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What is a freezing order
A freezing order is a form of injunctive relief secured over a defendant’s property in order to prevent the dissipation of assets, typically to ensure that there are sufficient assets to satisfy any judgment or award that may be made. Accordingly, the value of the assets frozen should not grossly exceed the amount claimed by the claimant. The scope of the targets of freezing orders are broad and usually include money held in bank accounts, real property, vehicles, shares and bonds.
What are cryptocurrencies?
Cryptocurrencies made their first appearance in 2009 following significant financial downturn in 2008. They are virtual currencies built on blockchain technology (blocks of transactions linked together in sequence), which can be sent directly between parties by use of a public address and a private key (both digital algorithms).
The value of a cryptocurrency depends on a number of factors including popularity, press scandals, mass adoption and production costs. Crucially, however, cryptocurrencies are not controlled by a central authority and are governed by the rule of consensus, which means they are valued and transactions are verified by a large number of people.
Accordingly, cryptocurrencies are insulated from government control and influence, including inflation and deflation. To help sustain this and prevent devaluation, most cryptocurrencies will have a fixed supply. While this fixed supply controls prices, as a result, cryptocurrencies operate on a thin market (where there is a finite level of stock and limited liquidity)
The Legal Statement on Cryptoassets and Smart Contracts published by the UK Jurisdiction Taskforce (the Legal Statement) published in November 2019, which, while not binding on the courts, offers welcome insights and tackled the question of whether cryptoassets can be characterised as property. The Legal Statement concluded that while cryptoassets cannot be possessed (in the strict meaning of the word), they are intangible and de-centralised. This does not disqualify them from being treated as property. They are capable of being property as a thing in action or “another third kind of property” but are to be treated “in principle as property”.
Vorotyntseva v Money-4 Limited
The decision of Elena Vorotyntseva granted a freezing order over Bitcoin and Ethereum, noting that there was no “suggestion that cryptocurrency cannot be a form of property or that a party amenable to the court’s jurisdiction cannot be enjoined from dealing in or otherwise disposing of it”. This tallies with the Legal Statement’s characterisation of cryptoassets and might represent the beginning of a sea change.
Comment
This decision has been well received. The sentiment of the legal community is that it is evidence of the judiciary making a positive and progressive step to engage in new technologies. Indeed, the court’s willingness to treat cryptocurrency as property is certainly positive, but whether lawyers should seize on this decision when securing freezing orders for their clients is a separate question.
There are certainly advantages. They benefit from a visible history thanks to their immutable ledger, can only be transferred by the owner of a private key and they operate on an international network, all rendering them perfect targets for freezing orders. However, nascent markets are fundamentally volatile and the value of cryptocurrencies is changeable. While this fact alone should not make cryptocurrencies unsuitable for freezing order, after all, shares have long been appropriate targets, the difference between the buy and sell price of cryptocurrencies can be as high as several dollars per day, compared to penny differences on traditional stock exchanges.
Crucially, cryptocurrencies, still in relevant infancy and far from the mainstream, do not currently benefit from a robust legal framework and are largely unregulated. It is this lack of comprehensive regulation that poses the greatest risk. Prudent legal advisors may therefore wish to wait for the law to catch up with judicial engagement before implementing the rule in Elena Vorotyntseva.
Read others items in Commercial Brief - April 2020
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