In the case Fabrizio D’Aloia v Persons Unknown Category A & B and Others [2024] EWHC 2342 (Ch), the claimant, Mr. Fabrizio D’Aloia, a successful businessman and founder of Microgame, brought a claim against several defendants after falling victim to a cryptocurrency scam. The defendants included Persons Unknown (alleged fraudsters) and multiple cryptocurrency exchanges, including Binance Holdings Limited, Polo Digital Assets Inc., Gate Technology Corp., Aux Cayes Fintech Co Ltd, and Bitkub Online Co Ltd. While claims against Binance were settled and those against Aux Cayes Fintech struck out, the case focused on the alleged liability of Bitkub in facilitating the laundering of the claimant’s stolen cryptocurrency, specifically Tether (USDT).
In its findings, the court first addressed the classification of cryptocurrency as property under English law. It was confirmed that USDT qualifies as property, following the precedent set in AA v Persons Unknown [2019] EWHC (Comm) 3556. This classification is based on the “rivalrous” nature of cryptocurrency, meaning that its ownership by one party precludes simultaneous ownership by another. Additionally, the court acknowledged that USDT, backed by real-world assets and administered by Tether Ltd, holds value that can be traced and subjected to proprietary claims, including constructive trusts.
The court concluded that while Bitkub had notice of suspicious activity on the relevant accounts and failed to comply with internal KYC and AML obligations, the claimant was unable to trace his stolen cryptocurrency to Bitkub’s platform. As a result, the claims for constructive trust and unjust enrichment were dismissed, and Bitkub was not held liable.
The cause of Action arose in December 2021 when Mr. Fabrizio D’Aloia, the founder of Microgame, opened an account with td-finan.com, believing it to be associated with TD Ameritrade. Acting on this mistaken belief, he began transferring cryptocurrency, including USDT, into wallets controlled by Persons Unknown, the alleged fraudsters behind the operation.
On January 10, 2022, Mr. D’Aloia transferred approximately £2.5 million worth of USDT into a wallet (referred to as 1dDA) controlled by the fraudsters. This cryptocurrency was then laundered through a series of transactions across multiple blockchain wallets, commonly referred to as “Hops.” Over the course of these transfers, the funds were dispersed across different accounts, obscuring their origin.
By February 21, 2022, a portion of these stolen funds, specifically USDT 46,291, was transferred into a wallet held by Ms. Hlangpan with Bitkub Online Co Ltd (referred to as the 82e6 Wallet). At this time, Bitkub’s internal systems flagged suspicious activity, as the sum transferred greatly exceeded the declared income of Ms. Hlangpan. Furthermore, a series of withdrawals, beginning on February 21, 2022, breached the daily withdrawal limits imposed by Bitkub’s KYC/AML protocols.
Between February 21 and 24, 2022, despite these red flags, no meaningful investigation was conducted by Bitkub. Automatic system blocks were imposed on Ms. Hlangpan’s account due to her exceeding the daily withdrawal limits, yet these blocks were lifted without explanation, allowing the funds to be withdrawn. The total withdrawn amounted to THB 33 million over three days, far in excess of her stated income.
The failure by Bitkub to investigate these significant breaches of its own KYC and AML obligations is one of the issue in the case. Bitkub failed to scrutinise the suspicious account activity and allowed the funds to be converted from cryptocurrency into fiat currency (Thai baht) and subsequently withdrawn from the platform. This constituted a failure in Bitkub’s responsibility to prevent the laundering of stolen cryptocurrency and safeguard the platform from fraudulent activity.
In this case, Bitkub Online Co Ltd is alleged to have breached legal provisions relating to Know-Your-Customer (KYC) and Anti-Money Laundering (AML) obligations. KYC regulations require financial institutions, including cryptocurrency exchanges, to conduct proper due diligence on their customers to prevent the facilitation of fraudulent or illicit activities. Bitkub failed to meet these obligations by not thoroughly investigating the account of Ms. Hlangpan, despite her transactions significantly exceeding her declared income and daily withdrawal limits. This failure constituted a breach of its duty to verify customer identity, monitor ongoing account activity, and investigate suspicious transactions.
Further, Bitkub allegedly breached its AML obligations, which mandate that financial institutions identify, flag, and investigate potential money laundering activities. Bitkub failed to take appropriate action when Ms. Hlangpan made large, unexplained withdrawals far beyond her account limits, raising clear red flags under AML guidelines. The exchange allowed these transactions to proceed without sufficient investigation, despite the obvious risk of illicit activity.
Additionally, Bitkub allegedly failed to comply with its own internal corporate governance duties by not adequately enforcing transaction limits or investigating breaches of such limits. The failure to impose appropriate controls and trigger immediate investigations into suspicious activity reflects a broader failure in adhering to governance standards aimed at preventing fraud and ensuring compliance with KYC and AML protocols.
While dealing with the issue the court first dealt with the categorisation of USDT and confirmed that USDT, like other cryptocurrencies, is recognized as property under English law. The court relied upon the precedent set in AA v Persons Unknown [2019] EWHC (Comm) 3556, where it was established that cryptoassets can be treated as property that can be owned, transferred, and traced. The judgement found that USDT has a rivalrous nature, can be traced, and has real-world value through its backing by Tether Ltd., satisfying the requirements of property law.
While dealing with the issue of Constructive trust and unjust enrichment by Bitkub, held that despite Mr. D’Aloia’s efforts to trace his stolen USDT through a series of blockchain transactions (referred to as “Hops”), it was found that he failed to conclusively trace his specific cryptocurrency to the 82e6 Wallet held by Ms. Hlangpan on Bitkub’s platform. The claimant’s expert evidence was inconsistent, and the sweeping of funds into Bitkub’s hot wallet, which mingles different users’ assets, made it impossible to identify the specific funds.
The court found that Bitkub breached its Know-Your-Customer (KYC) and Anti-Money Laundering (AML) obligations by failing to investigate suspicious transactions in Ms. Hlangpan’s account. Despite numerous red flags, including large withdrawals far exceeding her income and daily limits, Bitkub allowed the transactions to proceed without conducting proper due diligence or investigation.
The court concluded that Ms. Hlangpan was either directly involved in the fraud as a money mule or knowingly participated in laundering the stolen funds. The flow of funds from Mr. D’Aloia’s account through the blockchain to Ms. Hlangpan’s wallet and the subsequent conversion into Thai baht demonstrated a clear linkage between her and the fraudsters behind the scheme.
The court dismissed the claims for constructive trust and unjust enrichment against Bitkub. Although Bitkub had notice of suspicious activities and failed to adhere to its KYC/AML obligations, the claimant’s inability to trace the stolen cryptocurrency to the 82e6 Wallet meant that Bitkub could not be held liable for the fraud. The claim for a constructive trust, which requires that identifiable property be traced to the party holding it, failed due to the lack of evidence. There was no conclusive evidence that Bitkub had received or retained any of his funds. While Bitkub did benefit from the transactions in question, the funds were not traced back to the claimant, making the unjust enrichment claim untenable.
(Source: https://charltonsquantum.com/wp-content/uploads/2024/09/2024-EWHC-2342-Ch.pdf)
