Case Summary: CLM v. CLN and Others

Outcome: The Plaintiff’s applications for a worldwide freezing injunction (in relation to the First Defendant), a proprietary injunction (in relation to the First Defendant) and ancillary disclosure orders (in relation to the Second and Third Defendants being cryptocurrency exchanges with operations in Singapore), had been granted.

Background Facts

The Plaintiff is an American entrepreneur who, in January 2021, went on vacation in Mexico with 7 other acquaintances. Through a series of events on the night of 7 January 2021, the Plaintiff came to believe that some of these acquaintances had come to know the combination of the safe kept in the Plaintiff’s master bedroom, inadvertently creating an opportunity for any of these acquaintances to access the Plaintiff’s private keys to the Plaintiff’s cryptocurrency wallets (the “Plaintiff’s E-Wallets”).

On the morning of 8 January 2021, the Plaintiff accessed his E-Wallets only to discover that 109.83 BTC and 1497.54 ETH (the “Stolen Cryptocurrency Assets”) had been withdrawn from his E-Wallets to 3 different cryptocurrency wallet addresses unknown to the Plaintiff, without the Plaintiff’s knowledge or consent.

Key Issues Raised

In the grounds of decision published on Friday, 4 March 2022, the court ruled on 2 novel points of law:

Firstly, whether the court has jurisdiction to grant interim orders against persons unknown – it had been unknown, at the point the Plaintiff had made the relevant applications, which of the acquaintances (if even any of the acquaintances), had misappropriated the Stolen Cryptocurrency Assets.

Secondly, whether cryptocurrencies (such as BTC and ETH), can be the subject of a proprietary injunction – it had to be, first, determined whether cryptocurrencies are capable of giving rise to proprietary rights.

The Plaintiff’s Application

The Plaintiff, appearing before the High Court, sought the following:

3         In Summons No 2444 of 2021 (“SUM 2444”), which was heard on 8 June 2021, the plaintiff sought the following interlocutory relief via an ex parte application:

• A proprietary injunction prohibiting the first defendants from dealing with, disposing of, or diminishing the value of the Stolen Cryptocurrency Assets.
• 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.
• 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.

4       In Summons No 4880 of 2021 (“SUM 4880”), the plaintiff sought, via an ex parte application, leave to join persons as defendants to the action because they were either (a) individuals believed to have participated in or assisted with the theft or (b) entities who had received the Stolen Cryptocurrency Assets.

64     The plaintiff also applied for leave to serve the cause papers and relevant documents on the fourth to seventh defendants (the “additional defendants”) out of jurisdiction. Specifically, for the fourth and fifth defendants, the plaintiff applied for leave to serve them by way of email, ie, via substituted means.

The Nature of Cryptocurrencies

The Court, in its judgement, had described the nature of cryptocurrencies, in particular, BTC and ETH. The Court had elucidated on private keys, wallets, and transfer mechanisms:

10     BTC and ETH are commonly referred to as cryptocurrencies. While the word “currency” connotes a medium of exchange, a cryptocurrency is not associated with any physical object (unlike how a currency such as the US Dollar is). In essence, BTC and ETH are records in a network of computers associated with that cryptocurrency. These records are stored in publicly available ledgers that provide a digital record of every BTC or ETH transaction that has taken place. The records, in a form known as blockchain, provide an accurate, verifiable, and permanent audit trail with which one can track the transmission of cryptocurrencies.

11     BTC and ETH are sent between users electronically by sharing public “wallet” addresses on the blockchain. These wallets are represented by a string of numbers and letters, and loosely function like an account number. Unlike traditional bank accounts, however, all transactions to and from a given wallet can be viewed on the public blockchain.

