It is estimated that in 2021 $14 billion worth of cryptocurrencies will have been misappropriated through a combination of fraud and theft. The (relatively) decentralized and anonymous nature of cryptocurrency creates obvious difficulties for those seeking redress through existing legal remedies. However, the High Court of England and Wales has shown a willingness to take a head-on approach to the novel challenges surrounding crypto disputes. As a recent example, in a UK and European first, the court in D’Aloia against unknown persons and others ordered service to unknown persons through non-fungible tokens (‘NFT’).
The ruling is also of interest in that it notes that there is a good arguable case that owners/controllers of exchanges to which misappropriated crypto assets are transferred are constructive custodians of those assets.
The plaintiff, Mr. D’Aloia, alleged that he was the victim of a scam that tricked him into transferring over 2.3 million cryptocurrency coins to a website fraudulently posing as affiliated with a US-regulated online broker TD Ameritrade related issue. The website and associated email address were actually registered in Hong Kong, had no connection with TD Ameritrade and were operated by unknown individuals.
Mr. D’Aloia made numerous deposits into two named wallets and traded using the site’s facilities, reflecting the profits and losses from the trades as expected. After some time, Mr. D’Aloia’s open trades were unexpectedly closed. After Mr. D’Aloia submitted a withdrawal request from his trading account, his account was suspended, which subsequently showed a zero balance.
An investigative report commissioned by Mr. D’Aloia found that over 2 million of the coins deposited by Mr. D’Aloia had been transferred to a number of homes and exchanges operated or controlled by Defendants 2 through 7 .
Mr. D’Aloia initiated proceedings against the first defendant on charges of fraudulent misrepresentation and deception, unlawful agent conspiracy and unjust enrichment, and against the second through seventh defendants as constructive trustees of the embezzled coins transferred to their exchanges. He then requested (among other things) service on the first defendant by alternative means and service on the second through seventh defendants outside of jurisdiction.
Delivery of the procedure by alternative means
The Code of Civil Procedure (‘CPR’) 6.3 specifies acceptable methods of service, namely: personal delivery, first class mail, document exchange, deposit at a designated place, facsimile or other electronic means of communication.
If service is not possible according to these specified methods, CPR 6.15 provides that the court will issue an order permitting service by some other method or place “if the court has good reason to do so”. .
Prior to this ruling, the courts allowed the service through Instagram, Facebook and a contact page on a defendant’s website. In this case, it was argued that service via NFT was the most appropriate method of bringing the proceedings to the attention of the first defendant. The NFT, which includes a link to the court documents, could be airdropped into the two digital wallets into which Mr. D’Aloia had transferred his cryptocurrency, embedding the service on the blockchain. The court concluded that this was an appropriate method of service given the difficulties that would otherwise be encountered in attempting to serve unknown persons.
While this method of service had been introduced in cases before the New York State Supreme Court just days earlier, it was a first in the UK and Europe.
Permission to serve outside of jurisdiction
In order for an English court to give service outside of jurisdiction, it must:
- that there is a serious problem that needs to be attempted;
- that one of the “judicial approaches” applies; and
- that there is sufficient reference to case law.
In relation to the serious issue at issue against the second through seventh defendants, prior to this judgment the English courts had not considered the issue of whether owners and/or controls of digital asset exchanges act as de facto trustees of misappropriated transferred assets could be viewed towards them. However, the court surprisingly briefly waived this point, noting that “there is good reason for it”.
With respect to the use of a judicial gateway, CPR Practice Direction 6B Paragraph 3.1(15) provides a gateway for claims made against defendants as constructive trustees.
With regard to the sufficient connection with this case-law, the court found that the lex situs of a crypto-asset is the place where the person holding it resides (as discussed in Ion Science Limited & Duncan John v. Persons Unknown & Others (unreported))  (Notice), paragraph 13). Accordingly, since Mr D’Aloia was in England at all material times, there were good arguments that the false statements were made to him in England in relation to property located in England.
Since all three criteria were met, the court granted service of the proceedings out of jurisdiction.
This ruling signals a welcome enthusiasm to use new technologies to improve access to justice in crypto disputes. While the circumstances of this case made service through blockchain technology an obvious (albeit novel) choice, it remains to be seen whether service through this alternative method will be granted in non-cryptoasset disputes.
The finding that there was a good arguable case that exchanges are constructive custodians of misappropriated assets is significant. The final clarification of this question is eagerly awaited.