- in United States
- within Accounting and Audit, Immigration and Insurance topic(s)
On 4 May 2022, the BVI Commercial Court handed down its judgment
in ChainSwap v Persons
Unknown. This judgment marks the first time
that the BVI court has granted a freezing order over assets held by
persons unknown in relation to crypto fraud and follows similar
decisions in the UK and other commonwealth countries where such
relief is now commonly granted. Given the nature of the
respondents as 'persons unknown', the Court permitted
ChainSwap to serve the respondents outside the jurisdiction by
alternative methods.
In this case, ChainSwap, a BVI incorporated entity that provides a
service that allows cryptocurrency tokens to be transferred between
different blockchains, known as a cross-chain bridge, was the
subject of two hacks in July 2021: the first hack allowed
fraudsters to divert cryptocurrency from recipient wallets to
private wallets that they controlled and the second hack allowed
the fraudsters to effectively mint unlimited new tokens and
redirect these to their private wallets.
The consequence of the hacks carried out against ChainSwap's
cross-chain bridge was that hackers were able to misappropriate
assets from: (i) private users that had authorised their wallets to
interact with the bridge (pursuant to the first hack); and (ii)
projects issuing digital tokens that had used the bridge to offer
cross-chain operability on their tokens (pursuant to the second
hack).
The hackers then traded, exchanged or otherwise dissipated some of
the stolen tokens. One method used by the hackers to attempt
to obfuscate the dissipation of the tokens was by using a mixer or
'tumbler' service. The BVI Court was ultimately
satisfied that ChainSwap had established a good arguable case that
it had identified the destination wallet for the transactions which
were mixed through the tumbler service. A link between this
wallet and an exchange in Croatia was then identified, which led to
the court signing a letter of request addressed to the Croatian
Courts for any available KYC in relation to the wallet.
The judgment noted that although ChainSwap did not seek a
proprietary injunction, since it was not asserting a proprietary
right in the digital assets, had it been able to establish an
arguable case that the stolen tokens were its property then that is
a form of relief which this Court would have been able to grant
(following its own findings in Philip Smith v Torque Group
Holdings Ltd that cryptocurrencies are a form of
property).
This decision builds on the BVI's mature and pragmatic approach
to crypto disputes and demonstrates the Court's willingness to
assist those who may have been the victim of fraud.
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