12     For security, BTC and ETH wallets employ one or more “private keys” that should be known only to the wallet owner. The private key functions like a signature that confirms that any given transaction is authorised by the wallet owner. Private keys are represented by a string of 64 numbers and alphabets. Thus, anyone in possession of the private key can access the linked wallet and transfer BTC and ETH out. Likewise, losing the private key means that the funds held in the wallet cannot be accessed. As there are more than a billion permutations for what a private key may be, it is virtually impossible for one to guess the private key of a digital wallet.

The High Court’s Decision

Jurisdiction against Persons Unknown

The Court had been of the view that it has the jurisdiction to grant interim orders against persons unknown, in this case being the First Defendants – on the condition that the description of such persons unknown is sufficiently certain as to identify both those who are included and those who are not. The Court, in this case, had been satisfied that the description of the First Defendants met the requisite threshold of certainty:

34     In the present dispute, the following description was used:

[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.

35     I was satisfied that the present description describes with sufficient certainty the persons who fall within and outside of the description.

The Court had based its decision, on the jurisdictional limits of the court with regards to persons unknown, on the following factors:

28     To begin with, like in the case of the UK and Malaysia, there is nothing in our Rules of Court (Cap 322, R5, 2014 Rev Ed) (“ROC”) that requires a defendant to be specifically named. While the prescribed form for commencing an action by writ (Form 2 under Appendix A of the ROC) contains fields for the plaintiff to state the name and address of the defendant, O 1 r 7 of the ROC clarifies that: “the Forms in Appendix A to these Rules shall be used where applicable with such variations as the circumstances of the particular case require” [emphasis added].

29     Moreover, similar to CPR 3.10 in the UK (as relied on by the court in Bloomsbury), O 2 r 1 of our ROC expressly 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:

Proprietary Injunction

An applicant seeking to obtain a proprietary injunction from the Court ought to prove that:

• there is a serious question to be tried – which will be satisfied as long as the plaintiffs have a seriously arguable case that they have a proprietary interest; and
• the balance of convenience lies in favour of granting the injunction – by considering the potential prejudice that the applicant may suffer if the injunction is not granted, against the prejudice to the respondent in the event that the injunction is granted and the applicant’s hypothesis is refuted at the trial.

Before even considering whether the Plaintiff had a seriously arguable case that he had proprietary interest in the Stolen Cryptocurrency Assets, the Court delved into the question of whether cryptocurrencies were capable of giving rise to proprietary rights. The Court answered in the affirmative.

In coming to the aforementioned conclusion, the court considered the classic definition of a property right in National Provincial Bank Ltd v Ainsworth [1965] AC 1175 (“Ainsworth”) at 1248 – it must be definable, identifiable by third parties, capable in its nature of assumption by third parties, and have some degree of permanence or stability.

The Court highlighted that the Singapore International Commercial Court, in B2C2 Ltd v Quoine Pte Ltd [2019] 4 SLR 17 at [142], reasoned that cryptocurrencies meet the four requirements set out in Ainsworth and “have the fundamental characteristic of intangible property as being an identifiable thing of value”.

The Court, having considered the aforementioned, was of the view that cryptocurrencies satisfied the definition of a property right in Ainsworth. Following such conclusion, the court deemed that the two requirements for a proprietary injunction had been met, therefore granting the proprietary injunction prohibiting the First Defendants from dealing with, disposing of, or diminishing the value of the Stolen Cryptocurrency Assets:

46     Having considered the extant case law and especially the analysis in Ruscoe, I was of the view that cryptocurrencies satisfied the definition of a property right in Ainsworth. The plaintiff was therefore able to prove a serious arguable case that the Stolen Cryptocurrency Assets were capable of giving rise to proprietary rights, which could be protected via a proprietary injunction. I reiterate that the court does not engage in complex questions of law or fact at the interlocutory stage (see [39] above). Hence, the first requirement of showing that there is a serious question to be tried was satisfied.

47     The balance of convenience is assessed by considering the potential prejudice that the applicant may suffer if the injunction is not granted, against the prejudice to the respondent in the event that the injunction is granted and the applicant’s hypothesis is refuted at the trial (Bouvier at [161]).

