STOLEN CRYPTOCURRENCY ASSETS AND PROPRIETARY INJUNCTION
In CLM v CLN and others [2022] SGHC 46, the General Division of the High Court granted, among others, a proprietary injunction prohibiting the dealing with, disposal of, or the diminishing of value of allegedly stolen cryptocurrency assets. In addition, the Court held that the Court had jurisdiction to grant interim orders against persons whose identities are presently unknown. In this blog, we highlight some key points.
Brief facts. In brief, the plaintiff claims to be the owner of 109.83 Bitcoin and 1497.54 Ethereum (the “Stolen Cryptocurrency Assets”) which were allegedly misappropriated by unidentified persons (the first defendants).
A portion of the Stolen Cryptocurrency Assets were traced to the digital wallets controlled by the second and third defendants, who are cryptocurrency exchanges with operations in Singapore.
Via an ex parte application in Summons No 2444 of 2021 (“SUM 2444”), the plaintiff sought the following interlocutory reliefs:
“(a) A proprietary injunction prohibiting the first defendants from dealing with, disposing of, or diminishing the value of the Stolen Cryptocurrency Assets.
(b) A worldwide freezing injunction prohibiting the first defendants from dealing with, disposing of, or diminishing their assets up to the value of US$7,089,894.68, being the value of the Stolen Cryptocurrency Assets.
(c) Ancillary disclosure orders against the second and third defendants to assist in the tracing of the Stolen Cryptocurrency Assets and the identification of the first defendants.”
At the time of the hearing of SUM 2444, the plaintiff was unable to identify who the first defendants may be. In addition, the plaintiff was also asserting no substantive claims against the second and third defendants (other than the disclosure orders).
For the purposes of this blog, we will not be addressing the Mareva injunction and the ancillary disclosure orders, nor the other summons taken up by the plaintiff to join persons as defendants to the action. However, we urge readers to read this decision in full.
Jurisdiction against persons unknown. The Court referred to Bloomsbury Publishing Group Ltd and another v News Group Newspapers Ltd and others [2003] 1 WLR 1633 (“Bloomsbury”), CMOC v Persons Unknown [2017] EWHC 3599 (Comm) (“CMOC”), and Zschimmer & Schwarz GmbH & Co KG Chemische Fabriken v Persons Unknown & Anor [2021] 7 MLJ 178 (“Zschimmer”), and held that the principles set out in these authorities are “instructive and readily applicable to [the present] legal context.”
The Court found that:
1. Similar to United Kingdom and Malaysia, there is no requirement in the Rules of Court (Cap 322, R5, 2014 Rev. Ed.) (“Rules of Court”) that a defendant has to be specifically named.
2. O 2 r 1 of the Rules of Court provides that “even if the commencement of proceedings against persons unknown contravenes the ROC, such a contravention is treated as a mere irregularity, and will not result in the nullification of proceedings unless the court exercises its discretion to order the same”.
3. O 81 of the Rules of Court allows for persons unknown in summary proceedings for possession of land. Therefore, “[s]ince persons whose identities are unknown can be described as “persons unknown” in such summary proceedings, [the Court saw] no reason in principle why they cannot be so described for the purposes of interim orders”.
What is important is that, as per Bloomsbury, the description of the “persons unknown” must be sufficiently certain so as to identify those who are included and those who are not.
In CLM v CLN and others [2022] SGHC 46, the Court was satisfied that the plaintiff’s description, being “[A]ny person or entity who carried out, participated in or assisted in the theft of the Plaintiff’s Cryptocurrency Assets on or around 8 January 2021, save for the provision of cryptocurrency hosting or trading facilities”, was sufficiently certain.
Proprietary injunction. The Court also granted the proprietary injunction “prohibiting the first defendants from dealing with, disposing of, or diminishing the value of the Stolen Cryptocurrency Assets.”
