Service by NFT – Court serves defendants by ‘airdrop’ into digital wallet – Lexology

Service by NFT – Court serves defendants by ‘airdrop’ into digital wallet – Lexology

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Hong Kong December 9 2022

BACKGROUND

In D’Aloia v (1) Persons Unknown and (2) Binance Holdings Limited and others, the High Court of England and Wales granted the claimant permission to serve court proceedings on ‘persons unknown’ over blockchain, by way of non-fungible tokens (NFTs).

NFTs

NFTs are a relatively new class of digital asset. Ownership is recorded on a blockchain – the type of platforms on which cryptocurrencies such as Bitcoin are hosted. A blockchain is a decentralised and public digital ledger used to record transactions across multiple computers. It is impossible to alter the record of a transaction on a blockchain without modifying all subsequent blocks through consensus with the network. NFTs can, for example, represent digital tokens of tangible assets like artwork, videos, and music, and are non-fungible in that they cannot be copied, substituted, or subdivided.

THE CASE

The claimant, an Italian engineer and founder of online gambling company Microgame instituted proceedings against persons unknown and five cryptocurrency exchanges – Binance, Poloniex, gate.io, OKX and Bitkub. The claimant alleged fraudulent misappropriation of certain crypto assets, so-called ‘stable coins’ which peg their value to the United States Dollar. The application arose from the alleged misappropriation of the claimant’s cryptocurrency by ‘Persons Unknown’ operating a fraudulent clone online brokerage, duping investors who were deceived into depositing their crypto assets into digital wallets which, instead of being placed as trades as instructed, were stolen.

SERVICE

Most of the defendants were located outside the jurisdiction of the Court, but service was allowed by way of NFT ‘airdrop’ into the two digital wallets into which the claimant deposited his cryptocurrency.

Mr Justice Trower held that the Court would allow such service as it would lead to a higher likelihood of the persons behind this being put on notice of the proceedings. Issues that would otherwise arise and the complications in respect of service on unknown persons meant good reason had been shown to permit service this way. Service was also ordered by way of email.

The order recognised that the five cryptocurrency exchange defendants held the claimant’s identifiable cryptocurrency as constructive trustees – a positive development in the recognition of equitable remedies available to victims of crypto asset fraud and the recovery of crypto assets.

WHAT NEXT?

The Courts of England & Wales have previously granted permission to serve proceedings by alternative electronic methods, such as social media and email. However, this is the first occasion when a claimant has been granted permission to serve proceedings by way of blockchain. This development showcases a solution where traditional methods of service are not feasible due to claims being brought urgently, on an ex parte basis, or against persons unknown whose usual contact details, are impossible to identify.

Contact details for fraudulent platforms are often no longer active when victims seek to identify defendants to their claims. The order sets a precedent for crypto asset fraud victims to seek redress against unknown persons who have misappropriated their cryptocurrency. The potential of digital service over the blockchain is clear.

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