¶ 2501
Overview
Scope of the chapter. This chapter examines how the owner of misappropriated digital assets finds them, holds them in place and gets them back, particularly when the assets, the wrongdoers and the intermediaries are in different countries. It covers the evidence used to follow assets across ledgers, the legal rules that decide whether a claimant may treat an asset in a third party's hands as its own, the interim remedies that preserve assets pending trial, the orders that compel exchanges and other intermediaries to disclose what they know, the means of serving defendants whose names are unknown, and the final remedies that restore assets or their value. It then turns to recovery through the state: issuer freezes, criminal and civil forfeiture, and the remission and restoration of forfeited property to victims. It closes with a practical sequence for a recovery engagement and a checklist.
The relation to other chapters. Chapter 24 treats the enforcement of a money judgment against a known debtor who holds digital assets in the United States. This chapter is concerned with the earlier and harder case in which the claimant has been defrauded, hacked or extorted and does not yet know who holds its property. The characterization of digital assets as property, on which every proprietary remedy in this chapter depends, is examined in ch. 3 for the United States and in ch. 4 for England and Wales and the common-law world. The rules that locate a digital asset for conflict-of-laws purposes, including the English decisions on situs and the jurisdictional gateways for service out, are examined in ch. 5. The technology of addresses, wallets, mixers and bridges is described in ch. 2, and the private-law relationship between an exchange and its customers is analysed in ch. 10. Those discussions are summarised here only where the recovery analysis requires it.
Why recovery is possible at all. Two features of public ledgers make recovery of digital assets more feasible than recovery of cash. The first is that every transfer on a public blockchain is recorded permanently and can be inspected by anyone. A thief who moves stolen bitcoin leaves a trail that a bank transfer through correspondent accounts does not leave in public view. The second is that most stolen assets must eventually pass through a regulated intermediary to be converted into money that can be spent. Exchanges that collect identity information from their customers under anti-money-laundering rules hold the information that connects an address to a person. They also hold the assets themselves in wallets they control. A court order directed to an exchange can therefore freeze assets and identify a wrongdoer in a way that an order directed to an anonymous address cannot.
Why recovery is difficult. Against those features stand others. Transfers settle in minutes and can cross borders without any intermediary. Wrongdoers use chains of addresses, mixing services, cross-chain bridges and decentralized exchanges to break the visible link between the stolen asset and its later form. Exchanges often operate through groups of companies incorporated in several jurisdictions, and the entity that holds the relevant records may be difficult to identify. Exchanges pool customer assets in omnibus wallets, so that the identity of a particular unit is lost when it is deposited. And the law of tracing, developed for bank accounts and chattels, must be applied to assets whose transfer may extinguish one record and create another. Each of these difficulties is addressed below.
Plan of the chapter. Section ¶ 2510 describes the practical problem and the points at which assets can be stopped. Section ¶ 2520 examines blockchain analytics as evidence, including the standards courts have applied to expert tracing reports. Section ¶ 2530 states the legal rules of following and tracing and applies them to mixers, bridges, swaps and omnibus wallets. Section ¶ 2540 treats the English proprietary injunction, the worldwide freezing order and final relief, with a full discussion of AA v Persons Unknown. Section ¶ 2550 treats the information orders available in England, with a full discussion of LMN v Bitflyer Holdings Inc. Section ¶ 2560 surveys Singapore, Hong Kong and the offshore courts, and the service of proceedings on persons unknown, including service by token. Section ¶ 2570 examines the tools available in the federal courts of the United States, with a full discussion of Jacobo v. Doe. Section ¶ 2580 addresses issuer freezes, forfeiture, remission and the recognition of foreign orders. Section ¶ 2590 sets out a recovery playbook and a checklist.
Terminology. This chapter uses "misappropriated" for digital assets taken by theft, fraud, extortion or breach of trust. "Following" means identifying the same asset as it passes from hand to hand. "Tracing" means identifying a new asset as the substitute for the original. Both are processes of identification and confer no rights by themselves; the rights are given by the claim the identified asset supports. "Last hop" means the final address in a chain of transfers before the asset reaches an exchange or other identifiable intermediary. "Persons unknown" means defendants described by their conduct or by the addresses they control. "Freezing order" is used for the English worldwide or domestic freezing injunction and its equivalents elsewhere, and "asset freeze" for the American temporary restraining order or preliminary injunction that restrains the transfer of identified assets.