Cryptocurrency and Digital Assets Legal Disputes in Singapore

By Ronald JJ Wong

Overview of Blockchain and Crypto Disputes and Legal Issues and Cases

Our team has subject matter expertise in legal, technical, and economic aspects of blockchain-related matters, including token sales, listings, and issuances, SAFTs, real-world asset tokenisation projects, token exchanges, digital asset and on-chain tracing, crypto-related insolvency, and crypto fraud and scams. As Singapore lawyers, we’ve handled cryptocurrency claims involving persons from different jurisdictions/countries and cross-border elements.

In this article, we set out various legal issues, considerations and approaches regarding various types of blockchain and crypto disputes and transactions.

a.     Crypto fraud, online scams, and asset recovery

b.     Digital asset theft

c.     Crypto digital asset exchange disputes

d.     ICO, token issuance, SAFT or token sale and purchase disputes

To be clear, while we use the term crypto and digital assets in this article, we generally mean digital or virtual assets which may include digital payment tokens (DPTs), cryptocurrency, utility tokens, security tokens, Non-Fungible Tokens (NFTs), decentralised finance (DeFi) tokens, and stablecoins.

Crypto Fraud, Online Scams and Asset Recovery

We have attended to many cases of people being defrauded of their money or crypto or digital assets. A typical scenario would be where the victim is led to purportedly invest in cryptocurrency or digital assets on an online exchange or investment trading platform. The victim may transfer fiat currency money to some bank account to purportedly purchase the digital assets on the platform. Or the victim may be instructed to purchase cryptocurrency or digital assets on a real crypto platform. They’d then be instructed to transfer the crypto to their purported wallet address on the fraudulent platform. Thereafter, the victim will be led to believe that their crypto investments are growing with substantial returns. At some point, when the victim attempts to withdraw money or transfer digital assets out of their wallets on the platform, they will face obstacles, e.g. told that there’s a technical issue or that they’d breached some terms and conditions and that their account had thus been frozen. They’d usually be told they’d have to pay some charges to overcome the obstacles, e.g. to have the account unfrozen. Ultimately, the victim will discover that there is no identifiable and legitimate person or entity operating the platform and that there is simply no way to obtain their money or digital assets, whether any amount originally invested or deposited or any return on the purported investments.

In such scenarios, the identity of the fraudster is not known. However, this is not in itself fatal to a viable legal claim by the victim claimant.

a.     If the claimant has information on the bank accounts they had deposited or transferred money to, they can use this as a starting point to identify the account holders. The claimant can pursue claims against the account holders. We elaborate further below.

b.     If the claimant had transferred crypto or digital assets to certain blockchain addresses, blockchain forensics and analysis of transactions can be done to trace the transfer of the digital assets. Such forensic tracing can reveal information on:

i.     Blockchain transaction history: this will show time-stamped transfers of tokens from and to wallet addresses.

ii.     Transaction amounts.

iii.     Wallet addresses: while these do not have information on the identity of the persons controlling the wallet addresses, one is able to identify that certain addresses are e.g. associated with certain crypto exchanges.

iv.     Wallet address interaction patterns: if there are address patterns, this could suggest whether different persons are involved.

v.     Off-ramp transactions: where crypto and digital assets are ultimately exchanged for fiat currencies on centralised exchanges, information disclosure can be sought from these exchanges on the user identity information relating to the specific wallet addresses.

vi.     However, sophisticated fraudsters will often use crypto mixers/tumblers and engage in chain hopping to cover their trail.

c.     Where any crypto transfers can be traced to a centralised exchange, a claimant may apply to the court for freezing / Mareva injunctions and disclosure orders against the exchange as well as generically the person in control of the relevant wallet addresses which has received the digital assets. In this regard, disclosure orders can be obtained against persons who are not necessarily parties to the fraud or have committed any wrong. These are known as Bankers Trust orders (to provide documents to aid a tracing claim where there is alleged fraud) and Norwich Pharmacal orders (to provide information).

d.     There have been Singapore cases where information disclosure orders were made against centralised exchanges and the exchanges have duly complied by providing the requested information and documents on the users associated with the relevant addresses.

e.     Even though the claimant may not know the identity of the fraudster, the claimant can commence legal action naming the fraudster as a defendant with the moniker “Person Unknown, who controls address [XXX]”. We know of cases where such lawsuits were commenced and freezing injunction and information/document disclosure orders were applied for, and the persons identified as such came forward to provide the ordered information and documents as they realised that they themselves were unknowingly involved in the fraudulent scheme.

