Chill, Don’t Spill: Freeze Your Digital Assets, Master the Thrill!

Introduction

Since the 2010s, there has been a growing popularity in the concept of digital assets. They are non-fungible, valuable, and do not impose the same logistical troubles as physical assets. Every Tom, Dick, and Harry has either ventured into the realm of owning digital assets or are on their way to doing so. But in light of the ever-growing concept of assets due to technology, there is a need to question ourselves as to what defines “digital assets”. Digital assets are colloquially considered to be electronic files that can be owned and have its value transferred with it. A digital asset is only considered to be so if it has value to it in that it generates value for the person who owns the asset. The sky is the limit when it comes to the manifestations of the concept of digital assets. As of now, digital assets include cryptocurrencies, digital e-wallets, asset-backed stablecoins like tether, and non-fungible tokens (NFTs), and certificates of ownership of original digital assets.

Along with the existence of digital assets, much like their physical counterparts, there are natural instances where theft occurs. There is an added security risk whereby digital asset owners may fall prey to hackers. This happens when they are tricked into disclosing their private keys which are gateways to their assets. When one finds that his own digital asset has been jeopardised, there are two main questions that arise with many sub-questions that follow in turn. First, there is the question of whether a Mareva injunction (colloquially known as a freezing order) may be granted in favour of digital assets that have seemingly no tangible value. The second concern is, in the event said injunction can be granted, whether it can be granted despite the perpetrator’s identity being unknown. 

Mareva Injunctions 101

A Mareva injunction is, in simple terms, a court order granted with the aim of preventing another person from relocating, diminishing the value of, and dissipating an asset. The Mareva injunction is also commonly referred to as a freezing order.   This order is typically granted at the outset of proceedings so that the assets are kept safe and sound till the disposal of the suit.  

Do Digital Assets have a Property Right Attached to them?

The question of whether digital assets have a property right attached to them?  If so, that would enable an application for a Mareva injunction to be successfully made.  Without a property right there is no talk of applying for a Mareva Injunction. According to the English High Court in National Provincial Bank Ltd v Ainsworth (“Ainsworth”), a property right is established only if it is: 

“definable, identifiable by third parties, capable in its nature of assumption by third parties, and have some degree of permanence or stability.” [1]

This question was aptly answered by the High Court in New Zealand which was faced with a dispute relating to the determination of assets in the liquidation of a cryptocurrency exchange in Ruscoe v Cryptopia Ltd (in liq)[2]. In applying the test in Ainsworth, the court found that cryptocurrency is a species of intangible personal property. 

First, cryptocurrency has a public key, which comprises of readable computer characters, which would cause them to be distinct and capable of allocation to an account holder, hence making it definable. Next, cryptocurrency was found to be identifiable by third parties since they also require a private key that provides only the account holder with control and access to the cryptocurrency. So, owners have the power of excluding others from dealing with the cryptocurrency, making private keys a tool for transferring ownership to third parties. Third, naturally, cryptocurrency was found to be capable of assumption by third parties since the existence of the private keys makes it compulsory for third parties to respect the rights of the owner of the asset. Another important consideration is that the asset must be potentially desirable by third parties, which cryptocurrency is. Lastly, with regard to permanence and stability, cryptocurrencies are stable and remain in existence unless the owner “spends” it through the use of their private key. It is not a system that allows arbitrary cancellation or disposition, making it permanent in nature much like physical currency.

Therefore, cryptocurrencies are a type of intangible property.  

Does a Mareva Injunction Apply to Digital Assets?

The short answer is yes. The long answer can be observed from the various cases across different jurisdictions that have had judgments answering this question in the affirmative. 

Singapore

In 2022, the Singaporean High Court, in CLM v CLN was faced with a legal dispute involving cryptocurrency[3]. One of the main issues was if cryptocurrency could be the subject of proprietary injunction considering the facts by which the Plaintiff’s cryptocurrency, namely Bitcon and Ethereum, had been misappropriated by unidentified Defendants. In answering the question on whether cryptocurrencies are capable of giving rise to proprietary rights, the court referred to another Singaporean decision by the Singapore International Commercial Court in B2C2 Ltd v Quoine Pte Ltd where cryptocurrencies were said to possess the “fundamental characteristic of intangible property as being an identifiable thing of value”.[4] The court then proceeded to grant the Mareva Injunction applied for by the Plaintiff for several reasons. First, the Plaintiff had good arguable cause since his cryptocurrency had been misappropriated without his consent. Next, there was a real risk of dissipation since the Defendant had already dissipated the cryptocurrency through digital wallets to prevent the Plaintiff from being able to trace his asset. the court acknowledged that with digital assets there is a graver risk of dissipation since all it takes is the click of a button.

