Partner Nicola McKinney analyses crypto asset freezing in Bloomberg

May 23, 2023

Partner Nicola McKinney examines how the injunction against crypto exchange Globix shows how courts are willing to deliver robust asset tracing solutions.


Nicola’s article was published in Bloomberg Law, here, and Bloomberg Tax, here, 23 May 2023.

Following the collapse of crypto trader Globix amid heavy losses, a Gibraltarian court has granted injunctions to liquidators working to recover the shuttered company’s assets. As a result, Binance and several other high-profile crypto exchanges have been ordered to identify the users of wallets linked to Globix, as well as to freeze any currencies the wallets contain.

The liquidators had sought the injunction as part of their efforts to trace an estimated $43 million of missing funds, following the decision of Globix’s sole shareholder and to put the company into liquidation in March. Globix operated from Gibraltar, but was not licensed by local regulators, leading to criticism that the British Overseas Territory had failed in its much-vaunted efforts to tighten scrutiny of the crypto sector.

In 2018, Gibraltar became one of the first jurisdictions to pass regulations governing crypto investment, leading to an influx of crypto companies who found it easier to attract investors and customers given the protection offered by the rules. In 2022, the scope of the regulations was widened to include strictures against market manipulation and insider trading, in order to better protect market integrity in the sector, which provided further reassurance to consumers transacting with licensed firms.

Investors in Globix were not covered by the regulatory framework, since the company had not obtained a license from the national financial regulator, despite its daily activity handling client funds. However, a measure of solace could be taken from the court handing the liquidators these powerful recovery tools, robust action which may also repair some of the reputational damage caused to the territory by the initial scandal around Globix’s demise.

The court’s decision to grant these injunctions reflects the increasing ease with which both victims of fraud and liquidators are able to obtain asset freezing and disclosure orders in a growing number of jurisdictions. Growing judicial familiarity with the crypto sector, and the increased awareness of victims that court orders represent a viable recovery mechanism, has resulted in similar orders being handed down, helping to turn the tide in the often-uphill struggle to trace digital assets.

As a result, much-needed confidence will arguably have been injected into a sector which has been battered by controversy in recent years. With little to no crypto regulation in many jurisdictions, theft and fraud have become synonymous with crypto investment, acting as a strong deterrent to many consumers and investors considering entering the arena.

The failure of regulators to take sufficiently tough enforcement action for years led criminals to flood the crypto space, operating increasingly sophisticated schemes and causing massive losses for both individual and institutional investors and traders. Last year’s onset of the ‘crypto winter,’ in which cryptocurrency prices collapsed across the board, further exposed the perilous nature of the sector and the scant protections afforded to crypto consumers at the time.

The collapse of FTX and other major players in the crypto space has since provided both regulators and courts with extra impetus to take tougher measures to protect actual and potential victims of crypto-related crime. There have been numerous recent cases where English courts have ordered crypto exchanges to provide information to facilitate the identification of fraudsters, allow missing funds to be located, and to freeze assets in their possession.

English courts have paved the way for such actions, with numerous reasoned judgments now available to provide a roadmap for applicants and judges facing similar issues in separate jurisdictions. Some of the early possible hurdles to courts granting disclosure and freezing orders have been overcome, and the obligations upon applicants have also been re-emphasised. As a result, countries such as Gibraltar with legal and historic links to Great Britain are appearing increasingly likely to play host to successful local applications for asset freezing and disclosure orders.

There has undoubtedly been reputational fallout for countries hosting collapsed crypto exchanges, as well as scrutiny of the regulatory framework under which those businesses operated. However, the willingness of courts to deliver robust asset-tracing solutions is likely to increase confidence in those jurisdictions and provide suitable recourse for customers and shareholders alike.

The willingness of courts to offer such recourse will likely inform whether investors and advisors decide a crypto exchange or trading platform is safe to use or invest with. Such investment decisions are likely to encompass not just the regulatory requirements of the jurisdiction but also whether – if things go badly wrong – there is clear recourse to the courts to attempt recovery.

Time will tell whether Globix’s liquidators are able to trace and recover the millions missing from its accounts, but the Gibraltar courts have joined the judicial cohort signalling that times are changing in terms of their attitude towards crypto companies.

The ability to acquire information about account holders, and to freeze assets will make it harder for the perpetrators of crypto fraud and crime to shield themselves from remedial legal actions, which may in some cases also deter bad actors from carrying out the types of frauds which have become prevalent in crypto investment. The Gibraltar court’s decision in the Globix case is a shot in the arm for crypto consumers, and will doubtless be replicated in future cases, as regulators and lawmakers extend their efforts to take concrete steps to clean up the sector.