As to the cause of action for the claim, this would depend on the factual circumstances. The claimant may, for example, claim in misrepresentation, conversion, unjust enrichment, or conspiracy to injure.  

If the victim claimant had transferred money to a bank or payment account following a fraud on them, the claimant can potentially claim against the account holder in unjust enrichment. This could also be applicable where there has been theft of funds from a bank or payment account, or indeed any other kind of cyber fraud or online scam, resulting in a transfer to a recipient account. There have been cases where the court ordered judgment for the claimant on this basis.

Further, if the court considers that there has been a theft of funds or assets, the court can declare that an institutional constructive trust arises over the stolen assets at the time of the theft (ByBit Fintech Ltd v Ho Kai Xin and others [2023] SGHC 199 at [42]). If the recipient is a knowing recipient of the stolen assets or dishonest assistant, the recipient could also be liable to compensate the claimant.  

Alternatively, the claimant may consider that the funds have probably been transferred by the first layer recipient to subsequent recipients. In that case, a personal claim in unjust enrichment against the first recipient may be practically futile even if the claim may succeed and result in judgment. This is especially if the first layer recipient is likely a fraud victim themselves and may not have assets to make good on the judgment debt. In this case, the claimant may wish to frame the claim as a proprietary claim and seek a constructive trust as a remedy.

Thus, if it can be shown that a recipient of money or assets became aware of the fraud or mistake, even if the recipient themselves were not dishonest or have committed any wrongdoing, and even if the recipient is a second layer recipient, the court may order that the recipient is subject to a constructive trust over the money or assets held. Further, it is possible to then, on that basis, apply for information disclosure in respect of the bank accounts of the second layer recipient to further trace transfers to any third layer recipient.  

This could apply to money or crypto / digital assets. Hence, in one case (Jones v Persons Unknown [2022] EWHC 2543), the court ordered that a crypto exchange is subject to a constructive trust over crypto assets held in an account of the unidentified defendants / wrongdoers. Similarly, in Joseph Keen Shing Law v Persons Unknown & Huobi Global Limited, the court ordered that the crypto exchange deliver up the crypto assets which were the subject of a fraud to the claimant.

However, in Piroozzadeh v Persons Unknown Category A & Ors [2023] EWHC 1024 (Ch), the court set aside an interim proprietary injunction made against the crypto exchange Binance. Binance argued that the claimant had not made full and frank disclosure of a possible argument that Binance was a bona fide purchaser for the value of the crypto assets received and that once it had received the digital assets, it would be transferred into a pool with other account holders and use those assets as its own. However, the way the decision was framed, it is not necessarily the case that any exchange which uses this ‘pooled assets’ model (as opposed to a model where digital assets would be held in users’ respective wallets) would never be subject to injunctions and disclosure orders. Instead, the issue was with the breach of the claimant’s duty to make full and frank disclosure. As such, the argument itself should not be accepted as definitive at face value. It should also be noted that if the bona fide purchaser for value without notice defence is not made out, Foskett v McKeown [2000] UKHL 29 establishes that tracing of property interests can be done into a mixed pool of assets.

It should also be highlighted that often, many crypto and digital asset disputes are cross-border in nature and thus raise jurisdictional issues. Certain legal issues arise regarding the appropriate jurisdiction in which the claimant’s claim should be brought. And thereafter, for service of court process / claim papers to be permitted to be made on a foreign person. Thus far, in many of the Singapore-related cases, the claimants have been able to bring their claim in the Singapore court and ground their claim in a Singapore connection to seize the Singapore court’s jurisdiction over the action. 

