CRYPTO CURRENCY
In recent years, our firm has developed unique expertise regarding the fight against cryptocurrency fraud and contributed to building new tools to help victims. Developments in this area have been spectacular in recent years. New tools have been developed in the courts to freeze accounts where cryptocurrencies derived from fraud or theft have ended up as a prelude to compensation for victims’ damages, for example by returning the crypto in the account used for fraud to the victim.
What are cryptocurrencies?
Cryptocurrencies are an alternative form of digital money that is not issued by a central bank. Crypto currencies can be held at an owner’s personal “address” on a computer or other data carrier (such as a “ledger”), or they can be held in an account at a cryptoexchange, where you can also buy crypto currency. Addresses where crypto is stored are part of the “blockchain” – a kind of public ledger of transactions that are immutably recorded. There are many hundreds of types of crypto, the most well-known being Bitcoin (BTC). There are also “stablecoins,” digital currencies that are issued centrally (by commercial companies, usually based in a tax haven) and whose value is backed by dollar bonds, for example.
Cryptocurrency fraud
Fraud is of all times and people are curious about the possibilities of crypto. It is therefore inevitable that fraudsters and scammers are looking for victims in the crypto world. Not because they themselves want this crypto, but because crypto has value that can be moved, which can later be converted back to regular money, in the hope that the loot will be elusive to police, justice and lawyers who help victims of fraud, like our firm. The creativity of fraudsters and scammers knows no bounds, and neither does crypto itself. Cryptocurrency fraud is a growing, global phenomenon amounting to many billions of dollars a year. The world is regularly rocked by extreme forms of this cybercrime. Consider the stories of hundreds of individuals in Asia living in slavery to forcibly commit this form of fraud.
Boiler room fraud and Pig Butchering
The type of fraud we see and deal with the most is boiler room fraud, or Pig Butchering. In this form of fraud, victims invest in fake investment products through their own account in an investment website. Through scam software, these investments appear to increase in value, while these investments do not exist at all. All types of really existing investment products can be presented as real through scam software in an account when there is nothing there – except the money used to pay for the fake investments. Boiler room fraud has been around for years, but a development in recent years is that victims first buy crypto through their own exchange and this crypto is used to deposit into the boiler room account. So the payment method has changed: where victims used to pay the deposit through the bank to shadowy companies, the fraudsters now get paid in crypto, which they can easily and quickly siphon off. Meanwhile, the boiler room website suggests that the deposits arrive in the investment account so that investments can be purchased, but the reality is that the crypto is moved over the blockchain. At some point, the victim can’t or won’t deposit anymore – for example, because implausible stories are told about taxes or fees to be paid, with no money being returned, or simply because the victim runs out of money. At this stage, the victim realizes that fraud has occurred. The website of a boiler room usually disappears after a few months (for example, if warnings are posted by regulators such as the AFM). It is important to report it to the police; this is a serious form of cybercrime that leads to high damages. Victims can lose their entire pension or all their savings.
Blockchaintracing
The fact that the fraudsters send stolen crypto or crypto obtained from fraud via the blockchain has an important advantage. The crypto can be tracked from the victim’s address. Investigative agencies have developed software to track these shipments. These investigations and the reports are instrumental in successful legal actions aimed at freezing accounts where the crypto ends up. Indeed, fraudsters almost always ship crypto obtained from fraud to a cryptoexchange where the crypto can be sold or possibly exchanged into other crypto. Most exchanges have included in the terms and conditions with their users that an account can be frozen in cases of fraud or money laundering, whether by court order or otherwise. In a 2023 case from our office, such a measure was first applied by the Dutch court to a well-known internationally active cryptoexchange officially based in Seychelles, Huobi (HTX). Following this success, several other courts ordered account freezes to safeguard crypto derived from fraud for victims. This case law was further refined during 2024 and also applied to new exchange methods (“swaps”) and further shipments to underlying exchanges used by fraudsters as a ploy to make blockchaintracing and account blocking more difficult.
Who should do the blockchaintracing?
