The Law Commission’s Proposed Free-Standing Information Order

This post was written by Koji Takahashi, Professor at the Doshisha University Law School. It is the first contribution to the EAPIL online symposium on the Law Commission of England and Wales’s Consultation Paper on Digital Assets and Electronic Trade Documents in Private International Law. Readers are encouraged to participate in the discussion by commenting on the posts.

The Law Commission of England and Wales, in its consultation paper Digital Assets and (Electronic) Trade Documents in Private International Law, has put forth a proposal for a new power to issue information orders (paras. 8.1-8.3). This initiative aims to assist victims of crypto hacks or fraud in overcoming existing legal obstacles to recover their assets.

Victims of crypto theft can often trace misappropriated tokens on public blockchains, but the anonymity of these systems typically conceals the wrongdoer’s identity. However, some blockchain addresses are linked to known entities, such as crypto-token exchanges, which hold “know your customer” (KYC) details of their account holders. The proposed order aims to enable victims whose stolen tokens have passed through an identifiable exchange to obtain account holder information, potentially leading to the wrongdoer’s identification.

Usefulness of the Proposed Order

The Law Commission solicited feedback on the proposed order’s usefulness in facilitating legal proceedings and ultimately, the recovery of crypto-tokens (para. 8.4). To address this question, one might consider the functions of exchanges, the adequacy of the existing legal avenues and the advantages of a free-standing order, as detailed below.

1. Functions of exchanges

The proposed order’s usefulness is partly contingent on the extent to which wrongdoers utilise centralised exchanges (CEXs). They can exploit CEXs for money laundering by depositing illicit tokens (e.g., Crypto-token A) into an exchange’s address. The exchange then mixes these funds with legitimate deposits from other customers within its omnibus address. Subsequently, the wrongdoers withdraw the equivalent value in a different asset (e.g., Crypto-token B) to a new address. While this internal pooling and swapping of assets by the exchange severs the on-chain transaction trail, sophisticated criminals are increasingly turning to decentralised exchanges (DEXs) to obscure the origins of illicit funds, limiting the utility of CEXs as mixers. However, CEXs remain crucial as exit ramps for converting crypto-tokens into fiat currencies, making them a reasonable target for investigations. At the same time, it should also be acknowledged that an account holder at an exchange may not be the wrongdoer but merely a purchaser down the chain. It follows that simply revealing the identity of this person may not be sufficient; a further investigation following up the chain may be required to see if it ultimately leads to the wrongdoer’s identity. The practical usefulness of the proposed information order must be considered within these limitations.

2. Adequacy of existing legal avenues

The Law Commission’s proposal seeks to offer a solution to the current legal challenges. Under English law, victims currently petition courts for the ancillary relief of information orders, such as Norwich Pharmacal and Bankers Trust orders, against the relevant exchange. Due to the unknown identity and whereabouts of the wrongdoer, victims must construct a placeholder claim against “persons unknown” and seek permission for the service of proceedings out of the jurisdiction. Gateway 25 (Civil Procedure Rules, PD 6B.3.1(25)) provides a jurisdictional ground for this purpose. In the observation of the Law Commission, however, the requirement in this gateway that “the claimant at least intends to commence proceedings in England and Wales is a significant limitation” (para 3.80).

Gateway 25 was introduced in 2022 specifically with crypto fraud claims in mind (See Hannah Daly & Andrew James, “Searching for Assets in Cyberspace: A New Gateway Opens?” and Hui, Chee, Poppy, & Watt, “The New Service out Gateway for Third Party Information Orders”). It supports an application “made for the purpose of proceedings … which, subject to the content of the information received, are intended to be commenced … in England and Wales.” The words “subject to the content of the information received” indicates that a claimant is not bound to bring proceedings in England, if information received pursuant to the application discloses another more appropriate forum. Not forcing the claimant to commit upfront to suing in England, the language of Gateway 25 does not come across as posing a significant limitation.

3. Advantage of a free-standing order

Despite the potential remaining utility of Gateway 25 as just noted, the Law Commission’s proposal for a new power to issue information orders seems to represent an advancement.

The current system is a convoluted legal workaround, forcing victims into an awkward position of fabricating a nominal claim against anonymous defendants. This also necessitates unconventional and legally dubious methods of service, such as WhatsApp or NFT transfers. The proposed free-standing order would simplify the process by eliminating the need for a fabricated lawsuit and service on an unknown defendant. This directly aligns with the claimant’s goal of obtaining information from an innocent intermediary and promotes a more straightforward legal analysis.

