Introduction
The proliferation of cryptoassets has created unprecedented opportunities and parallel risks, with cryptoasset fraud emerging as a formidable challenge for legal systems worldwide. Victims of such fraud, dispossessed of their digital wealth, naturally seek the most robust form of redress available: a proprietary claim to recover their specific assets or their traceable proceeds. This directs them to the equitable doctrines of tracing and the suite of proprietary remedies that can follow a successful trace. English law has demonstrated notable pragmatism by recognising cryptoassets as a form of property, thereby opening the door to these powerful tools. However, this essay will argue that whilst this doctrinal foundation is sound, the protection currently offered to victims is theoretically promising but practically fragile.
This essay's central thesis is that equitable tracing and proprietary remedies should offer stronger protection. This strengthening does not require a radical doctrinal revolution that would jettison centuries of equitable principle. Instead, it necessitates a combination of courageous judicial evolution to adapt existing rules to the unique challenges of the digital context, supplemented by targeted legislative clarification and, most critically, enhanced international regulatory frameworks. The current disjuncture between a victim’s a proprietary right and their ability to enforce it against pseudo-anonymous actors in a borderless digital ecosystem represents the primary weakness that must be addressed. Stronger protection, therefore, means transforming a theoretical possibility of recovery into a practically achievable remedy. This essay will first outline the orthodox framework of equitable tracing, before analysing how the nature of cryptoassets strains this framework. It will then evaluate the practical efficacy of proprietary remedies in this context, before concluding with a series of recommendations for how protection can and should be strengthened.
The Orthodox Framework: Tracing and Proprietary Remedies as the Victim’s Shield
To evaluate the need for stronger protection, one must first understand the protection currently offered by equity. Equitable tracing is not a remedy itself, but a process of identification. As Lord Millett articulated in Foskett v McKeown, it is the process by which a claimant "traces what has happened to his property, identifies the persons who have handled or received it, and justifies his claim that the money which they handled or received… can properly be regarded as representing his property" (Foskett v McKeown, 2001, p. 127). The successful identification of assets allows a claimant to then seek a proprietary remedy, most commonly a constructive trust over the traced asset or an equitable lien to secure a personal claim against the defendant.
The preeminent advantage of a proprietary remedy is its superiority in the defendant's insolvency. A personal claim for damages or equitable compensation ranks the victim as an ordinary unsecured creditor, likely to recover only pennies in the pound. A proprietary claim, by contrast, asserts that the traced asset never truly formed part of the insolvent defendant's estate. The asset is held on trust for the victim, who can demand its transfer, bypassing other creditors entirely (Nurdin and Nurdin v Lombard, 2003). Furthermore, a proprietary claim allows the victim to capture any increase in the value of the traced asset, a particularly relevant feature given the volatility of many cryptoassets.
The process of tracing is governed by a series of well-established, albeit complex, rules. Where a trustee wrongfully disposes of trust property and acquires a new asset in its place (a 'clean substitution'), the beneficiary can trace into the new asset (Foskett v McKeown, 2001). The complexity arises when the claimant's property is mixed with other funds. If mixed with the wrongdoer's own money in a bank account, the claimant benefits from presumptions established in cases like Re Hallett's Estate (1880), which presumes the wrongdoer spends their own money first. The subsequent rule in Re Oatway (1903) establishes that if the remaining funds are dissipated, the claimant can trace into any asset purchased from the mixed fund before the dissipation. Where the claimant’s funds are mixed with those of another innocent party, the traditional 'first in, first out' rule from Clayton’s Case (1816) has largely been displaced in favour of a pari passu (rateable distribution) approach, deemed fairer to all innocent contributors (Barlow Clowes International Ltd v Vaughan, 1992). This framework, developed in the context of money in bank accounts, provides the starting point for analysing cryptoasset fraud.
The Cryptoasset Conundrum: Stretching Traditional Doctrines
The application of this orthodox framework to the decentralised, pseudo-anonymous, and technically complex world of cryptoassets presents significant challenges. While the judiciary has made important strides, several doctrinal and practical hurdles remain which dilute the strength of the protection offered to victims.
The Threshold Hurdle: Are Cryptoassets ‘Property’?
