Court backs cryptocurrency exchange bid to track down suspected scammers

According to cryptocurrency exchange LMN, in 2020 hackers managed to gain access to their systems and steal millions of dollars worth of cryptocurrencies. It has asked regulators and law enforcement for help and hired a forensic investigator to trace where the funds went. However, it has said that these investigations have only gotten so far and that it needs the six other cryptocurrency exchanges to disclose any information they may have about the people behind the transactions being tracked to further aid its investigations.

LMN’s application for information injunctions was granted by Mr Justice Butcher of the High Court.

The court ordered the release of extensive information and documents. It contains the name of the account holder(s) linked to each of the exchange addresses to which transactions were traced, know your customer (KYC) information and documents provided in relation to the account(s) as well any other data that identifies or is likely to identify the account holder(s) – such as email and residential addresses, telephone numbers and bank account details.

The six cryptocurrency exchanges were also ordered to explain to the best of their knowledge what became of the stolen assets and the corresponding balance figures on the customer account(s); and some of the exchanges were specifically instructed to share information that could also be used to identify other recipients of the stolen assets.

Andrew Barns-Graham, Pinsent Masons’ civil litigator, said: “Often the most difficult initial challenge for fraud victims is figuring out who cheated on them and what happened to their money. An important recent change in English procedural rules regarding service and jurisdiction has given victims the ability to request disclosure of this information from third parties such as banks and stock exchanges abroad.”

“The ruling in this case is the first reported ruling on this new rule of procedure and it is excellent news that it is working smoothly and as intended. It has the potential to be a real game changer and should help establish the English courts as the preferred jurisdiction for victims of international fraud,” he said.

Mehreen Siddiqui, who specializes in civil fraud and asset recovery at Pinsent Masons, said: “This decision is the latest in a series of recent cases showing the English courts are poised to look into the cryptocurrency space. This is a positive development for the case law as the English courts are once again proving to be agile in applying established legal principles to this asset class to provide relief to victims of cryptocurrency fraud.”

“Fraudulent activity tends to increase across industries in times of economic hardship. Those investing in cryptocurrencies can take comfort in the fact that the English courts are clearly able and willing to adapt the legal framework at their disposal to new issues faced by the parties,” she said.

Siddiqui said the decision will be well received by fraud victims, who seek more information from third parties innocently implicated in the wrongdoing of others to formulate their legal strategy and ultimately seek redress from fraudsters.

“Due to the decentralized nature of the assets and the general resistance to regulation within the cryptocurrency community – although developments are emerging – it is mostly a feature of cryptocurrency-related proceedings that the final location of the stolen assets cannot be established without expert help” said Siddiqui. “Therefore, as in the present case, experts in cryptocurrency forensics and asset tracking must be consulted.”

“LMN’s expert was able to trace the stolen assets back to 26 ‘exchange addresses’ — essentially unique locate points for where the cryptocurrency is held — but was unable to identify the individuals behind the transactions. LMN had reason to believe that the six other cryptocurrency exchanges or affiliates each collected KYC or anti-money laundering information and therefore may be able to provide relevant information that would enable the ultimate scammer(s) to be identified.” she said.

Siddiqui also said that the decision highlights that even identifying the correct respondent entities that may have been responsible for operating the various cryptocurrency exchanges, and thereby holding relevant documents, may not prove easy.

She said: “LMN presented evidence to the court that indicated that ‘many exchanges use different entities to enter into contracts in different jurisdictions and therefore the relevant entity may depend on where the individual associated with a destination address is located’ . This is therefore another feature of the cryptocurrency world that would-be plaintiffs and their advisers should keep on their radar.”

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