In many cases, service of court process was permitted to be done by alternative modes such as email and airdrop of tokens containing access to the court papers to the relevant defendants’ addresses, e.g. in D’Alois v Persons Unknown [2022] EWHC 1723.

Digital Asset Theft

A typical scenario in this category would involve a malicious actor stealing the victim claimant’s digital assets. This could be by way of a cyber-attack, e.g. phishing, spoofing, malware, password attacks, SQL injection, or physical means, e.g. stealing one’s devices or physical documents containing passwords, credentials, or recovery seed. The malicious actor would have to transfer the digital assets to other wallet address(es). From there, further transfers would be made, often to mixers/tumblers or innocent third parties as payment for legitimate transactions.  

Hence, victims / claimants should act quickly to report the matter to the law enforcement authorities, and to take civil legal action to apply to the court for a freezing / Mareva injunction.  

A freezing / Mareva injunction is a court order which prohibits the defendant from dealing with their assets. The claimant would have to prove actual or real risk of dissipation of assets by the defendant. If dishonesty or fraud can be proven, this is usually easily established. Freezing / Mareva injunctions can be applied to have worldwide scope or only in relation to assets in Singapore or identified assets or accounts.

In one case CLM v CLN, where the claimant alleged that their Bitcoin and Ethereum were stolen and transferred to certain addresses, the Singapore court granted a worldwide freezing / Mareva injunction up to the value of the stolen cryptocurrency assets.  

The court also granted a proprietary injunction, which is a court order prohibiting the defendant from dealing with the property itself.  In Janesh s/o Rajkumar v Unknown Person (“CHEFPIERRE”) [2022] SGHC 264, the Singapore court also ordered a proprietary injunction in respect of a Bored Ape NFT. In that case, the NFT was used as collateral for a loan, which the lender purportedly foreclosed. The lender then listed the NFT for sale on OpenSea. After the proprietary injunction was obtained, OpenSea then responded by freezing the listing and sale of the NFT on its platform. Hence, a proprietary injunction is a useful legal tool which can preserve claimants’ interests against third parties.

In CLM v CLN, the court also made information disclosure orders against centralised crypto exchanges, including information on account balances, account user information, and details of transactions of the accounts since the receipt of the stolen crypto assets. These are for the purpose of ascertaining “what remained of the stolen assets that were transferred to the [accounts], the extent that they have been transferred to other persons or accounts, as well as the whereabouts of such assets”. 

Beyond the freezing of assets, a claimant may then pursue the claim for recovery of the digital assets or the value of the same. Depending on the factual circumstances, the claimant may seek the remedy of an institutional constructive trust or monetary damages depending on the cause of action: unjust enrichment, conspiracy to injure, tort of conversion, etc. On the latter, it is not clear what the legal position in Singapore is as to whether a claim in conversion of digital assets is legally viable. The common law in this regard has traditionally characterised conversion as one involving the wrongful dealing of interests in tangible property. There have been commonwealth cases where judges have opined that intangible property may not be subject to conversion. Nonetheless, it remains to be seen how this would evolve. Importantly, this in itself is likely no bar to a viable claim against a thief of digital assets as other legal causes of action exist.

Crypto Digital Asset Exchange Disputes

We have seen various cases where users have disputes with crypto or digital asset exchanges. Typical scenarios would involve the user alleging that the exchange had wrongfully frozen their account, transactions were not properly executed, or funds or assets had been wrongly transferred out or debited from their account.  

In such cases, the terms and conditions of service or user agreement applicable at the material time would be crucial to determine the legal position. Effectively, the user would be claiming a breach of contract by the exchange operator. If there are no express terms governing the scenario, possible legal arguments about implied terms may have to be raised.

To the extent that any of the terms purport to give the exchange a discretion, e.g. to suspend, freeze or terminate an account, it should be noted that there are implied terms under the law which limit the ambit of such discretion.  

Further, depending on the analysis of the legal position regarding the manner that the crypto or digital assets are held or stored with the exchange, different legal arguments could be made as to whether a user is entitled to claim for delivery up of their assets, notwithstanding contractual terms which purport to grant the exchange any discretion regarding the account or the assets.

