Recent US and UK Court Rulings on Digital Assets Offer Flexibility to Plaintiffs | Morgana Lewis

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Recent US and UK Court Rulings on Digital Assets Offer Flexibility to Plaintiffs |  Morgana Lewis

In cases involving digital assets, especially those with anonymous, untraceable, or international parties, the significance of the process can pose an existential challenge. Recent decisions stemming from cryptocurrency-related litigation in the US and UK indicate that courts are increasingly taking a flexible approach to service of process, which could change the legal landscape in related cases. and not related to digital assets.

GROWTH IN CRYPTOCURRENCY DISPUTES

Throughout 2022, litigation related to cryptocurrency and other digital assets has steadily increased. During the recent “crypto winter,” the potential for fraud, manipulation, and self-dealing in the digital asset space has become apparent, and investors and others affected by this activity are turning to the courts. to recover lost investments. These developments suggest that cryptocurrency litigation may soon resemble established forms of financial litigation, such as securities class action lawsuits and market manipulation lawsuits.

One of the main attractions of digital assets, including cryptocurrencies and other coins, is that they often have no central authority, payment processor, or corporate management. This can facilitate peer-to-peer transactions, additional security (based on cryptography), and privacy. These benefits, along with the large returns offered by many crypto-assets in recent years, have led funds, individuals, and other entities to invest massive sums in crypto-assets.

At the same time, the volatility of many crypto markets, coupled with an unstable regulatory landscape and the often anonymous nature of crypto transactions, has provided openings for illicit actors to exploit cryptocurrency investors. The non-physical nature of crypto-assets means that clever criminals can steal hundreds of millions of dollars by tricking an investor into digitally signing a fake trade, or using a range of market manipulation tools, such as wash trading, to distort the price of an asset.

Crypto-asset thefts can occur in many ways, but most cases of crypto theft have involved hacking into crypto exchanges or the individual owner making mistakes (i.e. being manipulated into transferring their assets to the fraudster). Furthermore, the very benefits of crypto-assets – particularly the privacy built into transactions – also attract illicit actors, who seek to use the anonymity of crypto transactions (including tools such as coin-mixing services) to hide their identity and siphon off assets.

Government law enforcement agencies such as the US Department of Justice and the Securities and Exchange Commission have focused on crypto-related crime in recent months and successfully seized and recovered assets occasionally. However, for many crypto investors, private litigation for compensation may be the best method to protect their rights and recover lost investments.

Service of process has traditionally posed a challenge when the whereabouts and identity of defendants are uncertain, and unless a complaint or other document can be served, investors and other plaintiffs are unable to sue and obtain a binding judgment. While US federal and state laws often establish specific rules for service of process in civil and criminal cases, a court’s willingness to deviate from established principles related to service of process is never certain.

The decisions discussed below – one from a US state court and the other from a UK court – suggest that courts are willing to accept creative approaches to service of process, which could make cryptocurrency litigation more viable in the future.

DEVELOPMENT IN THE UNITED STATES: NEW YORK COURT RECOGNIZES ALTERNATIVE SERVICE METHOD

As of January 2022, LCX AG, a Lichtenstein-based cryptocurrency exchange, had approximately $7.94 million of various Ethereum blockchain-based cryptoassets stolen from various digital wallets. LCX quickly opened an investigation into the theft and worked with analysts to locate the stolen property and seek to identify the thief.

As the unidentified thief sought to use a coin-mixing service to conceal the transactions on the public ledger, LCX was able to trace the stolen crypto-assets to a USD Coin digital wallet operated by Center Consortium LLC (CCL) and /or Circle Internet Financial Inc. (CAF). CCL is the entity governing the protocol (i.e. software rules) that applies to USD Coin. While a significant amount of crypto-asset value had already been dissipated, $1.27 million worth of crypto-assets were identified as still being held in this digital wallet. LCX sued anonymous defendants in a New York court.[1]

In order to proceed – and to ensure that the funds were not dissipated before LCX could recover them – LCX was required by law to provide notice to the unidentified thief. In what is considered a world first, LCX has successfully argued that it should be allowed to provide legal notification of an asset freeze on the digital wallet by embedding a hyperlink to the notification in a non-fungible token. (NFT) that would be sent to the digital wallet/blockchain address. This method, known in the crypto community as airdropping, is possible because, although users must consent to withdraw assets from their wallets, assets can be transferred to any wallet – without the recipient’s consent. – as long as the sender knows the recipient’s public wallet. address.

Alternative modes of service are not new to the United States: the United States Supreme Court has previously authorized service by publication of the legal notice in a newspaper where the exact addresses of the interested parties were unknown, and the rules federal civil and criminal procedure offer judges flexibility in unusual circumstances. Since it is often difficult, if not impossible, to identify potential defendants in crypto-related litigation, this new method of service could significantly help potential plaintiffs overcome initial litigation hurdles. As in the English case discussed below, it is likely that where the defendant(s) are otherwise identifiable (i.e. by means of a postal or email address), these methods of service will be preferred and/or required in conjunction with the NFT method. .

UK DEVELOPMENTS

Following in the footsteps of the LCX case, the High Court of England and Wales has also issued an order allowing service of legal proceedings on unidentified defendants linked to two digital wallets through NFTs.[2]

Under English law, service of a claim form is permitted by (1) personal service, (2) post, (3) deposit at a certain specified address, or (4) by fax or other means of communication electronic. However, service by facsimile or electronic means is only permitted if the addressee (or his attorney) has indicated in writing that he consents to be served by such means.

Therefore, electronic means are generally not viable for claims presented on an emergency or “no notice” basis. If necessary, it is also possible to apply to the English court for an alternative service order under Article 6.15 of the CPR. However, the applicant(s) will have to prove that there is a “good reason” for authorizing such an alternative service. Previous examples of authorized alternative services have included via Facebook and Instagram.

The recent English case concerns a complaint filed by Mr. Fabrizio D’Aloia against “unknown persons”, four cryptocurrency exchanges and a software company. The “strangers” had misappropriated Mr. D’Aloia’s digital assets by operating a fraudulent online brokerage (i.e. mimicking the website and logo) in order to persuade potential investors to deposit cryptoassets into two wallets for alleged transactions. Mr. D’Alioa fell victim to the phishing scam and transferred millions in assets to the fraudulent brokerage.

Similar to the United States, the High Court of England and Wales allowed service of airdrop proceedings of an NFT in the two wallets in which Mr. D’Aloia originally deposited his crypto. -currency, as well as service by e-mail. The High Court noted that, in this case, service by NFT would be effective given its effect of printing a verifiable record of the service on the blockchain.

The High Court also determined that cryptocurrency exchanges arguably held Mr. D’Aloia’s identifiable crypto-assets as constructive trustees. Although this is a preliminary finding, it is very important because it means that if exchanges act contrary to High Court orders and fail to protect identifiable crypto-assets, exchanges risk being held for those responsible for breach of trust.

KEY POINTS: GREATER OPPORTUNITIES FOR CRYPTOCURRENCY AND OTHER DISPUTES

This remains a rapidly developing area of ​​law. However, these cases show that the courts, especially in the US and UK, are willing to tackle these new issues to find innovative ways to provide investors in the crypto space with legal recourse. Investors exposed to fraud, manipulation and other suspicious activity in the markets should consider their options, even in situations where the perpetrators are anonymous.

[1] LCX AG c. John Doe Nos. 1-25case number 154644/2022, in the Supreme Court of the State of New York, County of New York

[2] D’Aloia c. (1) Unknown persons (2) Binance Holdings Limited and others

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