So before we as a firm can act to freeze an account and secure crypto for the victim, an investigation must be done. There are only a few agencies that, in our experience, conduct reliable investigations at a fair price. Unfortunately, there are also agencies – often abroad – that are not reliable, charging too much money and making unrealistic promises, especially in terms of legal action, that are not fulfilled. In fact, a fraud victim then becomes another victim, namely a rogue company (recovery fraud). It regularly happens that victims have already spent money on a blockchain investigation, which we cannot use for a Dutch lawsuit. Fortunately, there are also reliable agencies with rock-solid reputations. We work with agencies that provide reliable investigations and can put you in touch with an investigation agency. This is usually also the first thing to do when a victim of crypto fraud reports to us, and the investigation should preferably be conducted as soon as possible after the fraud has taken place; this increases the chances of success of the follow-up steps.
Legal steps after the investigation
If through the blockchain investigation one or more cryptoexchanges are found where the victim’s crypto ends up, there are legal options. The address of the blockchain where the crypto ends up is then part of an account opened at the exchange by a user. That user is anonymous and the blockchain does not tell who it is, but the court can override this anonymity by issuing an order to the exchange to disclose the name and address information. This is also possible with foreign platforms. The judge can put a high fine to encourage the exchange to respect the judgment. The highest fine in a case from our firm was EUR 2,000,000, and this fine was not necessary because the exchange immediately disclosed the name and address information. If the name and address details are known, proceedings can be initiated against the person who received the crypto obtained from fraud. That person has no right to this crypto. It is, after all, fraud.
Freezing account
The best results can be achieved if the exchange freezes the fraudulent customer’s account before the crypto is sold (cashed out) or moved on. The crypto present in the account at the time of the freeze is then blocked and secured for the victim. However, these digital assets cannot simply be returned to the victim for compensation; that first requires a court ruling that settles it. The reason is that you can’t just take away property without a judge’s judgment, even from a fraudster. The cases are international, and the ordinary rules of attachment law do not apply; therefore, special expertise is needed to take all the steps. Crypto knows no borders and the law does; it was written when crypto did not exist. Victims can fortunately litigate in the Netherlands against both foreign fraudsters and foreign exchanges, even if they are based in tax havens such as the Seychelles. In a successful freeze, it also does not matter much where the counterparty lives. It may be in a country that does not cooperate internationally in legal matters, but that does not matter if the compensation actually consists of sending the frozen cryptocurrency out of the account.
How can you freeze an account?
This varies by exchange and is specialized legal work. Victims cannot do this themselves, it is far too complex. Freezing is similar to attachment, and you also need a lawyer and a bailiff for that, but it is a bit more complicated. Therefore, it is not wise to try this yourself, and another well-known pitfall is to follow advice from a foreign consulting firm or research firm, which thinks it knows how things are. These parties are not aware of Dutch jurisprudence and sometimes have a bad reputation and are then certainly ignored. It is also wise not to wait for police and judicial action. In the Netherlands, effective police and judicial action aimed at freezing accounts does not yet occur. It would be good if that changed, but for the time being, account freezing is the purview of specialized lawyers, such as our firm, who have the knowledge to initiate international litigation against the exchange and against the fraudsters.
The attitude of exchanges toward fraud victims
The degree to which exchanges open up to cooperate varies widely. Not surprisingly, Dutch judges have imposed high fines on exchanges to get them to cooperate in freezing accounts used for fraud – these fines are often higher than the fraud amount itself. The year 2024 brought both positive and negative developments. On the positive side, some exchanges did not resist legitimate claims from victims and cooperated well – sometimes after some grumbling or surprise at the intervention. Things have really changed at many exchanges, whether or not through stricter action by regulators and firm judgments by civil courts that have a disciplining effect. Consultations are possible with these “compliant” exchanges. Sometimes this leads, for example, to a provisional account freeze that takes effect immediately, followed by court ratification. Unfortunately, there are also “non compliant”, often new exchanges that do not cooperate well, do not respond to emails, do not want to provide information, or have chosen an inscrutable structure that makes it unclear which party you are dealing with. In that regard, every crypto fraud case is different; hundreds of exchanges now exist and developments are rapid. In any case, the fact is that the positive developments in jurisdiction cannot be reversed. Gone are the days when criminals could hide unlimited money on exchanges without intervention from the legal system. The civil legal system has proven well able to adapt to technological developments without legislative change. Nor does the tendency of exchanges to locate in tax havens make them immune. As a firm, we are proud to have contributed to these developments. Parties that try to get away and want to be elusive and play hide-and-seek simply fall under the legal system.
