How to recover stolen Tether USDT: the impact of D'Aloia v Persons Unknown
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Background
The recent claim of Fabrizio D'Aloia v Persons Unknown Category A & Ors [2024] EWHC 2342 (Ch) involves a typical scenario of crypto fraud. Mr D'Aloia was induced to hand over $2 million worth of cryptocurrency (importantly including Tether USDT) into a sham trading account. Given that the unknown fraudster(s) had long-since dissipated the stolen cryptocurrency prior to the fraud being uncovered, Mr D'Aloia's recovery efforts focussed on the crypto exchanges used to move the assets.
The bases for Mr D'Aloia's claims against various exchanges were that they had been unjustly 'enriched' by receiving his funds or, alternatively, they owed duties to him as trustees of his funds. We have previously considered an earlier stage of this case: Claims against crypto exchanges: the next battleground in crypto asset fraud? | Fieldfisher
Exchanges are now widely accepted as being mainstream organisations taking various steps within a regulatory framework. With a more mainstream standing, crypto exchanges are now far more accountable to victims of fraud and the actions of their customers. However, care should be taken for a victim of fraud to avoid pushing the boundaries too far.
On 12 September 2024, the High Court dismissed Mr D'Aloia's claim against one particular exchange, Bitkub Online Co Ltd. However, the comprehensive judgment (83 pages) touched on various points in relation to the recovery of crypto assets, including tracing of assets, unjust enrichment and constructive trust issues. It will be a practitioners' guide as to how such claims can succeed and how they might fail.
Positives for other victims of Tether USDT fraud
The judgment concluded that Mr D'Aloia was unable to show that on the balance of probabilities that his Tether USDT funds arrived in the wallet operated by Bitkub. Many will see the failure of Mr D'Aloia's claim against Bitkub as denting the hopes of victims and bolstering exchanges' confidence. The position is far more nuanced and, in fact, demonstrates the sophistication with which the English courts handle international disputes relating to crypto fraud:
- The High Court accepts that Tether USDT is property. This opens the doorway to an extended range of powerful claims against fraudsters, crypto exchanges and the company behind Tether USDT (Tether Limited), such as proprietary freezing injunctions, constructive trust claims and proprietary claims in insolvency.
- Crypto exchanges should take heed from the judge's detailed analysis in relation to allowing bad actors to exceed daily withdrawal limits. Fraudsters see crypto exchanges as an attractive vehicle to perpetrate fraud. Not only does the English High Court expect crypto exchanges to have satisfactory processes in place to prevent fraud, such processes need to be followed. Failure to do so could give rise to claims against the exchange in circumstances where assets have been dissipated.
- Tracing crypto is key. Whilst it is essential to communicate with crypto exchanges in the broadest possible manner as soon as a fraud has been identified, it is important to conduct a thorough exercise to demonstrate the flow of an asset and properly communicate this to the court. This was ultimately Mr D'Aloia's undoing.
However, most importantly, the High Court has taken the pragmatic approach of considering the underlying asset, Tether USDT, which is arguably the most attractive crypto asset to pursue. The judge implicitly accepted that as per Tether's White Paper, Tether Ltd has the ability to create and destroy Tether USDT, it is able to track each individual token and the transactional history of USDT Tether is "publicly auditable".
Despite the outcome of the D'Aloia case superficially suggesting that individuals should be dissuaded from making a claim, it can be seen as a positive that the High Court understands the particular nature of Tether USDT, which lends itself to unique means of recovery if properly traced. This judgment importantly suggests that the courts could compel Tether Ltd to melt and reissue stolen tokens, which would be a game-changer when enforcing judgments involving misappropriated Tether USDT.