Crypto on Ice: The Role of Asset Freezes and Expedited Discovery in Digital Asset Recovery

While the surge in cryptocurrency usage has revolutionized modern finance, it has also brought significant challenges, as I outlined in my earlier post “Five Tips for Crypto Funds Recovery.” In that post, I discussed a few key steps victims of crypto scams can take to improve their chances of recovering stolen digital assets. In this follow-up post, I delve deeper into two crucial legal tools available to victims in the recovery effort: emergency asset freeze orders, including temporary restraining orders (TROs) and preliminary injunctions, and expedited discovery. Recent cases where plaintiffs have employed these tools not only offer valuable insights into effective recovery strategies, but also underscore the foremost guiding principle of crypto recovery: timing is everything. 

Asset Freezes 

If nothing else, the asset freeze cases serve as a sobering reminder of the unfortunate rise in the sophistication and variety of cryptocurrency scams. One victim, for example, lost $4.4 million through SIM hijacking which allowed a fraudster unauthorized access to his BlockFi account.[1] Another was deceived by a fraudulent liquidity mining pool, and had $1.4 million stolen from his MetaMask wallet.[2] Yet another lost $1.4 million after being duped into transferring that amount worth of Tether to what seemed to be a legitimate account at an Australian exchange, only to discover it was actually a cloned site designed to steal his funds.[3] And a final victim lost nearly $3 million after fraudsters surreptitiously gained control and locked him out of his crypto account.[4] See examples of these court orders here, here and here. 

While each victim was scammed differently, they all secured asset freeze orders due to their swift action following the scam. This included promptly retaining counsel as well as securing blockchain analytics evidence which adequately demonstrated to the court that their stolen funds had been transferred to accounts on cryptocurrency exchanges like FTX, Binance, Kraken, Poloniex, and OKX.[5] Conversely, at least two courts have denied such relief to victims who the court determined had not acted quickly enough in seeking relief.[6]

 Expedited Discovery  

 Expedited discovery has emerged as a crucial companion that plaintiffs can seek in tandem with freeze orders. As I discussed in my prior post, one of the main issues that plagues recovery efforts is the anonymity surrounding cryptocurrency, which often forces victims to commence their cases against “John Does.” Courts have responded by granting plaintiffs expedited discovery to ascertain the identity of the wrongdoers, in addition to freezing their assets.[7] This has included subpoenas and other discovery seeking the names and contact information of perpetrators from cryptocurrency exchanges including Coinbase, Binance, and Gemini.[8] Courts have found such discovery is particularly appropriate in cases where the exchanges are legally required to perform Know Your Client (“KYC”) checks when onboarding new account holders.[9]  

Conclusion 

 In sum, the combination of asset freeze orders and expedited discovery has proven indispensable in the evolving world of digital asset recovery. Victims of cryptocurrency fraud who act swiftly have a much higher likelihood of securing the relief needed to stop the dissipation of their stolen funds. As the legal framework governing digital assets continues to evolve, prompt and diligent action, coupled with creative legal strategies remain the keys to recovery of stolen cryptocurrency. 

[1] See Heissenberg v. Doe, No. 21-civ-80716, 2021 WL 8154531, at *2 (S.D. Fla. Apr. 22, 2021).

[2] See Astrove v. Doe, No. 22-cv-80614, 2022 WL 2805315, at *2 (S.D. Fla. Apr. 22, 2022).

[3] See Jacobo v. Doe, No. 1:22-cv-00672, 2022 WL 2052637, at *1-*2 (E.D. Cal. June 7, 2022).

[4] See Gaponyuk v. Alferov, No. 2:23-cv-01317, 2023 WL 4670043, at *1 (E.D. Cal. July 20, 2023).

[5] See Heissenberg, 2021 WL 8154531, at *2 (plaintiff presented blockchain analysis to demonstrate that stolen cryptocurrency had been transferred to accounts on exchanges such as Binance and Gemini); Astrove, 2022 WL 2805315, at *3 (blockchain analytics were used to trace stolen USDT to accounts on cryptocurrency exchanges like OKX, Binance, Kraken, and FTX); Jacobo, 2022 WL 2052637, at *2 (plaintiff relied on blockchain analysis to demonstrate transfers of stolen cryptocurrency to Poloniex and FTX).

[6] In Huntley v. VBit Technologies Corp., the court denied the plaintiffs’ motion for a temporary restraining order after it found that their delay of nearly a year in seeking relief undermined the urgency required for such extraordinary measures. See No. 1:23-cv-00512, 2023 WL 4790323, at *4 (D. Del. July 26, 2023), report and recommendation adopted, 2023 WL 5938665, at *1 (D. Del. Aug. 10, 2023). Similarly, in Schiermeyer on Behalf of Blockchain Game Partners Inc. v. Thurston, the court denied the motion for injunctive relief based in part on plaintiff’s two-and-a-half-year delay in seeking relief. See 697 F. Supp. 3d 1265, 1271 (D. Utah 2023).

[7] See, e.g., Gaponyuk, 2023 WL 4670043, at *3-*4.

[8] See, e.g., Strivelli v. Doe, No. 2:22-cv-2060, 2022 WL 1082638, at *1 (D.N.J. Apr. 11, 2022) (granting expedited discovery to subpoena cryptocurrency exchanges such as Coinbase, StrongBlock, and Crypto.com to obtain information on the hacker's identity); Wuluvarana v. Does, No. 22-cv-982, 2023 WL 183874, at *1 (E.D. Wis. Jan. 13, 2023) (approving expedited discovery to obtain identifying information from Coinbase, Binance and Gemini after fraudsters misappropriated cryptocurrency).

[9]See Strivelli, 2022 WL 1082638, at *3.