When recovering stolen cryptocurrency or establishing recourse to crypto that is nothing more than a new guise of stolen bank assets after fraud, speed is of the essence. It is therefore crucial to have adequate legal tools in place to secure assets. An important question here is: can you impose a regular conservatory attachment on a Dutch cryptoexchange such as Bitvavo, or do you have to rely on a ‘freezing order’ through the summary proceedings court?

Uncertainty over seizure in cryptoland

This question was unanswered until recently. Opinions differ in the legal literature about the possibility of conservatory attachment of an account at a Dutch cryptoexchange. That you can use blockchaintracing to find an account belonging to an exchange but not the person in question is another problem that I discuss in another blog. Most legal scholars writing about crypto are limited to discussing whether attachment is possible on a physical crypto data carrier (e.g., a “Ledger”) and are of the opinion that it is possible, but that does not say whether and if so in what form custodial security can be established on an account at a cryptoexchange. Nor does such an account literally contain crypto, but should be seen as a dashboard through which the customer can manage crypto and liquid assets (purchases, sales, shipments) that are actually held elsewhere, depending on choices made by the exchange. For security reasons, exchanges do not store crypto in individual accounts. The lack of clarity had the disadvantage that accounts at cryptoexchanges could, in practice, act as a free port where stolen crypto currency – or crypto as a new manifestation of stolen money – could be stashed, without the civil justice system getting an effective grip on it, and without fraudsters having to fear successful recourse or recovery – an undesirable situation.

The “freezing order”: an alternative route to getting a grip on an account

In the past year, a so-called “freezing order,” or an order to freeze an account, has been developed in Dutch law through various summary judgment orders. This legal instrument obliges a cryptoexchange to freeze a user’s compromised account so that a victim of fraud has the opportunity to initiate recovery proceedings, or more purely put: Recover from the frozen cryptocurrency in the account that is not necessarily identical to the cryptocurrency obtained from fraud or theft, but includes whatever is in the account at the time of the freeze; i.e., that could include other types of crypto, subsequent inflows from other sources, or the liquid proceeds from crypto sold through the platform (bank balance within the account). However, these freezing orders have so far always targeted foreign exchanges due to the international nature of cybercrime. Preservation orders are a domestic instrument and if the need for preservation security is focused on foreign exchanges, you can’t make preservation orders anyway, because this is a domestic instrument. There was no precedent yet on the application of a freezing order and/or garnishment to a Dutch cryptoexchange, while of course there is also a lot of cybercrime within the country’s borders using crypto. This precedent does now exist in our client’s case against Bitvavo.

A principled case with major implications for Bitvavo

The Amsterdam District Court issued an important ruling on Feb. 15, 2024, on the question of whether a prejudgment attachment can be imposed on an account at Bitvavo, the largest Dutch cryptoexchange. In this case, the court had previously issued an “ex parte” order requiring Bitvavo to freeze an account used for fraud. The “ex parte order measure” is the mimic of a prejudgment attachment for which it is characteristic that neither the opposing party (nor the exchange) is heard beforehand (incidentally, a freezing order can also be applied after a hearing, but then the measure is thus not imposed unexpectedly). The plaintiff, our client, did not want to take any risk and wanted to create the widest possible safety net. Bitvavo complied with the freezing order and disclosed the cryptocurrency and cash balance in the account. However, Bitvavo disagreed with the procedure followed. That forced it to appear at the continued summary proceedings. According to Bitvavo, a regular prejudgment attachment would have been possible and our client should have chosen this less burdensome route, even though ordinary prejudgment attachments are hardly ever applied in practice so far due to unfamiliarity with this possibility. Bitvavo had an interest in preventing freezing orders from being imposed on it more frequently in the future, as it would then have to appear as a litigant in summary proceedings each time. With a prejudgment attachment it does not become a party to the proceedings, but is a third party that has to respect the attachment, just as the attachment department at a bank handles this attachment on a daily basis.

Structure and asset separation

Bitvavo substantiated its claim by pointing to its terms and conditions and structure. Bitvavo uses asset segregation; the cryptocurrencies it holds for its customers are housed in a separate custody foundation. According to Bitvavo, the customers have a claim against this foundation and the claim a customer has against Bitvavo can be subject to a regular garnishment or execution. For the plaintiff in this case, our client, the outcome of this issue of principle was not decisive, because the freezing order had already taken effect and thus the preservation security had already been established through a replicated preservation order. But for Bitvavo, this was an important legal issue because of the risk of being sucked into numerous incriminating proceedings the more it becomes known that accounts may be subject to redress.

The decision

The court ruled that a prejudgment attachment of an account at Bitvavo is in principle possible. The court deemed decisive that Bitvavo maintains a clear separation of assets and has placed its customers’ crypto currencies in a separate custodial foundation.

Precedent and limitations

This ruling has important implications, at least for cases where there is a need for custodial security on accounts of Bitvavo customers, but there are limitations. The ruling has precedential effect only for Bitvavo and for domestic cryptoexchanges that, like Bitvavo, maintain strict and externally cognizable asset segregation through a separate custodial foundation set up to keep customers’ digital assets separate from the business operations of the exchange itself in the event of bankruptcy. It is important to emphasize that asset segregation is certainly not a given with cryptoexchanges. Fines imposed by the U.S. regulator SEC on large foreign cryptoexchanges show that asset segregation is lacking at many platforms. This immediately raises the question of whether local attachment of assets is possible in other jurisdictions, if this legal figure exists – not every legal system has its own variant of our attachment of assets. For residents of the Netherlands, this is otherwise not a concern – all freezing orders imposed prior to the Bitvavo case were cross-border in nature, and thus in most cases a freezing order will be possible if the exchange is located abroad.

Hints for seizers of domestic crypto accounts

Specifically, what does this mean for victims of crypto fraud who are considering establishing custodial security with a domestic cryptoexchange, other than Bitvavo about which there is now clarity?

  1. See if the exchange in question has a clear separation of assets through a separate custodial foundation and map out the exchange’s structure.

  2. Carefully read the terms and conditions that apply between the customer and the exchange. If it can be inferred that the customer has a claim against a custodial foundation, then a prejudgment attachment could be formulated in the footsteps of the Bitvavo case. The wording of the attachment request is very precise: the attachment should focus on all crypto assets offered by the exchange plus available liquidity. The garnishee misses opportunities if, for example, it focuses only on bitcoins flowing into the account, which after all may have been sold or exchanged into another digital currency, while the value of the account in this example is still the same.

  3. In case of doubt about the feasibility of attachment, an order to freeze an account through summary proceedings remains possible. Summary judgment is a flexible instrument that can be used when a detailed statutory instrument such as garnishment may not be feasible.

Conclusion

The verdict in the Bitvavo case is an important development in the law surrounding crypto fraud. Crypto is being normalized and losing its elusiveness. The verdict makes it clear that a prejudgment attachment on an account at this major Dutch cryptoexchange is a possibility. In effect, Bitvavo is put on par with banks, which have to deal with garnishments on a daily basis. This legal development offers new prospects for recovering stolen cryptocurrencies and for taking recourse against debtors’ digital assets, so that crypto accounts can no longer function as unreachable havens of refuge. At the same time, caution remains to be exercised when applying conservatorship to other domestic exchanges and it is essential to closely examine the structure and terms of the exchange in question. The future will reveal whether conservatorship is possible with the other domestic exchanges.

Read the Bitvavo verdict here