While the judiciary’s main function lies in settling contentious disputes between two parties, disclosure orders issued against innocent intermediaries do not fall within this core function. This renders standard theories of adjudicatory jurisdiction unfit to apply to this type of orders. Instead, the threshold for such orders should be formulated by considering available resources and the interests of various stakeholders. In this regard, it may be helpful to draw parallels with disclosure orders used to identify anonymous online infringers of personality rights. Both scenarios involve a digital detective story to uncover wrongdoers. Just as crypto fraud victims may request information from exchanges, parties whose personality rights have been infringed seek information from internet service providers (See Koji Takahashi, “International Dimensions of Unmasking Anonymous Online Infringers of Personality Rights” (2015/2016) 17 Yearbook of Private International Law pp. 181-208).

Proposed Test for Granting the Order

While acknowledging the usefulness of the Law Commission’s proposed order, it seems also important to highlight its radical nature. It is a new investigative tool that targets an innocent intermediary which may be located abroad. It is also a free-standing order, not requiring a concrete case brought against the actual wrongdoer. Even criminal investigations typically require international cooperation to access information held by exchanges located abroad.

Apparently conscious of the proposal’s radical nature, the Law Commission frames this new power not as arbitrary, but as a carefully circumscribed exception. Inspired by precedents such as free-standing freezing orders and forum necessitatis, a four-limb threshold test is proposed (para. 8.3).

The self-evident element of the formulated test is necessity, as the primary goal of the proposal is to prevent technology from creating a space where justice cannot reach and criminals can operate with impunity.

Another element of the test is the merit of the claimant’s case. In the words of the Law Commission, “the court must be satisfied that there has clearly been wrongdoing on facts that disclose a potential case that is more than barely capable of serious argument and yet not necessarily one which the judge believes to have a better than 50 per cent chance of success” (para. 8.3). It seems wise to avoid setting the bar any higher because the strength of the claimant’s case depends on the facts and the applicable law. The stolen tokens may have found their way into the hands of a bona fide purchaser who has acquired a good title under the applicable law. The choice-of-law question here is exceptionally challenging (See Koji Takahashi, “Law Applicable to Proprietary Issues of Crypto-assets” (2022) 18(3) Journal of Private International Law pp. 339, 347-357). At the investigative stage of litigation, it should be sufficient to filter out frivolous claims.

The test’s third component, impossibility or unreasonableness, is explained by the Law Commission as meaning that the court must be satisfied that there is no other court in which the claimant could reasonably bring the application for relief. Given the potential ambiguity regarding whether, and on what grounds, courts in the exchange’s home country will issue a disclosure order, this hurdle may prove challenging to overcome, making Gateway 25 an easier option in some cases. Nevertheless, this requirement appears sensible for a free-standing order.

And finally, a link to England and Wales is required. The Law Commission explains, “the claimant’s habitual residence, domicile, or nationality would indicate such connection” (para. 4.103). Making judicial resources for the proposed order only available to the claimants with established connections to England seems prudent. It would ensure that the English courts are not stretched to act as a global inspector general.

Discretion in Granting the Order

The Law Commission frames the power to issue the proposed order as discretionary. What follows will suggest a few major considerations that should be entertained.

1. Effectiveness of the order

A crucial consideration would be the effectiveness of information orders. It is worth recalling that effectiveness is also an important element in assessing the expediency of worldwide freezing orders (Motorola Credit Corporation v Uzan [2003] EWCA Civ 752). The English court’s authority is undermined if its order is disobeyed. The Law Commission is, therefore, rightly concerned about the effectiveness of its proposed order. It invited feedback on whether exchanges are likely to comply with this order (para. 8.5). Being an investigative order, the proposed order is unlikely to be enforced abroad. Consequently, a foreign-based exchange may only comply with the English order if it is concerned about the reputational risk or if it is susceptible to the English court’s power of sanction for contempt of court due to the presence of its business interests or assets within the jurisdiction. The English court should exercise its discretion against issuing an information order, if it is likely to end up as an empty gesture.

2. Catch-22 situation for exchanges

Another consideration worth highlighting is the risk for exchanges of being caught in a catch-22 situation. They are generally subject to contractual or statutory duties to maintain customer confidentiality. For foreign-based exchanges, these duties may only be lifted if the English information order is recognised de facto or de jure. It may be recalled that the House of Lords ruled against issuing a third-party debt order (garnishee order) which would put the third-party debtor in double jeopardy (Deutsche Schachtbau v Shell International Petroleum Co Ltd [1990] 1 AC 295 and Société Eram Shipping Company Limited v Hong Kong and Shanghai Banking Corporation Limited [2003] UKHL 30). In the same vein, if an exchange demonstrates a real risk of liability or punishment for breaching confidentiality in its home country, the English court should exercise its discretion against issuing the information order.

Overall, if implemented with care, the Law Commission’s proposed order has the potential to become a chief investigative tool in the crypto ecosystem, ensuring that the courthouse doors remain open even when wrongdoers hide behind a veil of digital anonymity.