Can supervisors of crypto exchanges in offshore jurisdictions be held liable for funds stolen by crypto fraudsters via these exchanges? | JD Supra

Courts in offshore jurisdictions have begun to adopt the decisions of English courts when awarding relief with respect to the dissipation and recovery of crypto-assets. An example is the recent decision of ChainSwap against unknown persons where the BVI court granted an order to freeze assets held by unknown persons in connection with crypto fraud and follows similar rulings in the UK and other Commonwealth countries where such relief is now routinely granted. Therefore, we consider the recent English decision in D’Aloia versus Unknowns and others [2022] EWHC 1723 (Ch) which highlights the possibility that the controllers and operators of a crypto exchange could be considered a fiduciary of the misappropriated assets circulating in any crypto wallet it manages and therefore would have an obligation to report to the victims of the misappropriation of any unauthorized profit or gain made as a fiduciary.


The case concerns a request by Mr. Fabrizio D’Aloia for an interim injunction and disclosure against a number of defendants, arising from what he alleged was the fraudulent misappropriation of cryptocurrency in the form of approximately 2 .1 million USDT and 230,000 USDC by unknown persons. Mr. D’Aloia alleged that he was tricked, through fraudulent misrepresentation, into transferring USDT and USDC from his Coinbase and wallets to the operators of the “tda-finan” website, which were unknown. Using crypto investigative specialists, D’Aloia confirmed that some 2.175 million USDT and USDC had been transferred to a number of private addresses and wallets operated by or under the control of various cryptocurrency exchanges. The decision significantly considers the satisfaction of the injunction test with respect to crypto assets, including whether the English courts are the most appropriate forum for such a claim with reference to the lex situs of the crypto assets in question and where the damage occurred.

Can an exchange be responsible for the lost product?

One of the most significant developments in the ruling stems from the Court’s ruling that there was a good arguable case that Mr. D’Aloia has a claim not only against the fraudsters who stole his cryptocurrency, but also against the controller and operator of one of the exchanges that controlled the wallets through which it was possible to trace the crypto assets stolen from Mr. D’Aloia. In doing so, he pointed to the possibility that an exchange with sufficient control over the wallets it maintains could be seen as a fiduciary of the misappropriated assets circulating in those wallets and in turn have a duty to account to the victims of the misappropriation of any unauthorized profit or gain. done because of its fiduciary role. It remains to be seen whether Mr. D’Aloia’s claim in this regard will succeed at trial. Nevertheless, the fact that such a claim has been allowed to proceed is a significant decision not only in England and Wales but also offshore and specifically in the Cayman Islands and the BVI where such decisions are very compelling. and likely to be tracked.

Practical consequences

The decision in D’Aloia vs Unknowns is important because it demonstrates the ability for victims of crypto fraud to have direct claims against controllers and crypto exchange operators for fair compensation when a constructive trust claim is established. In circumstances where it is usually very difficult to take action against fraudsters given the pseudonymous nature of crypto assets and the associated difficulty of identifying fraudsters, victims of crypto fraud will now consider the possibility of direct claims against crypto exchanges, as known parties, when such exchanges have been notified that they are in possession of fraudulently misappropriated crypto-assets. Where crypto-assets are the subject of potential litigation, a court may issue an order requiring those assets to be properly segregated and not removed. Crypto exchanges in the Cayman Islands and BVI will need to consider best practices, including the level of control they exercise over wallets and procedures necessary to mitigate the risk of misappropriation of funds held in wallets managed by the exchange .

For more information on this issue, or if you require advice on these or any other Cayman Islands or BVI legal issues, please contact one of the Insolvency and Resolution Team’s primary contacts. Dubai disputes listed below.

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