Giambrone and Partners leading case against Cryptocurrency Fraud

The emergence and rise of cryptocurrency fraud has led to a number of individuals being defrauded of extremely large amounts of money, which, in turn, has resulted in complicated legal cases. Whilst cryptocurrency is yet to be comprehensively regulated at the global level, it is expected that established cryptocurrency exchanges follow robust KYC and AML policies to prevent their facilities from being used as a vehicle for fraudulent schemes.

Deputy Judge Farnhill’s judgment in D’Aloia v. Persons Unknown and Others, handed down on 12 September 2024, made a series of key findings in relation to the English Court’s approach to cryptocurrency claims. Giambrone and Partners’ client, Fabrizio D’Aloia, was induced to pass USDT, a stablecoin known as Tether, and USDC to the value of £2.5 million into the hands of fraudsters through the blockchain into various wallets. Once our client recognised he had been defrauded immediately took steps to retrieve his stolen funds through the Courts which necessitated the instruction of investigators to trace and find the stolen USDT and USDC, which was transferred through a number of wallets to obscure the origin of the funds.

1) Status of cryptocurrency: the Court established that Tether (USDT) is a form of property under English law, stating that “…it is neither a chose in action or chose in possession but rather a distinct form of property…”.

2) Failed defences: the Court held that the Thai cryptocurrency exchange Bitkub, could not rely on the defences of bona fide purchaser for value or ministerial receipt. During the course of the evidence presented by Bitkub’s witnesses, it became apparent that Bitkub had actively compromised its own policies in respect of suspicious account activity that had the potential to relate to money laundering. The Court accepted that Bitkub had policies in place to observe and act on practices that pointed to anti-money laundering. Even though Bitkub was clearly aware of the breaches, it failed to take any action. The account holder of the Bitkub wallet that allegedly received part of Mr D’Aloia’s misappropriated USDT, continually breached the withdrawal limits imposed by Bitkub, seemingly with the compliance of Bitkub.

When an assistant KYC manager, employed by Bitkub, was asked at the trial what was the purpose of the daily withdrawal limits that were part of Bitkub’s policies, they stated that they did not know the purpose of the daily withdrawal limits. Bitkub permitted the account holder to withdraw large sums of money considerably in excess of the daily withdrawal limits almost every day. Bitkub had policies in place to identify suspicious activity but failed to take any steps to investigate or respond in accordance with its own policies.

Cryptocurrency exchanges should take heed from the Judge’s detailed analysis in relation to allowing bad actors to exceed daily withdrawal limits. Not only does the English High Court expect crypto exchanges to have satisfactory processes in place to prevent fraud, such processes need to be followed.

3) Alternative tracing methodologies available: the Court considered the different tracing methodologies available and their application when tracing cryptocurrencies on the blockchain with the use of specialist software. This is a particularly complex issue and requires an understanding of the operation of fraudulent schemes while at the same time preserving the interests of other potential victims of the fraud. It is important to note that the Judgment acknowledges a number of different tracing methodologies that experts can implement in the pursuit of misappropriated victim’s funds. The evidence of the expert investigators, particularly Bitkub’s expert, was found by the judge to be “…difficult, if not impossible…” and he further commented that “…it was not always easy to follow…”.

This highlights the risk of a judgment being compromised due to the technical nature of the issue. Fraudsters typically introduce stolen cryptocurrency into crypto mixers in an attempt to obscure the ownership. The use of specialist software coupled with the necessary expertise can be helpful in overcoming the use of the cryptocurrency mixers.

Joanna Bailey, a Partner, commented “the Court dismissed Bitkub’s defences. Bitkub had policies in place to identify suspicious activity but failed to take any steps to investigate or respond in accordance with those policies when the account holder repeatedly breached the AML policies. Bitkub could not explain why the block that should have automatically been applied to the account was removed.” Joanna further pointed out “Also the different methodologies for tracing cryptocurrency employed by the investigators led to a controversy which was challenging to resolve”

It was comprehensively decided and agreed that Mr. D’Aloia has, without doubt, been defrauded, however the complicated nature of this relatively new type of fraud requires all parties to have a full understanding of all aspects of the way the fraud is enacted and techniques that can be applied to demonstrate who is answerable.

The case has exposed Bitkub’s connivance in the fraud that targeted Mr. D’Aloia highlighting the blatant actions that were permitted to take place enabling Bitkub to receive and pass on laundered funds. Giambrone and Partners’ banking and financial litigation lawyers warn that as new methods of fraud arise a complete understanding of the complexity and methods used by the fraudsters must be set out with the utmost clarity to enable to a decision to be made with a full understanding of all aspects. There is a risk of a judgment being compromised due to the technical nature of the issue. Fraudsters typically introduce stolen cryptocurrency into crypto mixers in an attempt to obscure the ownership.

Giambrone and Partners banking and financial fraud litigation lawyers have extensive experience in assisting individuals who have fallen victim to cryptocurrency fraud. 

Joanna Bailey frequently leads the litigation against financial institutions involved in cryptocurrency trading disputes, as well as Forex investment issues and regulatory investigations and has some considerable success in retrieving our clients' funds lost in fraud.She has developed a range of strategies both to find the assets of the individuals perpetrating the fraudulent schemes and restore the funds to our clients. As well as recognising culpability in the organisations facilitating (but not associated with the fraud), by failing to undertake adequate due diligence.

Joanna led the first case in Europe where proceedings were served on Persons Unknown connected with two digital wallets over the blockchain by non-fungible token or ‘NFT’ in a cryptocurrency fraud. Following this ground-breaking case Joanna was named as Lawyer of the Week in the Financial Times. Joanna is highly experienced in high-value out-of-court settlement negotiations and has in-depth knowledge of the Civil Procedure Rules as well as English common law.

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