Canada

Clarity can be found in Li et al. v. Barber et. al., 2022 ONSC 1176. [5]

During the height of the Covid- 19 wave of restrictions in Ottawa, the Government invoked the Emergencies Act whereby an executive order made it illegal to fund protests and blockades- either by physical or digital currency. This move was taken due to the protests organised by the “Freedom Convoy”. Meanwhile, a number of citizens affected by the protests wanted to take legal action against them for private and public nuisance (the plaintiffs). The plaintiffs wished to apply for a Mareva Injunction to prevent the protesters (the defendants) from dissipating their assets and being unable to provide the Plaintiffs with effective remedy in the form of damages. The defendants were shown to be owners of digital wallets containing bitcoin and other digital assets. 

The Court granted the Mareva Injunction on the crypto- based assets on the ground that they were being used to avoid Government seizure and because they were kept separate from the conventional funding platform in the hope that the Government would not be able to trace the  said funding. The court proceeded to emphasise how digital funds are not immune from execution and seizure. 

United Kingdom

The Plaintiffs in ION Science Ltd v Persons Unknown and Others, had fallen prey to fraud at the hands of the unknown defendants [6]. The Plaintiffs were induced to make investments in the form of Bitcoin and were made to transfer additional funds to acquire additional profits. Upon discovering that the Defendants claimed to be connected to a non-existent company, the Plaintiffs attempted to recover their stolen crypto assets that had been transferred by applying for a freezing order. The court, in granting the Mareva Injunction, acknowledged that cryptocurrency was in fact and law property and capable of being subject to an injunction. 

Can the Injunction be applied in favour of an Unknown Person?

One of the biggest problems with falling prey to theft or hacking of digital assets is that the perpetrator is almost always anonymous. In fact, the platforms that contain digital assets are by design made to make holders of said assets anonymous. This then begs the question of how one can take legal action and apply for a Mareva injunction to prevent their stolen assets from being dissipated. In the aforementioned case of CLM v CLN decided in the Singapore jurisdiction, an injunction was granted against persons unknown since the Plaintiff was not able to identify the First Defendants who had stolen his private key and drained his digital wallets dry. 

    Back home in Malaysia, the High Court case of Zchimmer & Schwartz GmbH & Co KG Chemische Fabriken v Persons Unknown & Anor is illuminating as it granted an injunction against an unknown defendant [7]. The Malaysian High Court referred to several cases from the jurisdiction of the United Kingdom in coming to its wise decision. The case of CMOC Sales & Marketing Limited v Persons Unknown and 30 others allowed the injunction against a group of unknown fraudsters because they fell within a defined class of persons, namely; (1) any person or entity who carried out and/or assisted and/or participated in the Fraud and (2) any person or entity who received any of the monies misappropriated from the Claimant other than in the course of a genuine business transaction. [8]

This position was also similar in the English case of Bloomsbury Publishing Group Ltd v News Group Newspapers whereby an interlocutory injunction had been granted against unknown individuals who removed copies of an unpublished Harry Potter book without authority and proceeded to offer them for sale. [9] The important principle is that when one takes legal action against an unknown defendant, the description used must be sufficiently certain to identify both those who are included and those who are not. 

What will the Future Hold?

One would be naïve to think that the future of legal actions for digital assets will be a bed of roses with the host of case laws protecting asset owners. Moving forward, the growth of grey areas in terms of digital assets will inevitably increase. 

Despite digital assets being recognised as property, there is still a major issue of whether they can be equated to “money” and whether they can be governed the same way fiat currency is. The Singapore High Court in an action brought to wind up an entity of failed crypto fund discussed this issue extensively, but ultimately answered the question in the negative. In response to the argument that cryptocurrency is money, Justice Vinodh Coomaraswamy sceptically rightfully asked the counsel whether the court would need to accept seashells as currency if a community used seashells as a medium of exchange. [10]

Next, the traceability of stolen funds is another can of worms that has not been properly opened across jurisdictions. The concept of crypto mixers makes the task of tracing funds incredibly difficult. Crypto mixers are services that blend cryptocurrency from various owners with the purpose of making it harder to trace the origins of the funds, making it nearly impossible to determine ownership and location. [11]

As we move further into this novel area of law, much clarification of the law is needed to address various scenarios that are unique to digital assets.  Nevertheless as of today, the recognition of cryptocurrency as property and the enabling of Mareva injunction orders to be granted against them are a welcome.