In an ‘English legal first’, the High Court of England and Wales has granted permission to a claimant to serve proceedings on “Persons Unknown” by way of a Non-Fungible Token (“NFT”).
D’Aloia v (1) Persons Unknown (2) Binance Holdings Limited and others
The decision is not a world-first; it swiftly follows an order of the Supreme Court of the State of New York on 2 June 2022 in the inspired case of LCX AG v John Does Nos. 1-25 which permitted the air-drop of legal documents by way of NFT to a wallet address on Ethereum.
In D’Aloia, the applicant sought interim injunctive relief, disclosure and further orders against a number of defendants, arising out of alleged fraudulent misappropriation of approximately 2.1 million USDT and 230,000 USDC by unknown persons between December 2021 and May 2022. The alleged fraudster had set up a website and email domain (tda-finan.com) purporting to be associated with TD Ameritrade, an online stock exchange and brokerage. A report by an intelligence investigator, adduced by the applicant, concluded that it was highly likely that those behind tda-finan.com had been using the domain to imitate the well-known brokerage in order to defraud unsuspecting investors. The report had also been able to track the misappropriated funds to a number of private addresses held by crypto exchanges.
In addition to considering permission to serve the claim form and particulars of claim by an alternative (and novel) method, Trowers J was being asked whether to grant a freezing injunction against “Persons Unknown” to prevent them from disposing of the cryptocurrencies, and Bankers Trust orders against the crypto exchanges to compel them to disclose information that may uncover the identity and whereabouts of Persons Unknown.
Satisfied that (i) there was a serious issue to be tried; (ii) there was a good arguable case that this was a case for the English Courts; and (iii) damages would not be an adequate alternative remedy, Trowers J found on the balance of convenience in favour of granting the injunction.
Trowers J also found that, in the case of a number of the cryptocurrency exchanges, there was a good arguable case that they held the applicant’s cryptocurrency as constructive trustees, meaning they are at risk of liability for breach of trust if they act contrary to the court’s order and fail to ring-fence the cryptocurrency in question.
Bankers Trust orders
Trowers J granted the Bankers Trust orders against the exchanges on the basis that he was satisfied that the exchange wallets belonged to the applicant and that there was a real prospect that the information sought would lead to the preservation of the cryptoassets (by identification of Persons Unknown).
One of the key attractions for many of transacting by way of cryptoassets, is the anonymity that it affords – senders and recipients are identified solely by a wallet address. It is notable that in determining the grant of a the Bankers Trust orders, Trowers J considered directly the impact that disclosure may have on the duty of confidentiality owed by the exchanges to their customers. He was satisfied, in this application that the balance came down in favour of the applicant.
When it came to whether or not the court was capable of granting permission to serve disclosure orders out of the jurisdiction, there is tension in the case law (namely decisions by Teare J and Butcher J in AB Bank Limited v Abu Dhabi Commercial Bank PJSC and Ion Science respectively).
It is worth noting that Trowers J recognised this conflict but decided not to consider it, as granting the Bankers Trust order was the “right thing to do”. D’Aloia being a without notice application, there is scope for any of the defendants to argue at an inter partes hearing that the Court does not in fact have the jurisdiction to make such an order.
Service by NFT
It was explained to the court that the advantage of serving documents by NFT is that the claimant will “embrace the Blockchain technology” because the effect of service by NFT will be that the “drop” will forever embed into the blockchain. Trowers J concluded that service by these means would likely lead to a greater prospect of those behind the fraud being put on notice of the order, and the commencement of proceedings.
On these shores, the judgment of Trowers J is significant and further proof that the Courts of England and Wales’ willingness to adapt to the fast changing world of technology and communications, having previously allowed service by way of social media.
Being able to serve court documents directly to wallet addresses is a positive step forward and demonstrates the progressive attitude of the Court to embrace technological change.
However the challenge in all such cases is locating and recovering assets from individuals who often are only readily identifiable by a wallet address, and have made every effort to remain anonymous. Most wallets are held by a small number of well-known cryptocurrency exchanges, and it is particularly encouraging that the Court considers those exchanges as custodians of crypto assets held by those wallets, and is willing to exercise its more effective interim measures to halt the onward transmission of funds acquired by deceit.
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