Digital currencies and injunctions in civil proceedings

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This article explains the relationship that Applicants and Respondents would have during the course of a civil dispute and where the subject matter would involve digital currencies. The basis of this relationship lies in the legal status of digital currencies and the Civil Procedure Rules (CPR) related to injunctions which could be used during these proceedings. Thus, this article focuses solely on the injunctions available to Applicants against Respondents rather than the wider scope of the CPR.  

Injunctions: In Brief

An injunction is best described as an order of the Court aimed at prohibiting or making a party to do a specific act. The rules that govern injunctions in England and Wales can be found in the CPR. Because an injunction either prohibits or makes a party to do a specific act, there are two types of injunctions which are prohibitory and mandatory; the clue is in the name.

The three most widely used types of interim injunctions are freezing, search orders and delivery-up. The rules that govern them can be found in CPR 25. Whilst a freezing order is a prohibitory injunction, a search and delivery order are mandatory injunctions. A freezing order aims to restrain a party from dealing with the assets. In order words, it is an order that blocks the party who is affected (i.e. the Respondent) from transacting using those assets. This sometimes involves including banks as third parties to the freezing order in the case where the subject matter of the order itself were to be a bank account. Having said this, a search order aims to  allow for a search and seizure of incriminating evidence before it is destroyed. This allows an Applicant to use this evidence in the substantive proceedings. Lastly, a delivery-up order consists in the physical handing over of certain goods that have relevance in the substantive proceedings.

Digital Currencies and Injunctions

On several occasions, it has been said that digital currencies such as Bitcoin could be used to hide assets. In truth, it is not unless these assets are been hid illegally in the first place. In fact, due to the HM Treasury guidelines, there is an obligation on the part of all digital currency holders to declare one’s holdings. Not doing this would directly contravene the guidelines and would make the ‘holder’ in breach of their tax obligations. Thus, the presumption is that all digital currency holders regularly declare their digital currency holdings. Using this as a starting point, the relationship that these assets have in civil proceedings would be the same as if they were more conventional assets such as real property or fiat currency in a bank account. Based on the fact that digital currencies would be treated the same as any other asset under the jurisdiction of the Court, it follows that during civil proceedings they could be drawn into the mix just as easily as all other assets; the issue, as described below, lies in enforceability.  

Even in an ideal scenario, where the wallet address is known and the ownership of that wallet is also known, being granted a freezing order would not be an easy task. Mainly, this is because a freezing order CPR 23, CPR 25 and the associated Practice Directions, would apply in the following way:

Firstly, the Applicant would prepare and file all the relevant documentation to the court via an application, for the most part without notice.

Secondly, there would be a hearing where evidence would be heard by the Court.

Lastly, the Court would need to decide that all of the following are true:

  • The Applicant must have a cause of action
  • The English courts have jurisdiction over the matter
  • The Applicant has a ‘good arguable case’
  • There are assets in existence
  • There is a risk of dissipation of those assets
  • An undertaking in damages must be provided by the Applicant

For all of those who are familiar with the fundamentals of how digital currencies work, there are a number of issues that arise. Firstly, wallets are solely controlled by the person who has the private key. Secondly, the pseudonymity of the wallet address means that there is no formal name attached to that specific wallet address. This creates obvious issues in terms of ensuring that the assets can be frozen as this is usually done by a third party such as a bank. Moreover, there is also the issue that if it is not known who the wallet belongs to, then the Court will not grant a freezing order over that particular wallet. Despite these issues, there are two choices that an Applicant should consider in relation to a freezing order. The first is to identify the identity of the owner of a wallet address by tracing past dealings of that wallet address with bank accounts and transactions made with exchanges. The second is to ditch applying for a freezing order altogether and instead opt for a delivery-up order of the hardware containing the wallet which would allow for control of the wallet.

In relation to a search order, the ideal scenario provides a more mildly positive situation as it would be one where the Applicant knows that the Respondent is in possession of a wallet and that they have access to it. In other words, the Respondent owns a wallet and has the private key linked to it. Similarly to the procedure for a freezing injunction, the search order would apply in the following way:

Firstly, the Applicant would prepare and file all the relevant documentation to the court via an application, for the most part without notice.

Secondly, there would be a hearing where evidence would be heard by the Court.

Thirdly, the Court would need to decide that all of the following are true:

  • There is a strong prima facie (i.e. initial/superficial) case against the Respondent
  • The Applicant’s interests have been damaged as a result of the Respondent’s actions
  • There is clear evidence that the Respondent is in possession of incriminating evidence
  • There is a strong possibility that the Respondent may destroy the incriminating evidence

Lastly, there is the actual search and, if successful, seizure of the incriminating evidence.

Again, for those who are familiar with the basic workings of wallets, which could be the subject of a search order, there can be multiple issues. The first is linked to the identity whilst the second relates to taking possession of the wallet address and its history of transactions. With regards to the former, the same mechanics and issues applied to a freezing order apply in this case. However, when it comes to the latter issue, there may be solace for the Applicant in Practice Direction 25A 7.5(8) which states that:

(8) if any of the listed items exists only in computer readable form, the respondent must immediately give the applicant’s solicitors effective access to the computers, with all necessary passwords, to enable them to be searched, and cause the listed items to be printed out,

As it can be seen from the wording of the Rule above, the Applicant’s solicitors would be able to have the power to order for a wallet to be opened up for inspection. So far so good but for the fact that the Respondent could claim that they forgot the private key or password to their wallet. Immediately, this renders any attempt to implement a search order useless in its totality. As a result, the more nuclear option of a delivery-up should be pursued instead.

When discussing a ‘delivery-up’ order, the ideal scenario seems to be the most effective option for an Applicant pursuing a Respondent in civil proceedings. In fact, in this ‘ideal’ scenario, the identity of the wallet address and its owner are known. Above all, it is known that the Respondent also has access to that same wallet. This set of conditions makes the delivery-up the most effective choice as it would allow for a straight up handing over of the hardware containing the wallet or of the passwords that allow access to the wallet itself.

Despite this action that can be taken, a delivery up is subject to some of the same restrictions that both freezing and search orders have: the traceable identity of ownership of the digital currency wallet. However, it is possible to circumnavigate this if the Applicant has reliable evidence that that wallet belongs to the Respondent; a solution suggested for both freezing and search orders alike. Having said this, one potential issue could be that the Respondent might claim to have forgotten the passwords or is not in possession of the private key which would otherwise be a requirement under PD25A 17. In the event that the wallet is physically stored on hardware, then this is not an insurmountable issue since the Applicant’s solicitor can still take possession of the physical location of the wallet which would mean taking possession of the entire computer. Whilst the Applicant may not be able to benefit from the content of the wallet, at least they can rest assured that its balance would remain untouched thus enabling safe keeping of the claimed assets. Because of this, with the civil procedure instruments available to the Applicant, it appears that this would be the most effective solution although a hap-hazard one nonetheless.

Conclusion

Overall, digital currencies and injunctions would seem to be at a crossroads in some instances of civil proceedings. The sprawling pseudonymity of wallet addresses in their current form means that an effective protocol of discovery is not yet available. At the same time, the inexistence of third parties to enforce injunctions in the practicalities means that Respondents hold the knife by its handle. Although these two aspects are at the very core of digital currencies in terms of how they function and are stored, it is no wonder that some public institutions would be reluctant to engage with these types of assets until a definitive way is established to bridge the technological gap.