First BVI Freezing Order Granted Against 'persons unknown' in Crypto Fraud Case

On 4 May 2022, the BVI Commercial Court handed down its judgment in ChainSwap v Persons Unknown.  This judgment marks the first time that the BVI court has granted a freezing order over assets held by persons unknown in relation to crypto fraud and follows similar decisions in the UK and other commonwealth countries where such relief is now commonly granted.  Given the nature of the respondents as 'persons unknown', the Court permitted ChainSwap to serve the respondents outside the jurisdiction by alternative methods.

In this case, ChainSwap, a BVI incorporated entity that provides a service that allows cryptocurrency tokens to be transferred between different blockchains, known as a cross-chain bridge, was the subject of two hacks in July 2021: the first hack allowed fraudsters to divert cryptocurrency from recipient wallets to private wallets that they controlled and the second hack allowed the fraudsters to effectively mint unlimited new tokens and redirect these to their private wallets.

The consequence of the hacks carried out against ChainSwap’s cross-chain bridge was that hackers were able to misappropriate assets from: (i) private users that had authorised their wallets to interact with the bridge (pursuant to the first hack); and (ii) projects issuing digital tokens that had used the bridge to offer cross-chain operability on their tokens (pursuant to the second hack).

The hackers then traded, exchanged or otherwise dissipated some of the stolen tokens.  One method used by the hackers to attempt to obfuscate the dissipation of the tokens was by using a mixer or 'tumbler' service.  The BVI Court was ultimately satisfied that ChainSwap had established a good arguable case that it had identified the destination wallet for the transactions which were mixed through the tumbler service.  A link between this wallet and an exchange in Croatia was then identified, which led to the court signing a letter of request addressed to the Croatian Courts for any available KYC in relation to the wallet.

The judgment noted that although ChainSwap did not seek a proprietary injunction, since it was not asserting a proprietary right in the digital assets, had it been able to establish an arguable case that the stolen tokens were its property then that is a form of relief which this Court would have been able to grant (following its own findings in Philip Smith v Torque Group Holdings Ltd that cryptocurrencies are a form of property).

This decision builds on the BVI's mature and pragmatic approach to crypto disputes and demonstrates the Court's willingness to assist those who may have been the victim of fraud.

BRITISH VIRGIN ISLANDS
Rosalind NicholsonPartnerT +1 284 852 2237rosalind.nicholson@walkersglobal.com

LONDON
John O'DriscollPartnerT +44 (0)20 7220 4987john.o'driscoll@walkersglobal.com
Daniel Hayward-HughesSenior AssociateT +44 (0)20 7903 8707 Daniel.Hayward-Hughes@walkersglobal.com

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