Ruling offers crypto fraud asset tracing lesson

The case revolved around claims of fraud made by Fabrizio D’Aloia, who has asserted that he was duped into transferring cryptocurrencies, including the stablecoin USD Tether, to ‘persons unknown’ via crypto investment scam online.

D’Aloia engaged a private investigator specialising in blockchain analytics to help trace the funds. D’Aloia asserted that the investigator’s evidence showed that, via a series of transactions, some of the funds were deposited in a Bitkub wallet linked to the account of a Thai woman.

The High Court in London determined that “a very significant failure in Bitkub’s internal systems and controls” enabled the account linked to the Thai woman to first receive “laundered funds” and then for sizeable withdrawals to be made from that account. It further determined that the Thai woman was involved in the fraud against D’Aloia, either as “as a perpetrator of it or as a money mule who lent the use of her account to those behind the fraud”.

However, in considering D’Aloia’s claims against Bitkub, Richard Farnhill, sitting as a deputy judge in the High Court, considered that because the stolen assets had been mixed with other funds, there was no route under common law through which D’Aloia could show that his assets had flowed to Bitkub.

In the absence of common law rights, the court went on to consider whether D’Aloia had an equitable proprietary claim. In this regard, the court was satisfied that the cryptoassets in question were capable of attracting personal property rights that D’Aloia could assert. However, any claims D’Aloia sought to make for recovery of the value of his property from Bitkub were undermined by inadequate evidence the court considered D’Aloia relied on to show his stolen cryptoassets had been transferred to Bitkub.

In this respect, the deputy judge took issue with the explanation offered by D’Aloia’s investigator over the method he had used for tracing the flow of D’Aloia’s assets. The deputy judge noted that the expert may have had a range of methodologies to choose from to trace the cryptoassets, but nothing was said as to how the expert’s chosen methodology was selected. The deputy judge cited Practice Direction 35 which states where there is a range of opinions the expert must say what they are and to give reasons for his opinion.

Because the investigator did not do this to the deputy judge’s satisfaction, the court considered D'Aloia could not evidence that his funds definitely flowed to Bitkub. This undermined the various arguments he raised as to why Bitkub ought to refund him – including his arguments that Bitkub was holding his funds on constructive trust for him and breached that trust when it allowed funds to be withdrawn from the Thai woman’s account.

Hinesh Shah and Tom Aries of Pinsent Masons said the ruling reaffirms the challenges of tracing digital assets through mixed funds and multiple transactions.

“Clear forensic tracing of cryptoassets is crucial in litigation to establish a direct link between the stolen funds and the accused party, as demonstrated by the failure of D’Aloia’s claim due to insufficient evidence tracing his funds to Bitkub,” said Shah, a forensic accountant who specialises in investigating fraud.

“Engaging crypto tracing specialists is essential in complex legal cases to provide the necessary expertise to trace stolen cryptoassets and to accurately show the flow across the crypto ecosystem in a manner that is clear, straightforward and presentable as reliable evidence in court,” he said.

Aries added: “This judgment adds to the growing body of authority addressing the property status of cryptoassets under English law and, the judgment having been handed down following a contested trial, solidifies the position that cryptoassets are capable of attracting property rights for the purposes of English law – at a time when a new Bill has been introduced into the UK parliament to further clarify the law in this area.”

“Parties need to be clear as soon as possible from the outset as to what funds can be traced and followed to ensure legal or beneficial rights are properly established. This case emphasises the complexities that tracing and following crypto brings to this, and the importance of clearly pleading the basis for a constructive trust,” he said.