The perils of suing crypto exchanges after ransomware assaults

In October 2019, unknown hackers infiltrated a Canadian insurance coverage firm by putting in the malware BitPaymer, which encrypted the agency’s information and IT methods. The hackers demanded a ransom of $1.2 million be paid in Bitcoin (BTC) in return for the decryption software program wanted for the agency to regain entry to its methods. 

The agency’s United Kingdom-based insurer — recognized solely as AA — organized to pay the BTC ransom, and the agency’s methods had been again up and working inside a couple of days. In the meantime, AA began the method of searching for authorized avenues to recuperate the BTC obtained by the hackers. It engaged the blockchain investigations agency Chainalysis, whose investigations revealed that 96 of the 109.25 BTC paid had been transferred to a pockets linked to the Bitfinex trade.

To this point, this story is (sadly) removed from uncommon. Bitcoin accounts for the overwhelming majority of ransomware funds on account of its anonymity, accessibility (making it simpler for victims to pay the ransom) and verifiability of transactions (permitting criminals to verify as soon as cost has been made). What is uncommon about this story, nonetheless, is that it sparked a 14-month-long authorized battle between AA and Bitfinex, one which solely just lately concluded after AA discontinued its declare towards Bitfinex within the U.Ok. Excessive Courtroom.

Having traced the stolen BTC to Bitfinex’s platform — and with the identification of the hackers nonetheless unknown — AA began its litigation towards Bitfinex in December 2019. Once more, this isn’t uncommon: U.Ok. courts have a variety of cures at their disposal to help victims of fraud in attempting to recuperate their belongings. In situations the place banks, exchanges or different intermediaries might discover themselves unknowingly receiving or holding misappropriated or stolen belongings, victims of fraud have been capable of depend on:

  • Norwich Pharmacal orders, which require a 3rd get together to reveal sure data to the applicant that may help in restoration efforts. On this context, the data could be the identification of the pockets holder to which the BTC was traced, and/or particulars of some other transactions involving the BTC since receipt by the pockets linked with the trade.
  • Freezing orders that forestall defendant fraudsters from coping with any of their belongings till additional discover. An trade notified of a freezing order referring to a shopper should take steps to freeze the account to stop the shopper from withdrawing and dissipating belongings.
  • The place it may be established that the third get together holds property that belongs to the fraud claimant, proprietary injunctions might be obtained to stop the third get together from coping with that exact property. Linked orders are sometimes made to require the topic of a proprietary injunction to reveal data of the Norwich Pharmacal-kind defined above.

Cryptocurrency as property within the U.Ok.

The U.Ok. courts are very conversant in the previous cures when involving financial institution accounts and fiat forex. Extra just lately, the courts have been grappling with how these rules apply to cryptocurrency. Nevertheless, it’s clear that the courts are keen to flexibly apply authorized rules, to make sure that these cures can be found to victims attempting to recuperate stolen crypto belongings.

Within the AA case, Justice Simon Bryan decided — for the primary time — that Bitcoin could possibly be labeled as property underneath British regulation, which means that he might grant a proprietary injunction in relation to that property. This appears apparent, however historically the regulation has seen property as one thing that might both be possessed in a tangible sense or be enforced by a proper to sue. Cryptocurrency clearly doesn’t meet both requirement, however the courts have taken a realistic method to make sure that novel intangible belongings, like cryptocurrency, are thought-about property.

This versatile method meant that AA was capable of get hold of injunctive reduction. Bitfinex duly froze the account and offered AA with details about the identification of the shopper who owned the pockets with the stolen BTC.

Because it turned out although, the BTC had been transferred once more earlier than Bitfinex was contacted by AA’s attorneys, and couldn’t be returned. AA reached a confidential settlement with Bitfinex’s buyer (additionally a defendant to AA’s declare) after which turned its sights on Bitfinex, in an try and obtain extra compensation. The insurer raised plenty of authorized claims towards Bitfinex, together with the assertion that the trade acquired the BTC (or its traceable proceeds) when it was property belonging to AA. As such, AA declared {that a} authorized belief ought to be imposed, holding Bitfinex accountable to AA for the BTC. It was additionally argued that Bitfinex was reckless on the subject of whether or not the BTC was lawfully transferred into the related pockets.

These are tough arguments to show, and after Bitfinex despatched out its detailed authorized protection and response to AA’s claims, AA in the end determined to desert its claims towards Bitfinex. However this was not fairly the top of the story. Often, when a claimant abandons its case, the default place is that it should pay all the defendant’s prices. Nevertheless, AA argued that its value legal responsibility ought to be diminished by 50%, based mostly upon Bitfinex’s supposedly “unreasonable” conduct. The events fought this out at a Excessive Courtroom listening to in January, culminating within the courtroom deciding there was no unreasonable conduct that will justify any discount. AA was subsequently ordered to pay 100% of Bitfinex’s authorized prices, together with the prices of its personal unsuccessful software to have these prices diminished.


It’s comprehensible that victims of fraud — who might not be capable to efficiently pursue the precise fraudster — is likely to be tempted to tackle a cryptocurrency trade with deep pockets, maybe within the easy hope that they’ll engineer a modest settlement, and keep away from the time and price of complicated authorized proceedings.

Cyber insurers like AA would possibly calculate that the cost-benefit related to these steps could be justified. Nevertheless, exchanges like Bitfinex will proceed to defend themselves robustly, notably when the authorized deserves of claims are extraordinarily difficult, and in the end characterize an try to pull an harmless trade into the fallout of a cybercrime it had neither information of nor involvement in.

This text was co-authored by Stephen Elam and Shelley Drenth.

The views, ideas and opinions expressed listed below are the authors’ alone and don’t essentially replicate or characterize the views and opinions of Cointelegraph.

This text is for common data functions and isn’t meant to be and shouldn’t be taken as authorized recommendation.

Stephen Elam is a accomplice and Shelley Drenth is an affiliate at Cooke, Younger & Keidan LLP, a disputes regulation agency that repeatedly advises on litigation and regulatory points, in relation to cryptocurrency.