Even in situations where the exchange has become insolvent and is subject to liquidation or winding up, legal claims could be framed in terms of crypto assets being subject to express trusts. This would depend on how the digital assets were held in the exchange. See Ruscoe & another v. Cryptopia Limited (In Liquidation) [2020] NZHC 728.  

Our team has acted for many users of crypto and digital asset exchanges in legal claims against and disputes with exchange operators. This includes a multi-million dollar class action suit or representative proceeding involving various cross-border multi-jurisdictional aspects.

ICO, Token Issuance, SAFT or Token Sale and Purchase Disputes

In a typical Initial Coin Offering (ICO), a token issuer offers for purchase or subscription certain tokens. Often, representations are made in the white paper, advertising, and other materials published or circulated in connection with the offer. The token issuer will purport that the tokens will grant the holder certain rights, benefits and interests. A dispute may arise if the project does not proceed as purported.

Token subscribers and holders may possibly bring claims in breach of contract or misrepresentation (whether fraudulent misrepresentation, negligent misrepresentation or misrepresentation under section 2(1) of the Misrepresentation Act). Depending on the model or structure adopted, the scheme may also possibly be legally characterised as an unincorporated association, an unregistered company, or a trust over assets, etc. The significance of that would be potential claims for breaches of fiduciary duties, which impose a higher standard than the other possible general legal obligations. 

As public token offerings tend to involve a large number of token subscribers, purchasers or holders, potential claimants may consider bringing claims as a class action suit or representative proceedings. There have been several such collective legal actions involving token offerings or sales in Singapore and beyond.

SAFTs are Simple Agreements for Future Tokens, adapted from the equity/shares version, which is the Simple Agreement for Future Equity. SAFTs are legal contracts where an investor pays an investment sum to a person in return for tokens to be issued to them when the ICO or public token sales or offering occurs. SAFTs are often used by early-stage Web3 project owners to raise capital. They are also sometimes described as ‘pre-sale’ contracts. In a sense, while they are effectively contracts of investments for tokens, they are also similar to token purchase contracts. 

Token investment and purchase disputes may take shape in different ways. In one case, Blockchain Optimization SA & Anor v LFE Market Ltd & Ors [2020] EWHC 2027 (Comm), it was alleged by the claimants that they had provided investment loans and services to the company issuing the tokens in exchange for certain sums. It was later agreed that the project / company founders would transfer certain digital tokens to a claimant to cover the loans. The company would pay a certain sum for the services provided. Subsequently, the company announced that those tokens were being replaced with a new type of token. However, the claimant’s tokens were not replaced. The company refused to replace the tokens unless proof of payment of the tokens could be provided, but this was not possible because the tokens were not purchased but provided pursuant to the aforementioned agreement. The failure to replace those tokens therefore rendered them worthless. The claimants also claimed that the defendants made false / fraudulent representations to the claimants, and also claimed in the tort of conspiracy relating to the alleged fraudulent misrepresentations and deliberate breach of contract.

In another case, Andoro Trading Corp & Anor v Dolfin Financial (UK) Ltd & Ors [2021] EWHC 1578 (Comm), the claimants alleged that they had made various investments in exchange for delivery of certain tokens, failing which the purchase price should be returned. The tokens were not delivered. The claimants claimed in misrepresentation, breach of duty of care, collateral contracts, breach of trust, dishonest assistance, knowing receipt, unlawful means conspiracy, and inducing breach of contract. They also claimed that payments made to the defendants were held on Quistclose trust. 

Conclusion

We have advised and acted for various clients in disputes involving crypto and digital assets. There are various legal strategies and tools which can be utilised to maximise asset recovery, trace the assets to the recipients and substitute assets, and pursue the appropriate claims, whether it is due to fraud, scam, theft or commercial disputes with crypto exchanges or token issuers or sellers. 

Should you require assistance in any such disputes, please feel free to contact our team.

Ronald JJ Wong, Deputy Managing Director: ronald.wong@covenantchambers.com

Stuart Peter, Senior Associate: stuart.peter@covenantchambers.com

James Tan, Associate: james.tan@covenantchambers.com