The most fundamental prerequisite for any proprietary claim is the existence of property. Cryptoassets do not fit neatly into the traditional legal taxonomy of property as either a chose in possession (tangible) or a chose in action (a right enforceable by a legal action). They are digital records on a distributed ledger, possessing neither a physical form nor representing a singular debt or obligation owed by a counterparty. This conceptual ambiguity posed a serious initial threat to the availability of proprietary remedies.
However, the English courts have adopted a highly pragmatic approach, prioritising substance over rigid form. In AA v Persons Unknown (2019), Bryan J, endorsing the analysis in the UK Jurisdiction Taskforce's (UKJT) influential Legal Statement on Cryptoassets and Smart Contracts, concluded that cryptoassets are indeed property. The court held they met the classic definition of property from National Provincial Bank v Ainsworth (1965) as being "definable, identifiable by third parties, capable in their nature of assumption by third parties, and having some degree of permanence" (AA v Persons Unknown, 2019, para 59). This landmark decision confirmed that cryptoassets could be the subject of a trust and, consequently, that proprietary remedies were in principle available. This reasoning has been followed consistently in subsequent cases, such as Ion Science v Persons Unknown (2020). Therefore, while academics continue to debate the precise jurisprudential classification (Green and Lazarski, 2021), the critical threshold question has, for the practical purposes of litigation, been answered in the affirmative. This judicial creativity provides the essential foundation upon which stronger protections can be built.
Identifying and Tracing in a Decentralised World
While cryptoassets are property, tracing them presents unique difficulties that strain the traditional rules developed for bank accounts. Fraudsters exploit the architecture of blockchain technology to obscure the trail of stolen assets.
A key issue is the nature of mixing. When stolen cryptoassets are sent to a large, centralised exchange (CEX), they are typically pooled with the assets of thousands of other users in the exchange’s omnibus wallets. Applying the rule in Clayton’s Case would be arbitrary and unjust, as well as practically impossible given the velocity of transactions. While courts would likely favour a pari passu approach, as seen in the context of client money shortfalls (FCA v Capital Alternatives Ltd, 2015), even this is complex. Calculating each victim's rateable share of a constantly fluctuating pool of millions of tokens is an evidentially demanding and costly exercise.
The problem is exacerbated on decentralised exchanges (DEXs) and with 'mixers' or 'tumblers'—services explicitly designed to break the on-chain link between an asset's origin and its destination by pooling and mixing assets from multiple sources. A fraudster might send stolen Ethereum (ETH) to a mixer and receive the 'clean' equivalent amount from the pool moments later, minus a fee. Does this defeat tracing? Doctrinally, it should not. In Agip (Africa) Ltd v Jackson (1991), the Court of Appeal held that tracing was possible through the electronic banking system, rejecting the argument that the mixing of funds in the New York clearing system defeated the claim. The principle is that the exchange for a substitute asset, even through a complex intermediary, does not break the chain. However, as scholars have noted, the sheer scale and opacity of crypto mixing services present an evidential challenge orders of magnitude greater than that in Agip (Low and Lee, 2022). A victim may be able to show their assets went into a mixer, but proving that the assets coming out to a fraudster's new wallet are the traceable an evidential chasm that is often too expensive to bridge.
A similar issue arises with 'chain-hopping' through DEXs, where a fraudster swaps one token (e.g., stolen ETH) for another (e.g., a stablecoin like Tether). This is a clean substitution, and in principle the claim should attach to the new asset. Forensic blockchain analysis firms can often track these swaps. However, a rapid series of swaps across multiple blockchains creates a complex web of transactions that, while theoretically traceable, becomes practically untraceable for all but the most well-resourced claimants. The law's abstract rules hold, but their practical application is blunted by the technology they are applied to.
The Efficacy of the Remedy: A Right Without a Realistic Pay-out?
Even if a victim successfully overcomes the evidential hurdles of tracing, securing a meaningful remedy presents a further set of formidable obstacles. A proprietary right is of little value if it cannot be enforced. The features of the cryptoasset ecosystem that facilitate fraud—pseudo-anonymity and a borderless nature—are the same features that frustrate enforcement.
The Challenge of Enforcement Against ‘Persons Unknown’
Cryptoasset fraud is typically perpetrated by individuals or groups who are, at least initially, anonymous. The English courts have responded robustly by granting freezing injunctions and disclosure orders against 'persons unknown' who are identifiable only by their crypto-wallet addresses (CMOC v Persons Unknown, 2017). This is a vital first step, but it is often insufficient. An injunction against a person whose identity and location are unknown is difficult to enforce.