Serious question to be tried. The Court was satisfied that there was a serious question to be tried, accepting that cryptocurrencies satisfied the definition of a property right (at least for the purposes of an interlocutory injunction).
The Court referred to Quoine Pte Ltd v B2C2 Ltd [2020] 2 SLR 20, and more importantly, relied upon the analysis in the New Zealand decision of Ruscoe v Cryptopia Ltd (in liq) [2020] 2 NZLR 809 (“Ruscoe”), finding that cryptocurrencies satisfied the classic definition of a property right in National Provincial Bank Ltd v Ainsworth [1965] AC 1175 as being “definable, identifiable by third parties, capable in its nature of assumption by third parties, and have some degree of permanence or stability”.
Given the Court’s emphasis on the importance of Ruscoe, we set out the Court’s summary of the analysis in Ruscoe below for readers’ ease of reference:
“(a) The first requirement is that the right must be “definable” – the asset must hence be capable of being isolated from other assets whether of the same type or of other types and thereby identified (Ruscoe at [104]). To this end, cryptocurrencies are computer-readable strings of characters which are recorded on networks of computers established for the purpose of recording those strings, and are sufficiently distinct to be capable of then being allocated to an account holder on that particular network (Ruscoe at [105]).
(b) The second requirement is that the right must be “identifiable by third parties”, which requires that the asset must have an owner being capable of being recognised as such by third parties (Ruscoe at [109]). An important indicator is whether the owner has the power to exclude others from using or benefiting from the asset (Ruscoe at [110]). In this vein, excludability is achieved in respect of cryptocurrencies by the computer software allocating the owner with a private key, which is required to record a transfer of the cryptocurrency from one account to another (Ruscoe at [112]).
(c) The third requirement is that the right must be “capable of assumption by third parties”, which in turn involves two aspects: that third parties must respect the rights of the owner in that asset, and that the asset must be potentially desirable (Ruscoe at [114]). The fact that these two aspects are met by cryptocurrencies, is evidenced by the fact that many cryptocurrencies, certainly BTC and ETH, are the subject of active trading markets (Ruscoe at [116]).
(d) The fourth requirement is that the right and in turn, the asset, must have “some degree of permanence or stability”, although this is a low threshold since a “ticket to a football match which can have a very short life yet unquestionably it is regarded as property” (Ruscoe at [117]). In this respect, the blockchain methodology which cryptocurrency systems deploy provides stability to cryptocurrencies, and a particular cryptocurrency token stays fully recognised, in existence and stable unless and until it is spent through the use of the private key, which may never happen (Ruscoe at [118]).”
Balance of convenience. The Court was also satisfied that the balance of convenience lay in favour of granting the injunction, given the potential prejudice the plaintiff may suffer if the injunction is not granted (as there would be a real risk that the first defendants may dissipate the Stolen Cryptocurrency Assets) is greater than the potential prejudice to the defendants in granting the injunction (as if the plaintiff’s case was later refuted, the first defendants can be compensated by damages).
Implications. As far as the authors are aware, this is the first reported decision by the Singapore Courts addressing whether proprietary injunctions can be granted against persons unknown for allegedly stolen cryptocurrency assets.
This decision by the Court is therefore extremely important as it not only deals with novel issues of law, but also because of its wider ramifications. The recognition, even for the purposes of an interlocutory injunction, that cryptocurrencies satisfy the definition of a property right will have important implications in terms of the rights that owners of cryptocurrencies possess.
Further, the suite of applications granted by the Court will no doubt be an important precedent in future cases in terms of how owners of cryptocurrencies may respond in similar situations involving misappropriation of cryptocurrencies.
This publication is not intended to be, nor should it be taken as, legal advice; it is not a substitute for specific legal advice for specific circumstances. You should not take, nor refrain from taking, actions based on this publication. Chancery Law Corporation is not responsible for, and does not accept any responsibility for, any loss or damage that may arise from any reliance based on this publication.