Judicial overview 2023-2024
The most important published judgments on crypto fraud to date are as follows:
ECLI:NL:RBROT:2024:6723, Rotterdam District Court, July 19, 2024, Rechtspraak.nl
KG. International dispute. May default be granted? Yes, application of HR December 14, 2007, ECLI:NL:HR:2007:BB7192. Vordering tot bevriezen van bitcoin accounts en verschaffen van informatie over de gebruikers van die accounts door gedaagde wordt toegewezen.
ECLI:NL:RBLIM:2024:2977, Limburg District Court, April 24, 2024, Rechtspraak.nl
Interlocutory injunction. Possible cryptofraud; Interim injunction (order, ex parte); freezing cryptowallet; service by e-mail; see also ECLI:NL:RBMNE:2024:2007.
ECLI:NL:RBOVE:2024:2578; Overijssel District Court, May 17, 2024, Rechtspraak.nl
Ex parte order(s) in summary proceedings. Alleged cryptocurrency fraud. Payment via email.
ECLI:NL:RBAMS:2024:2195, Court Amsterdam, April 17, 2024, Rechtspraak.nl
Interlocutory appeal. Continued from interlocutory judgment of Feb. 22, 2024 (ex parte order). Plaintiff is a victim of crypto fraud. Order in absentia to provide name and address details of user(s) of account where plaintiff’s crypto coins are located, and to continue freezing account.
ECLI:NL:RBAMS:2024:1958, Amsterdam District Court, Feb. 22, 2024, Rechtspraak.nl
In summary proceedings, by way of order (pseudo-conservatory attachment), it was ordered to freeze a cryptocurrency account, all pending the substantive hearing of the summary proceedings
ECLI:NL:RBAMS:2024:2195, Court Amsterdam, April 17, 2024, Rechtspraak.nl
Interlocutory appeal. Continued from interlocutory judgment of Feb. 22, 2024 (ex parte order). Plaintiff is a victim of crypto fraud. Order in absentia to provide name and address details of user(s) of account where plaintiff’s crypto coins are located, and to continue freezing account.
Note Advocate: If a blockchain tracing report gives a deposit address with a cryptoexchange, it may be a “nested service,” that is, an underlying party that itself also operates as an exchange and uses the liquidity of the first exchange. In that case, the first exchange can be used to sell incoming cryptocurrency (obtained from fraud) after which the proceeds are distributed to the nested service. Only the latter then knows the identity of the end user.
ECLI:NL:RBAMS:2024:2212, Court Amsterdam, Feb. 15, 2024, Rechtspraak.nl
KG, fraud, cryptocurrency, money claim assigned, prior freezing order set aside, attachment of assets in a digital storage wallet is possible, exhibit claims assigned
Hint: if the cryptoexchange applies asset segregation and the customer has a claim against the custody foundation, conservatory and executory garnishment is possible under the foundation. A freezing order is not necessary in that (domestic) situation. However, most cryptoexchanges do not operate with segregated assets, or do not provide information about them.
ECLI:NL:RBGEL:2024:2153, Gelderland District Court, April 12, 2024, Rechtspraak.nl
Default, cryptofraud, freeze user account, issue data user.
ECLI:NL:RBGEL:2024:1564 Court Gelderland, March 21, 2021, Rechtspraak.nl
Possible crypto fraud; ex parte injunction request; freezing cryptowallet; service by email
ECLI:NL:RBMNE:2024:2007, Court Midden-Nederland, March 21, 2024, Rechtspraak.nl
Interlocutory injunction. Possible cryptofraud; Interim injunction (order, ex parte) ; freezing cryptowallet; service by email.
ECLI:NL:RBZWB.2024:1874 District Court of Zeeland-West Brabant, March 20, 2024, Rechtspraak.nl
Preliminary injunction (orderly measure) under Article 223 Rv. Cryptocurrency fraud.
ECLI:NL:RBAMS:2023:7228, Court Amsterdam, Nov. 10, 2023, Rechtspraak.nl
Interlocutory appeal. Continued from interlocutory judgment of August 28, 2023 (ECLI:NL:RBAMS:2023:6218). Plaintiff is a victim of crypto fraud. Defendant is ordered in absentia to provide the name and address details of the person in whose name the wallet in which plaintiff’s crypto coins reside is registered.
ECLI:NL:RBAMS:2023:6218, Court Amsterdam, Aug. 28, 2023, Rechtspraak.nl
Interlocutory order granting an ex parte order, similar to the leave to foreclose, requiring that a wallet containing cryptocurrency be frozen pending the oral hearing of the interlocutory order.