The more effective strategy has been to target third parties, primarily the crypto exchanges where the stolen funds are held. Courts have shown a willingness to grant Norwich Pharmacal orders (requiring third parties mixed up in wrongdoing to disclose information) and Bankers Trust orders against exchanges to force them to reveal the identity (KYC – 'Know Your Customer' data) of the fraudster and to freeze the relevant assets. Cases like Ion Science and D'Aloia v Persons Unknown (2022) demonstrate the courts’ commitment to using these procedural tools to assist victims. In D'Aloia, the court went so far as to permit service of court documents on the defendants via an NFT airdropped into their crypto wallet, a striking example of judicial adaptation.
However, the effectiveness of this approach is contingent on the nature of the exchange. If the exchange is a reputable, regulated entity with a presence in the UK or a cooperative jurisdiction, these orders can be highly effective. If, however, the exchange is located in a jurisdiction with weak rule of law, or no physical presence at all, a UK court order may be ignored with impunity. The decentralised dream becomes the victim's nightmare, leaving them with a judgment that is practically worthless. The 'strength' of protection is therefore heavily dependent on the cooperation of centralised intermediaries, an ironic weakness for a supposedly decentralised system.
Cross-Jurisdictional Quagmires
The global and decentralised nature of cryptoassets means that fraud invariably involves multiple jurisdictions. The victim may be in the UK, the fraudster in Eastern Europe, and the servers hosting the exchange in South-East Asia. This creates a legal and logistical quagmire. While the court in D’Aloia creatively addressed service out of jurisdiction, the subsequent step of enforcing a proprietary judgment internationally remains a significant barrier.
The process of seeking recognition and enforcement of an English judgment in another country is slow, expensive, and its success is uncertain, depending on local laws and the existence of reciprocal enforcement treaties. If a constructive trust is imposed over cryptoassets held by an uncooperative offshore exchange, the victim is left with little recourse. The English court cannot directly compel the foreign entity to transfer the assets. This gap between obtaining a domestic remedy and enforcing it internationally represents the single greatest weakness in the protection offered to victims of cryptoasset fraud. The sophisticated fraudster knows that by routing assets through uncooperative jurisdictions, they can effectively place them beyond the practical reach of their victims, regardless of the strength of the victim's underlying legal claim.
Forging a Path Forward: How Should Protection be Strengthened?
Given these manifest challenges, it is clear that the protection offered to victims of cryptoasset fraud should be stronger. The question is how to achieve this. The answer lies not in a radical overhaul, but in a multi-faceted approach combining judicial adaptation, legislative clarification, and regulatory action.
Doctrinal Evolution, Not Revolution
Equity’s greatest strength is its flexibility and its basis in good conscience. The core principles of tracing established in Foskett are sound and should not be abandoned. Instead, courts should continue to apply them robustly and adapt them to the digital context. For instance, courts should explicitly confirm that for the purposes of tracing into mixed cryptoasset funds held by exchanges, the rule in Clayton’s Case is inapplicable and a pari passu or rolling charge approach is to be preferred. This would provide greater certainty for claimants.
Furthermore, courts could develop stronger evidential presumptions to assist victims. Where a victim proves their assets were sent to a known mixing service, and the fraudster is shown to have withdrawn assets from that same service shortly after, the court could impose a rebuttable presumption that the withdrawn assets are the traceable proceeds of the victim's property. This would shift the notoriously difficult evidential burden from the innocent victim to the wrongdoing fraudster (or the intermediary facilitating the wrongdoing) to disprove the connection. This would be a powerful, pro-victim evolution of tracing principles, fully consistent with equity's historic purpose of confounding fraud. The decision in Tulip Trading Ltd v van der Laan (2023), where the Court of Appeal considered the possibility of developers owing fiduciary duties, indicates a judicial willingness to explore novel duties in the crypto space, which could in turn provide new avenues for proprietary claims.
Legislative and Regulatory Support
While the common law can and should do much of the heavy lifting, certain issues would benefit from legislative intervention and enhanced regulation. The Law Commission’s Final Report on Digital Assets (2023) made several key recommendations aimed at providing legal certainty. One standout recommendation is for a statutory confirmation that digital assets are a distinct, 'third' category of personal property. While the judiciary has already reached this conclusion, a statutory provision would eliminate any residual ambiguity and provide a definitive, future-proof foundation for the development of the common law in this area.
