Crypto fraud: what have we learnt in 2023?

2023 followed the unfortunate year-on-year upward trend of crypto fraud and crypto scams. This has been met with an increasingly innovative approach adopted by both crypto lawyers and the English courts, and a levelling-out and rise in the crypto investment world following the crypto winter of 2022/23. The first phase of crypto regulation in England and Wales was a welcome introduction.

Cryptocurrency scams continue to escalate and are becoming increasingly sophisticated, with most scams being connected to large-scale organised criminal gangs from across the globe, often using artificial intelligence to target victims. Inevitably, social media continues to be used as the mechanism to approach victims.

Victims caught up in these types of cryptocurrency scams are often caught out by fake trading platforms, and unregulated and fake brokers posing as someone legitimate traders. Those who have either recently inherited funds, or have a wealthy portfolio or retirement pot, are typically amongst those targeted.

Trends and types of crypto scams

The most common types of scams include:

• Long-term investment scams through fake trading platforms and exchanges.
• Training or educational scams (where victims sign up for a training/crypto course).
• Romance scams or pig butchering scams, as they are often referred to (where victims are approached through dating apps).
• Giveaway scams (where investors believe they are investing in a project which abruptly ends and liquidity is immediately drained).
• Rug pulls (where scammers create a seemingly legitimate project, attract investors, then pull out of the project, leaving it with nothing).

Whilst all of these scams operate in slightly different ways, they often involve the victim’s money being paid through a fake crypto platform. The fake platforms are typically managed by companies linked to serious organised criminal gangs. The method for these fake trading platforms appears to be that the victim is allocated an ‘account manager’ who speaks with them (either by telephone or messaging service) to coerce them into investing further sums, often over an extended period of time. The victim is often given access to a fake online app to review the investments made.

In reality, as often uncovered through subsequent investigation, the online apps are fake – used by the fraudsters to control the victim’s belief about their purported investment. Mostly, the funds being paid are being immediately stolen by the fraudsters and used to support criminal activities.

Double scams

Victims may be targeted again in what is known as the ‘double scam’. Victims are often approached by companies posing as asset recovery agents with promises that they can get the victim’s money back for a fee.

In more than 90% of cases, victims are deliberately targeted by fake recovery agents in an attempted double scam. This type of fake recovery scam is also known as an advanced fee fraud: the victim pays a fee for something which will never happen. Double scams like this are often disguised by the scammer as being a fee for anti-money laundering (AML) checks, tax payments, or fee for withdrawals.

The fraudsters will usually then sell lists of victims’ details to other organised criminal gangs. Essentially, despite having been defrauded already, victims’ personal details effectively get put onto a list where the fraudsters continue to harass the victim, sometimes on a daily basis, using all manner of methods to try to extract further funds. Someone who has been scammed once will likely be approached at least one further time.

It is very often in crypto cases that victims are embarrassed to admit that they have been caught up in such scams – as a result they often feel unable to speak with family members or admit the truth of what has happened.

Legal recovery procedures

Most crypto frauds are committed by criminals out of this jurisdiction. In law, cryptocurrencies are treated as property. A solicitor may act on the victim’s behalf to recover the assets. In the first instance the transfer of the cryptoassets would need to be traced, often using an investigator. Legal representation may be able to obtain a worldwide freezing order and a proprietary injunction issued by the court, against persons associated with the victim’s cryptocurrency or its traceable proceeds. The courts will grant service out of the jurisdiction where the location of the defendants is unknown.

Crypto scammers operate in the form of serious organised criminal gangs, who have significant links with terrorism, child exploitation and human trafficking. The problem is significant and these gangs are causing untold harm to livelihoods across the globe. 2023 saw the courts consider more cases involving crypto fraud. Keystone Law and Littleton Chambers were involved in cases concerning:

• HTX/Huobi – the striking-off from the Seychelles Companies Register and the attendant “decentralisation” process has resulted in the courts widening the scope of entities being held to be proper defendants.
• The Court’s approach to exchanges innocently caught up in very serious criminal activities is to make information orders in line with the 2023 High Court case of Piroozzadeh.
• Dishonest assistance – such claims against the exchanges particularly arise if there has been a blanket refusal to respond to information orders.
• Recent judgments – notwithstanding the refusal of some exchanges to not respond to information orders, there are notable examples of some exchanges providing helpful assistance from the first notification they received. It is essential that such knowledge is utilised such that working with the exchanges is progressed so as to seek a swift resolution.
• Disclosure – there are marked differences in the approaches by exchanges: some are helpful from the beginning, whilst others simply ignore court orders.
• Enforcement – third party debt orders, committal proceedings, and enforcement overseas are all part of the weaponry which is available to a successful claimant who has obtained a judgment.
• Amending claims to go as against the exchanges for failure to comply with information orders and thereby providing grounds to seek accessory liability against the exchanges themselves.
• Alternative service of proceedings by NFT Airdrop creates the ability for the claimants’ experts to ascertain exactly when the documents have been downloaded, which is an important forensic development in relation to the additional benefit of being able to prove actual (as opposed to deemed) service.
• Anonymity orders – these require careful preparation and presentation.
• Assigning claims – this includes advanced claims which have been assigned to English-domiciled companies.
• UK platform – jurisdictional gateways are a regular feature of service overseas of such claims and we strive to locate an English defendant such that it provides an anchor defendant, which is sufficient, so long as it can be shown that the overseas defendants are necessary and proper parties.
• FCA regulated exchanges – proceedings have been issued against some regulated exchanges in UK as a result of regulatory breaches, which is an increasingly important redress route for victims of crypto fraud.
• Limitation – there are various potential limitation pitfalls to avoid, which require careful consideration as to the precise causes of action and remedies which are chosen to be advanced: usually, from an equity and restitutionary perspective.

If you have been a victim of any of the types of fraud mentioned in this article, please contact Louise Abbott.

This article was co-authored by Andrew Maguire of Littleton Chambers.