Can the controllers of crypto exchanges in offshore jurisdictions be held liable for the funds stolen by crypto fraudsters through those exchanges? | Walkers

Courts in offshore jurisdictions have started to adopt the decisions of the English Courts when granting relief with respect to the dissipation and recovery of crypto-assets. One example is the recent decision in ChainSwap v Persons Unknown where the BVI court granted a freezing order over assets held by persons unknown in relation to a crypto fraud and follows similar decisions in the UK and other commonwealth countries where such relief is now commonly granted. Therefore, we consider the recent English decision in D’Aloia v Persons Unknown and Others [2022] EWHC 1723 (Ch) which highlights the possibility that the controllers and operators of a crypto exchange may be considered a trustee of misappropriated assets flowing through any crypto wallet that it maintains and that it would therefore have a duty to account to victims of the misappropriation for any unauthorized profits or gain made as trustee.


The case concerns an application by Mr Fabrizio D’Aloia for interim injunctive relief and disclosure against a number of defendants, arising out of what he alleged to be the fraudulent misappropriation of cryptocurrency in the form of approximately 2.1 million USDT, and 230,000 USDC by persons unknown. Mr D’Aloia alleged he was induced, by way of fraudulent misrepresentation, to transfer USDT and USDC from his Coinbase and wallets to the operators of the “tda-finan” website, who were persons unknown. By using crypto investigation specialists, Mr D’Aloia confirmed that some 2.175 million of USDT and USDC was transferred to a number of private addresses and wallets operated by, or under the control of, various cryptocurrency exchanges. The decision importantly considers the satisfaction of the test for injunctive relief as it relates to crypto assets, including whether the English courts are the most appropriate forum for such an application with reference to the lex situs of the crypto assets in question and where the damage occurred.

Can an exchange can be responsible for the proceeds lost?

One of the most significant developments from the decision stems from the Court’s ruling that there was a good arguable case that Mr D’Aloia has a claim not only against the fraudsters who stole his cryptocurrency, but also against the controller and operator of one of the exchanges which controlled the wallets through which it was possible to trace the crypto assets stolen from Mr D’Aloia. In doing so, it highlighted the possibility that an exchange with sufficient control over wallets that it maintains will be considered a trustee of misappropriated assets flowing through those wallets and in turn have a duty to account to victims of the misappropriation for any unauthorized profits or gain made as a result of its role as trustee. It remains to be seen whether Mr D’Aloia’s claim in this regard will be successful at trial. Nonetheless, the fact that such a claim has been allowed to proceed is a significant decision not only in the England and Wales, but also offshore and specifically in the Cayman Islands and the BVI where such decisions are highly persuasive and likely to be followed.

Practical consequences

The decision in D’Aloia v Persons Unknown is significant as it demonstrates the possibility for victims of crypto fraud to have direct claims against the controllers and operators of crypto exchanges for equitable compensation where a constructive trust claim is made out. In circumstances where taking action against the fraudsters is ordinarily very difficult given the pseudonymous nature of crypto assets and the associated difficulty of identifying the fraudsters, victims of crypto-related fraud will now consider the availability of direct claims against crypto exchanges, as the known parties, where those exchanges have been notified that they are in possession of fraudulently misappropriated crypto-assets. Where crypto-assets are the subject of a potential dispute, a Court may make an order requiring that such assets be properly ring-fenced and not withdrawn. Crypto exchanges in the Cayman Islands and the BVI will need to consider best practice, including the level of control they exercise over wallets, and the procedures needed to mitigate against the risk of misappropriated funds being held in wallets maintained by the exchange.

For more information on this issue, or if you require advice such matters or any other Cayman Islands or BVI legal issues, please contact any of the primary contacts from the Dubai Insolvency and Dispute Resolution team listed below.

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