48     In my view, the balance clearly lay in favour of granting the proprietary injunction. If it were not granted, there would be a real risk that the first defendants would dissipate the Stolen Cryptocurrency Assets, which would prevent the plaintiff from recovering those assets even if he successfully obtained a judgment in his favour. Conversely, even if the plaintiff’s case were later refuted, the first defendants would only suffer losses arising from their inability to deal with the Stolen Cryptocurrency Assets, which could be compensated by way of damages.

Mareva Injunction

With regards to the Plaintiff’s application for a worldwide freezing injunction to restrain the First Defendants from dealing with, disposing of, or diminishing the value of, their assets up to the value of US$7,089,894.68, being the value of the Stolen Cryptocurrency Assets, two requirements have to be proven by the Plaintiff for such application to succeed:

• First, the applicant must have a good arguable case on the merits of its claim.
• Second, there must be a real risk that the defendant will dissipate his assets to frustrate the enforcement of an anticipated judgment of the court.

The Court was of the view that the Plaintiff’s application for a mereva injunction ought to be granted on the basis that:

53     … it is hornbook law that where a person misappropriates the property of another without consent, a constructive trust arises by operation of law over the stolen assets, as it would be unconscionable for the misappropriating party to assert any beneficial interest in the property or their traceable proceeds (Yuanta Asset Management International Ltd and another v Telemedia Pacific Group Ltd and another and another appeal [2018] 2 SLR 21 at [113]). In my view, this alone was sufficient to show that the plaintiff had a good arguable case against the defendants.

54     As for proving a real risk of dissipation … I found that the first defendants dissipated the stolen assets through a series of digital wallets that appear to have been created solely for the purpose of frustrating the plaintiff’s tracing and recovery efforts, and which had either no or negligible transactions other than the deposit and withdrawal of the Stolen Cryptocurrency Assets. Moreover, the risk of dissipation in the present case is heightened by the nature of the cryptocurrency: the Stolen Cryptocurrency Assets are susceptible to being transferred by the click of a button, through digital wallets that may be completely anonymous and untraceable to the owner, and can be easily dissipated and hidden in cyberspace.

Disclosure Orders

With regards to the Plaintiff’s application for ancillary disclosure orders requiring the second and third defendants to disclose to the plaintiff:

(a) the current balances of the second and third defendants’ accounts that were credited with the 15.0 BTC and 0.3 BTC respectively, that are traceable to the Stolen Cryptocurrency Assets

(b)     information and documents collected by the second and third defendants in relation to the owners of the relevant accounts in the second and third defendants; and

(c)     details of all transactions involving the relevant accounts in the second and third defendants from the dates on which the stolen assets were credited against the accounts;

the Court was of the view that the disclosure orders sought were just and convenient, and therefore granted the ancillary disclosure orders in favour of the Plaintiff:

60     In the present case, I was of the view that the disclosure orders sought were just and convenient. The plaintiff required the information sought to understand what remained of the stolen assets that were transferred to the second and third defendants, the extent that they have been transferred to other persons or accounts, as well as the whereabouts of such assets. The information sought would also facilitate the identification of the first defendants, or any persons that may have assisted or acted in concert with them. I therefore granted the ancillary disclosure orders sought by the plaintiff.

Conclusion

The Court, in this case, had dealt with two novel questions of law, coming to the conclusion that:

1. the Court has the jurisdiction to grant interim orders against persons unknown on the condition that the description of such persons unknown is sufficiently certain as to identify both those who are included and those who are not; and
2. cryptocurrencies are capable of giving rise to proprietary rights.

Authors and Contributors: Peter Doraisamy, Mike Chiam, Kashib Shareef Ahmad, Amanda Goh and Jennifer Eng

This case summary is provided to you for general information and should not be relied upon as legal advice. You may access the reported grounds of decision via the respective website links at Singapore Law Watch and the Singapore Courts website.