⚡ Key takeaways from D’Aloia case on what crypto fraud victims need to establish to trace and claim against a crypto exchange ⚡
The High Court of England and Wales on 12 Sep 2024 delivered a significant judgment in D’Aloia v Persons Unknown Category A & Ors [2024] EWHC 2342 (Ch).
🪙 [Summary]
D’Aloia alleged he was defrauded by unknown persons to transfer crypto incl. USDT. 1D transferred the crypto into various wallets. 7D withdrew it as fiat. A crypto exchange Bitkub was one of the Df which 7D held accounts with, from which fiat was withdrawn. The court held that the claimant failed to prove that his USDT were in Bitkub’s wallets.
🔎 [Tracing & Following]
The claimant argued that Bitkub held the crypto on constructive trust. The court considered that as a matter of law, it is possible for USDT to be followed through mixed funds.
However, the expert evidence in this case failed to prove that the identifiable crypto in the Bitkub wallet was in fact the claimant’s. Thus, the claimant failed to establish equitable title and certainty of subject matter in the identifiable crypto to successfully assert a constructive trust.
The court considered that the ‘first in first out’ principle could be applied in tracing crypto transactions. However, it should not be the sole tracing method.
💰 [Constructive Trust]
The court considered that a constructive trust could arise from the recission of the fraudulent contract with the scammers which the claimant entered. The recission would be deemed to occur upon service of proceedings. But the scammer 1D being the counterparty, and not Bitkub, would be the constructive trustee.
If assets from the fraud can be traced to Bitkub and if it is proven that Bitkub received the crypto with knowledge of the fraud or where it is inequitable for it to retain the crypto, then Bitkub could be imposed with a constructive trust. That is if Bitkub still retained the assets. Otherwise, the viable alternative would be a knowing receipt claim.
A bona fide purchaser for value without notice defence could generally apply. However, if the crypto exchange had actual or constructive notice of suspicious activity of the account in question, then the defence could fail.
💰 [Unjust Enrichment]
The court considered that the claimant could have made out a claim in unjust enrichment, , unjust factor being mistake or unauthorised payment, if the USDT was proven to be traced to the wallet. Good faith change in position defence could be applicable, although good faith in this case would be questionable.