Home Blockchain NFT at your service – English court grants service of blockchain proceedings | Hogan Lovells

NFT at your service – English court grants service of blockchain proceedings | Hogan Lovells

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NFT at your service – English court grants service of blockchain proceedings |  Hogan Lovells

In D’Aloia versus Unknown and others [2022] EWHC 1723 (Ch), the English court has, for the first time, allowed service of proceedings to be carried out by non-fungible token (NFT) on the blockchain.

The option to serve by NFT can be vital for victims of cryptocurrency fraud in circumstances where a relevant wallet address can be identified but the identity of the defendant behind the address is unknown. The service by means of blockchain technology also provides immutable and verified proof of an effective service given its tracking functions (see the Hogan Lovells alert The $4.5 billion Bitfinex hack – five things you need to know).

In From Aloia, the plaintiff was the victim of a scam in which he was fraudulently deceived into transferring approximately 2.1 million Tether (a cryptocurrency, also called USDT) and 230,000 USD Coin (another cryptocurrency, called USDC) to two wallets associated with a bogus online brokerage website, namely “www.tda-finan.com”which was registered in Hong Kong and operated by unknown persons.

The plaintiff commissioned a crypto investigative work expert who traced the assets to several private addresses administered by five cryptocurrency exchanges (the exchange defendants) located in different countries outside the jurisdiction.

The plaintiff filed applications for injunctions to freeze the assets transferred into the wallets, disclosure orders requiring the defendants of the exchange to provide information allowing the plaintiff to trace the assets and/or identify the unknown persons, authorization to serve on the defendants of the exchange of jurisdiction and to serve the unknown persons by NFT in the wallets.

Continuation of a trend

The move followed previous English authorities recognizing cryptocurrency as “property”, thus allowing the court to make it subject to a property injunction or freeze (see Hogan Lovells alerts Cryo-currency? Hong Kong court grants freezing injunction on bitcoins and Into the Unknown – cryptocurrency is property, says English court in blackmail dispute).

It has also been previously established that under English law, the location of a crypto-asset is likely to be the place where the person who owns it resides or is domiciled. Since the applicant is domiciled in England, the USDT and USDC, of ​​which he was deprived due to the fraudulent declaration of the unknown persons, were also deemed to be located in England.

The court also accepted that the claim itself was governed by English law, as the damage in question occurred in England when the English assets were misappropriated.

New forms of alternative service

In Hong Kong, Order 10, r.1 of the High Court Rules (Cap. 4A) provides that a writ may be served in person, by registered mail or by inserting it in a letterbox. Similar to the position in English law, any other method of service can only be done with leave of the court.

In cryptocurrency litigation, where the interim relief sought is against anonymous defendants, new forms of alternative service may become necessary. For example, an alternative email service was authorized in a recent English case (see Hogan Lovells alerts Into the unknown – cryptocurrency is property, says English court in blackmail dispute).

In this case, in addition to service by e-mail which was the mode of communication between the plaintiff and the strangers, the court allowed alternative service by launching NFTs in the wallets, suggesting that “this is likely to lead to a greater perspective of those behind the tda-finan with the website being notified of the making of this order and the initiation of this proceeding”. Airdropping in this sense simply means uninvited transferring a digital asset to a wallet address on the blockchain.

It should be noted that the court was reluctant to order service by NFT only without service by email, so it remains to be seen in court whether service by NFT alone is sufficient for meaningful service, especially when there is no no exchanges of e-mail or any other communication. between the plaintiff and the fraudsters.

Exchange Defendants as Constructive Trustee

The court found that there was a good arguable case that the swap defendants held the misappropriated assets in a constructive trust. The effect was that the exchange’s defendants could be held liable for breach of trust if they failed to take steps to protect the affected cryptocurrencies once they were made aware of it. This was particularly important as it provides a direct way for a claimant to seek redress against the exchange, especially when the identity of the fraudsters is unknown.

However, there are practical issues with ring-fencing fraudulent cryptocurrencies, as deposits are often mixed with other users’ cryptocurrencies on an exchange.

It should also be noted that this was a no-notice request, meaning the court made this preliminary finding without the benefit of submissions from the defendants of the exchange.

New hope for victims of crypto-asset scams

This decision demonstrates the commitment of English courts to embrace new technologies in the context of crypto-related litigation. It will be interesting to see if Hong Kong courts will join forces and use blockchain technology in court proceedings.

Serving court documents is just one of the potential applications of blockchain technology in dispute resolution. Blockchain is, in theory, also capable of being used in circumstances such as disclosure, digital signatures and document exchange.

On the other hand, the preliminary finding on cryptocurrency exchanges acting as implied trustees of hijacked cryptocurrency is a wake-up call for exchanges to invest in compliance and security infrastructure to prevent fraud first.

Careful consideration should be given to these proceedings as they progress to see if the court provides further analysis of this issue and what kinds of obligations are imposed on a cryptocurrency exchange that turns out to be a constructive fiduciary.

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