Litigating Crypto Fraud: Legal Innovations in Pursuing Justice

In recent days, a new crypto-related pyramid scheme has taken Cyprus by storm. Metamax, a questionable “investment platform” had been promising huge profits to its investors in the form of daily rewards in stablecoins (i.e. USDT), for completing various “tasks”, such as watching videos and providing ratings. However, while these “tasks” created an illusion of productivity, the primary purpose of the platform was to incentivize new members to join and invest which would bring significant rewards to the recruiters (1).

Interestingly enough, as it now turns out, Metamax’s supposed CEO was in reality an AI-generated avatar, while the company’s listed office in Canada did not exist (2).

Local news outlets report that regional Criminal Investigation Departments (CIDs) are now investigating numerous complaints related to Metamax made by affected individuals who have fallen victims of this new crypto-related fraudulent scheme (3) .

Naturally, this development sparks, once again, discussions regarding crypto fraud claims, their limitations and the possibility of ultimately recovering lost digital assets.

The Person(s) Unknown Jurisdiction

It is well known that combating digital asset fraud poses substantial challenges.

Decentralization and variable degrees of anonymity are hallmark characteristics that contribute to the popularity and appeal of cryptocurrency, offering users enhanced privacy and freedom from centralized control and traditional financial systems. These features empower individuals by providing secure and private transactions, making cryptocurrencies attractive to a broad audience. However, the same qualities that make crypto appealing also pose significant challenges in legal contexts, particularly in cases of fraud. The degree of anonymity afforded by crypto that protects legitimate users, can also be exploited by fraudsters to conceal their identities and activities, creating substantial obstacles for litigants attempting to track them down and recover stolen assets in crypto-related fraud.

To tackle these challenges, common law systems in countries like the UK, the US, Singapore, and the BVI have utilized the “Persons Unknown” jurisdiction, a legal tool historically employed in cases of trespass or defamation.

In a nutshell, the “Persons Unknown” jurisdiction refers to the power of the Court to entertain proceedings and even issue orders against individuals described as “Persons Unknown”, identified by a specific description, even if their exact identities are unknown (4).

Building on previous authorities, the English courts in CMOC v Persons Unknown [2018] extended this jurisdiction to worldwide freezing injunctions (WFOs) while recognising the possibility of issuing ancillary disclosure relief with extra-territorial effect (5). This establishes a new avenue for acquiring information concerning the identities of fraudsters and the location of embezzled digital assets even if the third parties involved are located outside the Court’s jurisdiction.

Alternative Service by NFTs

While the “Person(s) Unknown” jurisdiction enables victims of crypto fraud to pursue proceedings, secure interim relief and even judgments against unidentified fraudsters, serving these individuals remains a significant challenge to plaintiffs. Traditional methods of identification and service are often found to be inadequate due to the potentially anonymous nature of blockchain transactions.

An innovative solution has emerged through blockchain technology. In 2022, the Supreme Court of New York issued an order allowing court proceedings to be served via a unique method involving Non-Fungible Tokens (NFTs) airdropped into the wallet of an anonymous defendant which included a hyperlink to a website hosting the service documents (6). Similarly, shortly after, in a case where the plaintiff fell victim to a crypto scam, having been deceived into transferring cryptocurrency to unidentified individuals, the English High Court issued an order allowing service of court documents through alternative means, specifically by using Non-Fungible Tokens (NFTs) airdropped into the wallets into which the plaintiff initially transferred the cryptocurrencies (7).

Judgments Against “Unknown Defendants”

In one of the latest developments, the case of Mooij v Persons Unknown [2024] saw the English High Court grant summary judgment against an unidentified group of individuals (8). The Court ruled that since alternative service had been effected through an NFT airdrop into the targeted wallet, it had jurisdiction to grant both proprietary and non-proprietary relief in the form of a summary judgment against the unknown defendants.

Said judgment is also in line with previous case law in which either summary or default judgments against persons unknown were granted (9).

One might question the practicality of such judgments, assuming they might be merely victories of symbolic nature. However, securing a judgment against unidentified defendants becomes particularly useful in cases where the plaintiff’s digital assets can be traced to wallets on centralized cryptocurrency exchanges. In such scenarios, it is possible to enforce the judgment, provided those exchanges are willing to cooperate and comply with the court’s orders. A pertinent example is the case of Law v Persons Unknown [2023], where the English Commercial Court ordered Huobi, a crypto exchange, to transfer frozen cryptocurrency to England for the purpose of enforcing the issued judgment (10).

Although modern financial fraud, especially in cryptocurrency transactions, presents unique challenges for litigants globally, the recent advancements underscore the adaptability and flexibility of common law. These developments clearly demonstrate that when courts embrace change and acknowledge new realities, new avenues for achieving justice emerge.

An Opportunity for the Cypriot Courts

In Cyprus, while these matters have not yet been addressed by the Cypriot Courts, it is well established that common law and principles of equity are directly applied and supplement the overall operation of the law. The case law of the Cypriot Courts is often influenced by English authorities, which at times, may even have binding effect (11).

It remains to be seen how the Cypriot legal system will respond to the challenges posed by cryptocurrency fraud. Given the strong influence of English jurisprudence, it is likely that Cypriot Courts will look to recent English judgments, such as Mooij and Jones, for guidance. The adoption of similar innovative approaches, including the use of NFTs for service and actions against “persons unknown”, could provide effective legal remedies for victims of crypto fraud in Cyprus.

In conclusion, the rapid rise of blockchain technologies and cryptocurrencies has created fertile ground for new forms of financial fraud. This evolving landscape demands that both the Courts as well as legal practitioners adapt, demonstrate a commitment to providing solutions for victims of crypto fraud, and leverage the innovative tools these technologies offer.

(1) https://clearangles.com/blog/metamax-review-scam-or-legit-opportunity/
(2) Ibid.
(3) https://knews.kathimerini.com.cy/en/business/new-pyramid-scheme-preys-on-cypriots-promising-big-profits and https://cyprus-mail.com/2024/07/03/police-investigating-pyramid-scheme-as-victims-come-forward/
(4)As explained in Bloomsbury Publishing Group Ltd v News Group Newspapers Ltd [2003] EWHC 1205 (Ch).
(5) CMOC v Persons Unknown [2018] EWHC 2230.
(6) LCX AG v John Doe Nos. 1-25 (Dkt.No.,154644/2022) (N.Y. Supreme, Ct., NY County).
(7) D’Aloia v Person Unknown & Ors [2022] EWHC 1723 (Ch).
(8) Mooij v Persons Unknown [2024] EWHC 814 (Comm).
(9)See Jones v Persons Unknown [2022] EWHC 2543 (Comm) and Mannarino v Persons Unknown [2023] EWHC 3176 (Ch).
(10) Joseph Keen Shing Law v Persons Unknown & Huobi Global Limited [2023] 1 WLUK 577.
(11) Section 29(1)(c) of Courts of Justice Law (L. 14/60) and Constantinou ν. Panayides (1984) 1 CLR 466.