The High Court has discharged an interim proprietary injunction against the cryptocurrency exchange Binance which required it to preserve certain cryptocurrency that the claimant, the alleged victim of a cryptocurrency fraud, claimed to be able to trace to the exchange: Piroozzadeh v Persons Unknown and Others  EWHC 1024 (Ch).
There have been a number of recent cases in which the High Court has granted interim proprietary injunctions against cryptocurrency exchanges on a without notice basis. This is the first decision we are aware of where a cryptocurrency exchange has challenged the grant of such an injunction, and it highlights a number of important points in relation to such applications.
Where the victim of a cryptocurrency fraud claims to be able to trace their assets to an account on a cryptocurrency exchange, and seeks an injunction to preserve those assets, the claimant’s legal advisers should consider whether it would be sufficient to obtain an injunction against the owner of the cryptocurrency account and to serve that injunction on the exchange as a third party (which is common practice in relation to bank accounts), rather than naming the cryptocurrency exchange as a respondent itself. If an injunction is inappropriately obtained against the cryptocurrency exchange itself and later discharged, the claimant may be left with a significant adverse costs order.
If the claimant does seek an injunction against the exchange itself, the claimant’s legal advisers should be careful to distinguish the position of the exchange from the position of other potential defendants (for example, the alleged fraudsters). Particular consideration should be given to:
- Whether there is a proper basis for making an application against the exchange without notice. If the application is made without notice, the claimant must be careful to comply with the duty of full and frank disclosure.
- Whether there is a serious issue to be tried in respect of a claim against the exchange itself, and the defences that the exchange might have to such a claim. If the application is made without notice, the potential defences must be clearly drawn to the court’s attention.
- Whether damages would be an adequate remedy against the exchange in respect of any claim against it. If damages would be an adequate remedy, an injunction should not be granted.
- Whether there are identifiable assets at the time the application is made which the exchange could be required to preserve. If the assets have been mixed or dissipated and are no longer identifiable, an injunction should not be granted because it would serve no useful purpose. Any injunction should also be drafted in a form which makes it clear what the exchange is required to do.
Herbert Smith Freehills LLP acts for Binance in relation to the claim.
The claimant claims to have been the victim of a fraudulent scheme pursuant to which he was induced to transfer 1,990,051 Canadian Dollars to bank accounts nominated by the fraudsters and 870,818 USD Tether (USDT), a form of cryptocurrency, to blockchain addresses nominated by the fraudsters during the second half of 2021.
By early December 2021, the claimant suspected that he had been the victim of a fraudulent scheme. He instructed solicitors in the first half of 2022 and they instructed a forensic investigation expert in June 2022. The forensic investigation expert produced a report which asserted that it was possible to trace the claimant’s USDT to certain blockchain addresses, including “deposit addresses” for accounts on the Binance cryptocurrency exchange. For the purposes of the application to discharge the injunction only, it was not disputed that the USDT could be traced to those addresses.
In relation to the Binance exchange, a “deposit address” is a blockchain address which is linked to a user’s Binance account. One way that a Binance user can deposit cryptocurrency to their Binance account is by transferring it to the deposit address linked to their account. Once the cryptocurrency is received in the deposit address, Binance credits the user’s Binance account with a corresponding value of cryptocurrency. The cryptocurrency transferred to the deposit address is then periodically swept to a Binance-owned central pooled funds wallet.
The claimant issued proceedings in October 2022 against various defendants including (a) the alleged fraudsters, (b) the recipients of the CAD and USDT, i.e. the owners of the bank accounts and cryptocurrency accounts to which the CAD and USDT could allegedly be traced, (c) the banks at which the relevant bank accounts were held, and (d) the cryptocurrency exchanges at which the relevant cryptocurrency accounts were held (Binance and OKX).
At a without notice hearing on 18 October 2022, Sir Anthony Mann made various orders including proprietary injunctions against the alleged fraudsters, the recipients of the USDT, and Binance and OKX. In respect of Binance, the proprietary injunction required Binance to “preserve the Claimant’s 470,904 USDT, or the traceable proceeds thereof” which it was alleged to have received from the blockchain addresses identified by the claimant’s forensic investigation expert (which were deposit addresses for Binance user accounts).
Binance applied to set aside the proprietary injunction against it and opposed the continuation of that injunction on the grounds that (a) there was no basis for the claimant to have proceeded against Binance without notice, (b) the claimant’s legal representatives had failed to comply with their duty of full and frank disclosure at the without notice hearing, (c) there was no serious issue to be tried in respect of the alleged proprietary claims against Binance, (d) there was no evidence that damages would not be an adequate remedy against Binance, and (e) it was impossible in practice for Binance to comply with the injunction because the USDT in question had been transferred to its central pooled funds address where they had been mixed and dissipated in the ordinary course of its business before it was served with the injunction.
