wallets’, which is a term explained in the Securities and Exchange Commission's Glossary to the Cryptoeconomy as ‘wallet[s] … connected to the internet, enabling [them] to broadcast transactions’.
C's evidence is that some two years ago, hackers obtained access to its systems, and transferred some millions of dollars-worth of cryptocurrency (consisting of Bitcoin, Ripple, Tether, Ethereum, ZCash and Ethereum Classic) from it. C sought help from a number of UK regulatory and law enforcement agencies, including the FCA, the National Crime Agency and the Metropolitan Police. It worked closely with officers of the Metropolitan Police's Cyber Crime Unit. After about 3 months, however, the Cyber Crime Unit said that it could provide no further assistance and suggested that C should consider civil proceedings.
After a further four months, C instructed solicitors to pursue a civil action. C instructed an expert, Pamela Clegg of CipherTrace, to seek to trace the cryptocurrency which had been transferred by the hackers. Ms Clegg produced a report dated 14 September 2022, and then a supplementary report dated 7 November 2022. Ms Clegg's reports indicate that she was provided by C with details of the transactions believed to have been carried out by the hackers on the day of the hack. She then tracked the transactions on the relevant blockchains. Using proprietary software and public records, Ms Clegg was able to identify addresses under the same control; and through further software-based analysis of transactions was able to identify ‘address clusters’ that could be inferred to be under common control.
On any occasion where the chain of transactions reached an ‘exchange address’ Ms Clegg could not discover what became of the cryptocurrency thereafter. This is because ‘exchange addresses’ are addresses owned and operated by the exchange itself. Whilst such addresses tend to be associated with a particular customer, the actual crediting of cryptocurrency to the relevant customer's account takes place ‘off-chain’ (ie via an internal accounting exercise). Cryptocurrency received into an ‘exchange address’ will be often merged by the exchange into an ‘omnibus wallet’ which is used to service multiple customers' requests.
The result of Ms Clegg's exercise was the identification of 26 recipient addresses, which were ‘exchange addresses’, to which Bitcoin (‘BTC’) or Bitcoin Cash (‘BCH’) had been transferred. The distribution of these addresses amongst exchanges operated either by the relevant Defendant or a company in the same group (a point to which I will return) was as follows for BTC: D1, 1 account; D2, 5 accounts; D3, 1 account; D4, 2 accounts; D5, 1 account; and D6, 5 accounts. For BCH the distribution was: D2, 7 accounts; D6, 4 accounts.
C's evidence is that, as all these addresses are ‘exchange addresses’ it is impossible to trace the cryptocurrency any further without information from the exchanges about the individuals behind the transactions. In the case of exchanges either operated by one of the Defendants or by an associated company, C had reason to believe that each collected know your client (‘KYC’) and anti-money laundering (‘AML’) information, and thus might be able to provide relevant information.
As already indicated, C's evidence prepared for the initial hearing, while identifying the exchanges concerned, was not able to identify the exact legal entities which might be responsible for operating them and hold the information and documents which C sought. That evidence suggests that many exchanges use different companies to contract in different jurisdictions and thus the relevant entity might depend on where the natural person associated with a target address was located. Accordingly, in the initial Claim Form what was called the ‘topco’ for each exchange was identified. These ‘topcos’ had been identified by C from a number of sources, including websites, Bloomberg, WSJ, and regulatory and legal filings.
The 28 October 2022 Hearing
At the 28 October 2022 hearing, C sought a ‘rolled up’ hearing of applications for permission to serve the Defendants out of the jurisdiction and to serve by alternative means, and of the substantive application for information orders. I agreed that this hearing should be held in private, in order that publicity should not defeat the object of the proceedings by giving notice to the putative fraudsters of the attempts to identify them. I also agreed to consider the application for permission to serve out and to serve by alternative means. I declined, however, to proceed with the application for the substantive relief without notice being given to the Defendants. To do so appeared to me inappropriate in the present case given: (a) that the alleged fraud was not of very recent occurrence; (b) that the application was not made against the putative fraudsters; and (c) none of the Defendants (nor any associated company) was alleged to have been itself in any way fraudulent.
The application to serve out of the jurisdiction
The principal application which was, therefore, considered at the 28 October 2022 hearing was that for permission to serve out. The Claim Form in relation to which this permission was sought at that stage named six Defendants, to wit Ds 1–4 and 6, and Coinbase Global Inc as D5. The Claim Form stated in part:
‘[C] seeks disclosure of documents and information, and ancillary relief, against [Ds] in the form of the draft order appended to this Claim Form, pursuant to s. 37 of the Senior Courts Act 1981, the Bankers Trust jurisdiction, to assist in identifying Persons Unknown and locating the proceeds of [C's] property.
… Part 8 of the Civil Procedure Rules applies to this claim.’
The draft order there referred to sought from each D the following information:
1.1. In respect of any customer account(s) which the [relevant] Target Cryptocurrency were allocated to and/or received on behalf of:
1.1.1. The name the account(s) is held in;
1.1.2. All ‘Know Your Customer’ information and documents provided in respect of the account(s);
1.1.3. Any other information and documents held in relation to the account(s) which might or does identify the holder of...
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