Lost in the Blockchain: Asset Tracing and Recovery of Cryptocurrency: D’Aloia v Persons Unknown Category A & Ors [2024] EWHC 2342 (Ch) (12)

On 12 September 2024, the High Court of England and Wales in D’Aloia v Persons Unknown Category A & Ors [2024] EWHC 2342 (Ch) (12) dismissed a claim against a Thai cryptocurrency exchange, Bitkub Online Co. Ltd, emphasising the difficulties in tracing digital funds across blockchain networks and the necessity for precise legal and technical proof.

Background

The litigation involved proceedings brought by Fabrizio D’Aloia, the claimant, alleging he was the victim of a cryptocurrency scam. Relevantly, Mr D’Aloia transferred around £2.5 million in cryptocurrency (Tether/USDT) to unknown persons through a website, ‘https://td-finan.com’, after which the funds passed through various blockchain wallets before being withdrawn as fiat currency. By his claim, Mr D’Aloia sought to recover those funds from several defendants with whom they allegedly arrived including Binance, Polo Digital Assets, Gate Technology, Bitkub, and others.

At the core of the litigation was whether the Sixth Defendant, Bitkub, could be liable for Mr D’Aloia’s losses. In a nutshell, Mr D’Aloia argued that Bitkub held his stolen funds and thereafter failed to act in a commercially reasonable manner by allowing suspicious transactions by the fraudsters to proceed. The Judgment largely revolved around whether Mr D’Aloia could, as a question of fact, trace his funds to an identifiable wallet (82e6) on Bitkub’s exchange and hold Bitkub accountable for unjust enrichment, constructive trust, and breach of anti-money laundering (AML) duties.

Key issues and Findings

1. Cryptocurrency as property. The court held that cryptocurrency is a distinct form of property to which rights can attach (recently the subject of a Law Commission Report, Law Comm No 412 “Digital Assets: Final Report”) and therefore can be the subject of tracing (technically ‘tracing’ is a process rather than a particular claim or remedy). Accordingly, USDT, a stablecoin tied to the value of the US dollar, can constitute trust property.
2. Tracing Funds. Mr D’Aloia alleged that his USDT could be traced through 14 blockchain transactions (referred to as “Hops”) to Bitkub’s 82e6 wallet. However, the court found that while tracing through mixed funds is possible under equitable claims, Mr D’Aloia failed to provide sufficient evidence that his funds arrived at the wallet in question.
3. Unjust Enrichment. Although Bitkub did receive USDT 400,000 into the 82e6 wallet, the court held that Mr D’Aloia failed to prove that any portion of his funds were part of that amount. Therefore, there was no enrichment at his expense.
4. Commercial Unacceptability. Mr D’Aloia asserted that Bitkub acted improperly by allowing suspicious activity, such as large withdrawals that breached daily limits. However, without expert evidence on the relevant Thai law, the court did not conclusively determine whether Bitkub breached AML/KYC standards.
5. Defences. Bitkub relied on several defences, including being a bona fide purchaser and ministerial receipt. The court rejected these defences, noting that Bitkub was on notice of suspicious activity and failed to investigate it properly, rendering these defences unavailable.

Conclusion

The court dismissed Mr D’Aloia’s case against Bitkub, finding that although the exchange did receive large sums of suspicious funds, Mr D’Aloia could not prove on the balance of probabilities that his stolen cryptocurrency was among them. No direct liability was found against Bitkub as D’Aloia could not conclusively trace his funds to the exchange.

The decision highlights the legal and practical difficulties in tracing stolen cryptocurrency across multiple exchanges and wallets.

For more information, please contact Thomas Johnson or any member of the Commercial Disputes team.

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