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In a fast-paced session, the panel of experts, moderated by Christopher Whitehouse of RPC, ran through a considerable range of the liability issues facing crypto exchanges.

Crypto exchange as constructive trustee

Henry Byam-Cook KC (Twenty Essex) highlighted the advantages of constructive trust claims against crypto exchanges. As a proprietary claim their utility is indicated given the first instance decisions confirming the status of cryptoassets as a form of property. Noting many crypto disputes currently emanate in the fraud context, the benefit of such proprietary remedy include: (i) priority enforcement ahead of unsecured creditors where there is a limited pool of available assets, (ii) the different tests for proprietary freezing injunctions generally provide an easier route to pre-action injunctive relief, (iii) the ability to recover the specific property misappropriated (and thus any intervening rise in its value), (iv) a constructive trust opens up the horizon of potential defendants against whom to pursue recovery. Constructive trusts do not require establishing knowing receipt or dishonest assistance. Their imposition is fact dependent, the categories for which are not closed. Two areas of potential relevance for crypto asset disputes where constructive trusts may be imposed are (i) where the transfer has been rescinded, having been induced by fraudulent misrepresentation and (ii) and where the transfer is itself a theft. Two contrasting judgments of invaluable reading if considering such a claim: Jones v Persons Unknown [2022] EWHC 2543 (Comm) (court imposed a constructive trust) and Piroozzadeh v Persons Unknown [2023] EWHC 1024 (Ch) (court set aside injunctive relief and declined to find the exchange as constructive trustee).

Crypto exchanges owing a Quincecare duty?

Sri Carmichael (Barrister, Wilberforce Chambers) summarised the history and current status of the Quincecare duty (Barclays Bank plc v Quincecare [1992] 4 All ER 363): the tension that exists between a bank’s contractual duty to give effect to its customer’s execution instructions, tempered by the overlay of its tortious duty that in doing so with reasonable skill and care, it may need to hold back from executing those instructions if put on notice of fraud (to paraphrase).  The Supreme Court’s decision in Philipp v Barclays Bank is due any day and may see a clarification of the scope of the Quincecare duty, noting in particular the circumstances of Philip which dealt with an ‘external’ fraud (an authorised push payment, APP) as opposed to a rogue corporate director. To date there is no known claim involving an attempt to pursue a crypto exchange on the basis that it owes a Quincecare type of duty, however, given the interim decision in Hamblin v World First [2020] EWHC 2383 (Comm) which held that ‘other payment service providers’ could, by analogy with banks, be susceptible to such duty, then arguably it is not impossible (subject to anything yet to come in Philipp). However even then, any potential claim would still have to establish both that the exchange owed a duty in respect of the specific transaction under scrutiny and that the exchange fell below the standard of care expected of a crypto exchange. This is where such a claim may face difficulty. Thus far, exchanges do not have in place the same fraud monitoring systems as banks, and therefore it will likely be much harder to establish that the exchange has fallen short of expected standards.

Regulatory redress under FSMA 2000

Chloë Bell (Barrister, 3VB) considered the extent to which exchanges may be liable to suit by reference to regulatory and statutory forms of redress, with particular reference to sections 19, 26 and 30 of the Financial and Services Market Act 2000 (FSMA 2000). There is scope for pursuing such claims per se, even if the assets themselves are not yet regulated. Furthermore plans are afoot to bring crypto assets themselves within specific regulation with the Financial Services and Markets Bill. However, note that many terms of service seek to circumvent the reach of the English courts applying these provisions for regulatory redress, whether by use of exclusive jurisdiction and applicable law provisions which exclude the English courts, arbitration clauses, very strict contractual limitation provisions or waiver of group and class actions. However, some inroads have been seen in this area where consumers are involved, see the decisions in Soleymani v Nifty Gateway LLC [2022] EWCA Civ 1297 and Chechetkin v Payward Ltd [2022] EWHC 3057 (Ch).

Mitigating the risks

Given the above skate through on where the attacks are coming from, Nick Price was tasked with identifying what exchanges can do to mitigate the risks they face. His short answer was that for an industry which is fast moving and innovative when it comes to tech and product development, it needs to match this with its understanding of where the law is at. Attention needs to be paid to terms and conditions, keeping them up to date, understanding what will work in one jurisdiction but not in another. In answer to a specific audience question, he observed that not all players in this market are averse to some form of regulation. Certainty is a key issue and so if regulation is imminent you may see the larger players waiting for that to come before deciding to establish in a particular jurisdiction.

So there was plenty for the audience to digest and clearly there will be more to come and  â€¦ where regulation comes, further litigation will likely follow.