MSTR Cat

Crypto Law/Level IX · Death, divorce and disputes/9.3 Going to court/Lesson 5

Freezing orders against persons unknown

How courts in England, Singapore and the US freeze stolen crypto before anyone knows who took it, and make exchanges reveal who holds it.

Education, not legal, tax or investment advice. Crypto law differs between countries and states and changes often. Check the current rules where you live with a qualified lawyer or tax adviser before you act.

The lean path

The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.

  1. Act within hours at no cost: ask the receiving exchange or token issuer to freeze the funds and report to police and the FBI’s IC3; a voluntary freeze is at the platform’s discretion, so a court order may follow.
  2. In US federal court, plead an equitable claim such as constructive trust over traced coins, as in Jacobo v. Doe (2022); Grupo Mexicano bars freezing assets for a money-damages claim alone, and Rule 65(c) requires security.
  3. A US temporary restraining order granted without notice lasts no more than 14 days unless extended under Rule 65(b)(2), so prepare the preliminary-injunction motion at the same time.
  4. In England and Wales, combine a proprietary injunction with Bankers Trust and Norwich Pharmacal disclosure orders against exchanges; since 1 October 2022 gateway 25 allows service abroad, but a cross-undertaking in damages is usually required.
  5. Singapore grants similar orders against unnamed persons if the description is sufficiently certain, as in CLM v CLN [2022] SGHC 46; these interim orders preserve assets but do not decide ownership.

MaterialsFetch.ai Ltd v Persons Unknown Category A [2021] EWHC 2254 (Comm)Civil Procedure Rules Practice Direction 6B, paragraph 3.1(25) (information orders against non-parties)CLM v CLN [2022] SGHC 46 (High Court of Singapore)Jacobo v. Doe, No. 1:22-cv-00672 (E.D. Cal.), order of 7 June 2022

Wonder

  1. How can a court make an order against someone it cannot name?
  2. Can an exchange be made to freeze an account and say who owns it?
  3. Why are US courts more cautious about freezing assets than English courts?

Explore

  1. Thieves rarely give their names, but stolen coins often pass through an exchange that does know its customers. Courts in several common-law countries have adapted two older tools for this. A ‘persons unknown’ order names defendants by description, such as anyone who took part in a particular theft, instead of by name. A freezing order stops defendants from moving assets: either specific property traced as the claimant’s own, called a proprietary injunction, or assets up to a set value, called a freezing injunction. In AA v Persons Unknown (2019), covered in lesson 4.3.5, the English High Court used this route over bitcoin paid as a ransom.
  2. Fetch.ai Ltd v Persons Unknown, decided on 15 July 2021 by His Honour Judge Pelling QC, shows the full set of tools. Fraudsters had gained access to the company’s accounts at Binance and traded its crypto assets away at large undervalues. The court granted a proprietary injunction and a worldwide freezing order against the unknown fraudsters. It made a Bankers Trust order, which requires a third party to disclose information to help trace assets claimed by the claimant, against Binance Holdings in the Cayman Islands. It also made a Norwich Pharmacal order, which requires someone mixed up in a wrong to help identify the wrongdoer, against the group’s UK company.
  3. Two later steps helped in England and Wales. From 1 October 2022, a new gateway 25 in Practice Direction 6B allows an application for disclosure to be served outside the jurisdiction where it seeks the true identity of a defendant or ‘what has become of the property’ of a claimant. In D’Aloia v Persons Unknown, on 24 June 2022, the High Court accepted that an exchange’s holding company, once notified of an injunction over wallets it controls, is likely to come under the duties of a constructive trustee, holding the property for its rightful owner. These are interim orders: they preserve assets until trial and do not decide who owns them.
  4. Singapore has followed. In CLM v CLN, heard by Justice Lee Seiu Kin in 2021 and reported in 2022, the High Court granted a proprietary injunction and a worldwide freezing injunction against unknown persons who stole 109.83 bitcoin and 1,497.54 ether, with disclosure orders against two exchanges operating in Singapore. The judge held that the court may make orders against unnamed defendants if the description is ‘sufficiently certain as to identify both those who are included and those who are not’. He also accepted that stolen cryptocurrency can be the subject of a proprietary injunction because it is capable of being property.
  5. US federal courts start from a narrower rule. In Grupo Mexicano de Desarrollo, S.A. v. Alliance Bond Fund, Inc., decided on 17 June 1999, the Supreme Court held that a federal court lacked authority to freeze a defendant’s assets before judgment in a claim for money damages, because courts of equity historically could not do so. Crypto claimants therefore plead equitable claims, such as a constructive trust over specific traced coins. On 7 June 2022, in Jacobo v. Doe, a federal court in California relied on that distinction to grant a temporary restraining order freezing a John Doe defendant’s crypto at listed exchange addresses, after a $1.4 million loss to a fake liquidity-pool scheme.
  6. These orders have conditions and limits. In England the applicant usually gives a cross-undertaking to pay the defendant’s losses if the order proves to have been wrongly made. Speed matters, because coins can leave a reachable exchange quickly (lesson 4.3.5), and an order only bites on someone who can actually freeze the assets. Serving unnamed defendants raises its own problems (lesson 9.3.6), and proving the trace at trial is harder than at the urgent first hearing (lesson 9.3.4). A practical check: list every address your lost crypto passed through and mark which belong to identifiable exchanges or to token issuers that can freeze balances.

Key facts

  • In Fetch.ai Ltd v Persons Unknown (2021) the English High Court granted a proprietary injunction, a worldwide freezing order and disclosure orders against an exchange group over a crypto fraud.
  • A Bankers Trust order requires a third party, such as an exchange, to disclose information to help trace assets claimed by the applicant.
  • Since 1 October 2022, gateway 25 in Practice Direction 6B has allowed disclosure applications seeking a defendant’s identity or the fate of a claimant’s property to be served abroad.
  • In CLM v CLN [2022] SGHC 46 the High Court of Singapore granted a proprietary injunction and a worldwide freezing injunction against unknown persons over stolen cryptocurrency.
  • In Grupo Mexicano de Desarrollo v. Alliance Bond Fund (1999) the Supreme Court held that federal courts may not freeze assets before judgment in a claim only for money damages.
  • In Jacobo v. Doe (E.D. Cal. 2022) a federal court froze crypto at exchange addresses because the plaintiff sought equitable relief including a constructive trust.

Exercise nine, six, three, one

9CollectList up to 9 places a stolen or misdirected crypto transfer could end up, such as exchanges, private wallets, bridges, mixers or token issuers (some lists are shorter).
6ClusterSort them into 6 groups: regulated exchanges, unregulated or offshore exchanges, private wallets, stablecoin or token issuers, mixers and bridges, and unknown destinations.
3DistillReduce the 6 groups to 3: places a court order could reach quickly, places reachable only with effort abroad, and places no court order is likely to reach.
1CrystallizeWrite 1 sentence explaining why a freezing order against unknown persons usually depends on a known intermediary.

Fact check

Dates, figures and claims checked against the published sources listed below.

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