Victims of Fraud Series Part 4: Tracing issues in crypto assets cases

Claims involving digital assets (including crypto assets) have become relatively common in the English Courts over the last five years and, as a result, the main areas of disagreement between the parties to those disputes are starting to emerge. A major theme is the methodology that should be applied to the tracing and following of digital assets.

This article considers two recent cases and the strategic impact they will have on future claims.

Analysing the movement of crypto assets

The process of analysing the movement of crypto assets, particularly in a fraud claim, creates an interesting tension between (i) the need to rely on technical expert evidence and (ii) the application of common law and equitable tracing and following rules and principles. The way in which a particular crypto asset behaves (including how transfers are technically made and/or where they are allocated from) may differ depending on the rules or constraints of the blockchain software on which it operates. In addition, the way certain exchanges operate and hold or administer transactions can create further complexity owing to the way that crypto assets are held or pooled. Therefore, what might appear to be a simple question of finding cryptocurrency necessarily involves the assistance of an expert who (likely with the aid of specialist software) can analyse the relevant transactions.

Many (but not all) of the orders and judgments obtained in these cases are uncontested, as claims are generally brought against unknown parties. However, two recent cases which were contested have thrust the issue of tracing methodology into the spotlight. In both cases, the claimants were the victims of fraud which resulted in them being induced to transfer crypto assets to a third party.

D’Aloia v Persons Unknown & Others (2024)

In D’Aloia v Persons Unknown & Others the Court gave judgment following the trial of issues between the claimant and a cryptocurrency exchange (Bitkub). Many of the causes of action were founded on the basis that a Bitkub wallet known as “82e6” had received the traceable proceeds of the claimant’s crypto assets. However, the Court ultimately determined that the claimant had failed to show that any of his funds were received in 82e6 due to errors in his expert’s tracing methodology.

The case considered what tracing methodologies may or may not be appropriate and the Court reiterated there was flexibility in determining this. The judge commented that the traditional tracing methods (‘first in first out’ (FIFO), pari passu distribution, and rolling charge) are not the only approaches open to a party as a matter of law. He held that: “in my view the law is not so limited and other methods, if methodologically sound and properly evidenced, are available to a party seeking to trace assets, at least in the context of claims arising out of fraud.”

In addition, the Court also highlighted the importance of taking care when trying to trace into a fund which contains assets belonging to other innocent third parties, saying: “there is no good reason why one innocent victim should be favoured over others. FIFO is considered acceptable because while it is arbitrary, it is equally arbitrary to all parties. Similarly, pari passu distribution does not favour one party over another. [The claimant expert’s] approach seeks to ignore the funds of other innocent victims, both in terms of pre-existing balances and incoming funds. It then seeks to trace into the largest sums, which improves the prospects of recovery by minimising leakage at each stage. But it seems to do so by favouring [the claimant] over other victims of fraud.”

Jones v Persons Unknown & Others (2025)

In Jones v Persons Unknown & Others the claimant obtained summary judgment which resulted in an order requiring a cryptocurrency exchange (Huobi) to deliver up around 89 Bitcoin to him. The claimant had contended at the time of the summary judgment hearing that he was able to trace his Bitcoin to a wallet controlled by Huobi. However, another cryptocurrency exchange (Kyrrex) made an application to set aside that judgment on the basis that, amongst other things, the cryptocurrency address which was subject to the original order had not received the Claimant’s Bitcoin, and it had in fact contained assets belonging to Kyrrex.

Kyrrex’s application was ultimately unsuccessful. However, it transpired that the original order was made on misleading expert evidence about whether the assets held in the wallet controlled by Huobi were traceable to the fraud perpetrated on the claimant, and whether the wallet was exclusively the subject of fraudulent transfers into it. The Court held that “it is probably the case that in both senses [the original judge] was actually misled”. However, the Court went on to say that to the extent that the original judge was misled, it was innocent and did not give rise to a right to set aside the judgment.

Analysis

It is expected that these issues will continue to arise over the coming years, particularly because fraudsters now use mixing services and other obfuscation techniques, which require a higher degree of reliance on specialist software to untangle. Tracing methodologies will continue to be a contested issue in claims involving digital assets. The key message is that any tracing methodology must be properly explained and justified, particularly so as to ensure that any methodology is fair to other innocent third parties.

With thanks to Chris Recker, Legal Director at Kingsley Napley and now partner at FBC Manby Bowdler in Birmingham.