At the return date hearing, the High Court (Trower J) discharged the proprietary injunction against Binance and ordered the claimant to pay Binance’s costs of the application on the indemnity basis amounting to £90,000.
The without notice application
The judge found that the claimant’s justification for making the application without notice failed to distinguish between the position of the different defendants. This was a significant failing in circumstances where there was no evidence that Binance itself would have taken any steps or permitted any steps to be taken if it was forewarned of the application. The obvious solution in that situation was for the claimant to proceed without notice against the alleged fraudsters and to serve any order on Binance as a non-respondent.
The judge held that this failing, taken purely in isolation, would not have justified the discharge of the injunction, but that did not mean that the claimant should have proceeded against Binance without notice.
Full and frank disclosure
The judge found that the claimant’s legal representatives had failed to comply with the duty of fair presentation at the without notice hearing in several respects.
1. Potential defences
The judge reiterated previous authorities which emphasise that an applicant for a without notice injunction has an obligation to anticipate potential defences to the claim and cannot rely on the judge to do so. The claimant’s counsel had not made any reference at the without notice hearing to the possibility of Binance raising a bona fide purchaser defence. While the judge at the without notice hearing had been told that the relevant assets had been swept from the Binance deposit addresses to Binance pooled funds addresses, the possible legal consequences of that were not explained to him and they should have been.
This failing was more acute because both the claimant’s solicitors and counsel also acted for another claimant in similar proceedings against Binance in which Binance had asserted a bona fide purchaser defence. Therefore, at the time of the without notice application in the present proceedings, the claimant’s legal representatives were aware that the operation of the Binance exchange involved the pooling of assets and that, where that had occurred, Binance was likely to assert a bona fide purchaser defence. However, this was not mentioned to the judge at the without notice hearing.
2. Adequacy of damages
The judge held that the question of whether damages would be an adequate remedy should also have been dealt with in a more comprehensive manner. At the without notice hearing, the claimant’s legal representatives did not address the adequacy of damages as against Binance (as opposed to the other defendants) at all. It remained unclear at the return date hearing why it was said that damages would not be an adequate remedy against Binance.
3. How Binance could comply in practice
The judge held that the claimant’s legal representatives had failed to explain to the judge at the without notice hearing how Binance could in practice freeze the relevant USDT given the operation of the Binance platform and the fact that the assets had been transferred to a pooled address where they had been mixed and dissipated. Again, it remained unclear at the return date hearing how it was said that Binance would be able to identify the “traceable proceeds” of the relevant USDT in order to freeze them, and the claimant’s counsel was not able to offer any assistance on that point.
Conclusion on full and frank disclosure
The judge concluded that the position was not, objectively speaking, fairly presented to the judge at the without notice hearing. Therefore, in the normal course, the injunction should be discharged but the court retained a discretion to continue or regrant the injunction. There are a number of factors that must be taken into account when exercising that discretion: the importance of the non-disclosure to the issues before the judge, the need to encourage compliance, the extent of culpability and the risk of injustice to the claimant which may occur if an order is discharged. The judge formed the view that, having regard to those considerations, there was no basis on which the injunction in the present case should be regranted.
- The failure by the claimant’s legal representatives to distinguish between the position of Binance and the other defendants was an important one.
- The need to ensure compliance with the duty was acute in the context of cases such as the present one. Exchanges can often find themselves joined as respondents for the purposes of Bankers Trust relief and/or injunctive relief. It is important that the nature of the claims against them and whether there is a substantive claim or merely a claim for Bankers Trust relief is properly differentiated.
- There was some level of culpability on the part of the claimant’s legal representatives. A deliberate decision had been made not to disclose the possible bona fide purchaser defence, although there was no suggestion that this was motivated by anything other than a misapprehension as to the nature and extent of the duty of full and frank disclosure, and there was no suggestion that there was any dishonesty or anything of the like involved.
- There was no risk of any significant injustice to the claimant. There was still no explanation as to why damages would not be an adequate remedy against Binance, and the injunction would serve no useful purpose because Binance would not be in a position to preserve assets which had already been mixed and dissipated.
Serious issue to be tried
The judge concluded that it was not necessary for him to decide the question of whether there was a serious issue to be tried in respect of the proprietary claim against Binance and that it was not right to express any concluded view on that issue at the return date hearing, in particular because there was an extant application by OKX for reverse summary judgment on the claims against it. However, the judge emphasised that the claimant could garner no support for thinking that his claim against Binance had any real substance, and it was perfectly possible that an application to strike out or dismiss by reverse summary judgment might succeed.