Quillon Law successfully defends crypto exchange Bitkub Online Co Ltd in landmark High Court case

Partner Nicola McKinney led a team, including Colette Bacon, in successfully defending Thailand-based crypto exchange Bitkub Online Co Ltd (“Bitkub”) at a trial in D’Aloia v Persons Unknown and Others, in which the Claimant (“Mr D’Aloia”) sought damages and compensation after falling victim to a crypto fraud perpetrated by the First Defendant, Persons Unknown Category A (“Persons Unknown”).

The Judgment is the first in the English courts to make findings following a full trial as to a number of questions relating to the status and treatment of crypto currency in English law, including that:

• USDT/Tether (the relevant crypto currency in this claim) is property and in so doing, adopting the approach proposed in the Law Commission’s 2023 Report, “Digital Assets: Final Report” that USDT/Tether is a new, third type of property and neither a chose in action nor a chose in possession.
• It also considers in detail the methodological bases of tracing which may be available to claimant fraud victims – both in relation to crypto currency frauds and beyond – and concluded that new methods might be relied upon, in preference to established methods such as ‘first in first out’, provided that they are methodologically sound and do not favour one victim of fraud over another.

Nicola McKinney, Partner at Quillon Law, commented: “We are delighted that our client’s defence, which has from the start of these proceedings been that the Claimant’s tracing analysis was flawed, has been very clearly accepted by the Court.

“The Judgment includes detailed analysis on the nature of cryptocurrency, and the tracing methodologies available to fraud victims, that is likely to be of interest to claimants and defendants in future cases.”

It was not disputed that Mr D’Aloia had been the victim of a fraud perpetrated by Persons Unknown.  Over a period of months and a considerable number of transactions, Mr D’Aloia had transferred the fiat equivalent of approximately £2.5 million into the control of the fraudsters. A number of those transfers involved requests for further amounts which were said to be necessary to unblock ‘freezes’ on his account, in order to make withdrawals. In fact, the fraudsters had moved his USDT to wallets of a sham entity, and Mr D’Aloia realised that he was the victim of a significant scam.

In 2022, Mr D’Aloia issued proceedings against Persons Unknown, and also against several crypto exchanges for compensation and damages, including Bitkub. He claimed that that the unknown fraudsters had moved his crypto currency through several wallet addresses on the blockchain and that each of the Defendant exchanges had received part of his USDT into custodial wallets on their platforms. The claims against Bitkub were that it held 46,291 of his USDT as constructive trustee, and/or that Bitkub had been unjustly enriched by that amount in receiving his USDT. Mr D’Aloia abandoned a further proprietary restitutionary claim at the start of the trial.  No claim in fraud was advanced against any of the exchanges.

Prior to trial, Mr D’Aloia’s claims against the crypto exchange, Aux Cayes Fintech Co Ltd had been struck out by the English Court, and against Binance Holdings Limited had been settled.

In the Judgment in this “legally complex case”, following a 5-day trial in June 2024, Richard Farnhill (sitting as Deputy Judge of the High Court) found that Mr D’Aloia had not proved that any of his USDT had been received into the relevant Bitkub wallet address.

Mr D’Aloia had relied on the evidence of a blockchain expert, seeking to show that his USDT could be identified and traced through multiple wallets, including where it was mixed with other USDT. The Judge concluded that, while in principle USDT is capable of being identified in mixed pools, Mr D’Aloia could not evidence on the balance of probabilities that any of his USDT could be traced to the relevant Bitkub wallet.

All of Mr D’Aloia’s claims against Bitkub consequently failed.  The Judge also found that no breaches of Thai law had been pleaded or proved against Bitkub and the court also dismissed Mr D’Aloia’s allegation that Bitkub had acted in a commercially unacceptable manner, in permitting its account holder to open an account and operate a wallet, and that there were ‘KYC’ failings in it doing so.

Quillon Law instructed Darragh Connell and Eoin MacLachlan of Maitland Chambers, on behalf of Bitkub.

The Judgment was handed down on 12 September 2024.  An application for summary judgment against persons unknown and other parties remains to be determined, and consequential orders, including as to costs, will be heard at a later date.

The full Judgment can be read here.

This has been reported on in Law360, 12 September 2024, Cointelegraph, 13 September 2024, Cryptonews, 13 September 2024, Coinlive, 13 September 2024, 99Bitcoins, 13 September 2024, CDR Magazine, 16 September 2024, Law360, 17 September 2024, and Solicitors Journal, 18 September 2024.