However, the most significant strengthening of protection will come from the international regulatory sphere. The problems of enforcement against anonymous fraudsters and uncooperative offshore exchanges cannot be solved by a domestic court alone. Stronger international agreements are needed to mandate uniform, high standards of KYC and AML for all cryptoasset service providers. If all major exchanges are required to collect and, where compelled by a court order, disclose user information, the cloak of pseudo-anonymity used by fraudsters would be stripped away. Furthermore, establishing international protocols for the swift recognition and enforcement of freezing orders and final judgments relating to cryptoassets would be transformative. This would close the enforcement gap and ensure that a victim with a valid English proprietary judgment can see it enforced against assets held on an exchange in another signatory state. This is admittedly a long-term and politically complex goal, but it is the most crucial element in providing truly strong protection.
Conclusion
In conclusion, the question of whether equitable tracing and proprietary remedies should offer stronger protection for victims of cryptoasset fraud must be answered with a firm affirmative. The English judiciary is to be commended for its pragmatic extension of traditional property concepts to encompass cryptoassets, laying a vital foundation for proprietary claims. However, this foundation is currently built on uncertain ground. The orthodox rules of tracing, conceived for the analogue world of bank accounts, are stretched to their conceptual and practical limits by the speed, complexity, and opacity of blockchain transactions. More significantly, even a theoretically successful trace is often a pyrrhic victory, with the final remedy being rendered unenforceable by the pseudo-anonymity and jurisdictional arbitrage that fraudsters so effectively exploit.
To strengthen protection is to bridge this chasm between right and remedy. This does not require discarding the flexible and principled doctrines of equity. Instead, it calls for a continued, bold judicial evolution of tracing rules to meet the digital reality, such as the use of stronger evidential presumptions against wrongdoers. This common law development must be supported by the legislative certainty recommended by the Law Commission. Ultimately, however, truly robust protection cannot be achieved within the borders of one jurisdiction. It is only through concerted international regulatory action—mandating universal KYC standards for exchanges and creating streamlined channels for cross-border enforcement—that the shield of equity can be made as effective in the digital world as it is in the physical one. Without this, the protection offered to victims of cryptoasset fraud will remain more of a theoretical hope than a practical reality.
References
Cases
- AA v Persons Unknown [2019] EWHC 3556 (Comm).
- Agip (Africa) Ltd v Jackson [1991] Ch 547.
- Barlow Clowes International Ltd v Vaughan [1992] 4 All ER 22.
- CMOC v Persons Unknown [2017] EWHC 3599 (Comm).
- Devaynes v Noble (Clayton's Case) (1816) 1 Mer 572.
- D’Aloia v Persons Unknown [2022] EWHC 1723 (Ch).
- FCA v Capital Alternatives Ltd [2015] EWCA Civ 284.
- Foskett v McKeown [2001] 1 AC 102.
- Ion Science Ltd v Persons Unknown (unreported, 21 December 2020).
- National Provincial Bank Ltd v Ainsworth [1965] AC 1175.
- Nurdin and Nurdin v Lombard [2003] EWCA Civ 773.
- Re Hallett’s Estate (1880) 13 Ch D 696.
- Re Oatway [1903] 2 Ch 356.
- Tulip Trading Ltd v van der Laan [2023] EWCA Civ 83.
Legislation and Reports
- Law Commission (2023) <a href="https://www.lawcom.gov.uk/project/digital-assets/">Digital Assets: Final Report (Law Com No 412)</a>. The Law Commission.
- UK Jurisdiction Taskforce (2019) <a href="https://technation.io/lawtech-uk-jurisdiction-taskforce-legal-statement-on-cryptoassets-and-smart-contracts/">Legal statement on cryptoassets and smart contracts</a>. LawtechUK.
Secondary Sources
- Green, S. and Lazarski, K. (2021) 'Crypto-assets & property law: a difficult relationship', King's Law Journal, 32(1), pp. 1-13.
- Low, K.F.K. and Lee, P. (2022) ‘Crypto-assets and the problem of “pure” mixing’, Journal of Equity, 16(2), pp. 119-142.
- McGhee, J. (ed.) (2021) Snell's Equity. 34th edn. Sweet & Maxwell.
