Lawyers Ashhab and Chan: “Cryptocurrency-related fraud to rise by 75% in 2021”

• Cryptocurrency-related fraud surged since 2017
• Victims of cryptocurrency scams sought legal remedies to trace and recover assets
• Fraudsters can be identified and hauled to court

In June 2016, Dr. Ruja Ignatova walked onto the Wembley Arena stage to cheers from thousands of adoring fans. Also known as the “Cryptoqueen”, she was there to promote her cryptocurrency – OneCoin, which she touted as the next bitcoin. Between her charming persona and impressive credentials, people from all over the world were sold on the OneCoin dream. It is estimated that investors poured over $4 billion into OneCoin purchases between August 2014 and March 2017.  

The scheme eventually unravelled – OneCoin was nothing more but a Ponzi scheme. Ignatova went missing in October 2017 and has not been found to date. The OneCoin scam was one of the world’s first, and possibly largest, cryptocurrency-related scams. Since then, cryptocurrency fraud has only been on the rise, targeting both retail and institutional investors alike.

Surge in cryptocurrency-related fraud 

Global market capitalisation for cryptocurrencies hit $1.7 trillion in January 2021, an 800% increase from January 2020. As of now, the global cryptocurrency market capitalisation is well over $2 trillion. Based on current levels of suspicious activity, researchers have predicted a 75% increase in cryptocurrency-related crimes in 2021. 

With cryptocurrency becoming more accessible to the general public, the days of “Nigerian prince” scams are over. As investors become more sophisticated, fraudsters too have had to update their approach to find a way to have a slice of the pie.

Legal remedies have been taken to trace and recover assets

Early this year, a North-American company successfully secured a $3.9 million injunction that led to the freezing of the assets of a Hong Kong-incorporated company that was used as a vehicle for a bitcoin fraud. In this elaborate global scheme involving parties from Canada, the US, the UK, Malaysia, Singapore, and Hong Kong, fraudsters used fictitious identities to convince victims to invest in large amounts of bitcoin that they did not actually have. As the North-American company engaged a law firm to act early, they were able to swiftly trace and freeze the fraudsters’ assets before they could be dissipated. 

In another case, an individual saw his cryptocurrency wallet hacked after he was tricked into clicking on a pop-up window that had prompted a “software update”. The client’s losses exceed $70 million and he went on to engage a law firm to act for him. Steps have been taken in court to trace and recover the stolen cryptocurrency.

To ascertain the identity of potential defendants with a view to commencing legal proceedings, a Norwich Pharmacal Order (a disclosure order made by the court against non-parties) may be sought. This is especially useful in cryptocurrency fraud cases since fraudsters can hide behind a wall of anonymity provided by decentralised systems. This order compels the production of documents and relevant information, which may assist in revealing the identity of the fraudster. A Bankers Trust Order (a specific disclosure order made by the court against non-parties, including banks and cryptocurrency exchanges, to aid in the tracing of funds) may also be sought to compel the disclosure of relevant information that may assist in tracing and recovering assets. 

Fraudsters can be identified and hauled to court

If the fraudster has been identified and assets traced, a Mareva injunction (a temporary order that freezes the assets of a party pending further or final resolution by the court) may be obtained against the fraudster’s assets to aid a prospective judgement. This way, the fraudster will not be allowed to move his or her funds out of reach, so that there will most likely be sufficient amounts to recover losses. Unfortunately, fraudsters have resorted to using technology to gain leverage during the COVID-19 pandemic. The availability of this very practical and effective remedy when utilised timely increases the chances of recovery and also leads to a fast settlement. Law firms have obtained several injunctive orders including one for a worldwide freezing order coordinated over several jurisdictions for a claim valued at $5 billion. 

A leap of faith

Navigating the cryptocurrency world is still a challenge for both regulators and investors alike as it is difficult to govern the exchange of cryptocurrency without curtailing the very features that differentiate it from fiat currency. If proper due diligence is done before buying or investing in any cryptocurrency-related products, and/or if the appropriate legal remedies are embarked upon promptly after the fraud has taken place, the risks associated with navigating the treachery of trading in cryptocurrencies can be substantially mitigated. 

Bazul Ashhab is the managing partner and head of dispute resolution, and Lionel Chan is a partner, litigation and dispute resolution, at Oon & Bazul, one of Singapore’s largest conflict-free law firms.

Views and opinions expressed in this opinion-editorial belong strictly to the authors/contributors and do not reflect that of The Asian Banker.