A New Standard for Crypto Asset Disputes?

In D’Aloia v Person Unknown & Others [2022] EWHC 1723 (Ch), the High Court, for the first time, granted permission for proceedings to be served by non-fungible token (“NFT”) and email. In our article

Catch Me If You Can: Service of Proceedings by NFT – Blaser Mills Law we noted that it remained unsettled law whether service by NFT alone would be permissible.

In the recent case of Osbourne v Persons Unknown and another [2023] EWHC 39 (KB), the High Court has now clarified the position and, for the first time, permitted service of proceedings by NFT alone. 

The Decision in Osbourne

Osbourne concerned a claim brought in relation to the hacking of a digital wallet containing two NFTS, representing unique digital works of art, which were transferred out of the claimant’s wallet. The claimant instructed a digital forensic investigator to trace the NFTs, each of which had been transferred multiple times through various intermediary wallets.

One NFT had ultimately been transferred to an identifiable individual in South Africa, for whom an email address had been obtained (“the Identified Defendant”). However, the second NFT had been transferred to a wallet of a person unknown (“the Unidentified Defendant”).

The Court granted the claimant permission to serve proceedings on the Unidentified Defendant exclusively by NFT, on the basis that there was no other method available to the claimant. In line with the principles established D’Aloia the claimant was given permission to serve proceedings by both NFT and email on the Identified Defendant.

The Court further granted permission for the documents which were to be served via NFT, to be redacted, to protect private data, on the basis that they would be publicly accessible on the blockchain, on the proviso that the Defendants would be given unredacted versions.

Jurisdictional Gateways

In considering the jurisdictional gateways of Practice Direction 6B (as contained in the Civil Procedure Rules) in determining the application for service out, the Court noted the difficulties in applying gateways 11 and 15 to cases involving crypto-asset hacking and made the following observations:-

1. Gateway 11 (claim relating to property within the jurisdiction) and gateway 15(b) (constructive trust, where the claim relates to assets within the jurisdiction): the Court raised two queries (i) whether England and Wales remained the situs of the NFTs in circumstances where they had been transferred to the wallet of person(s) unknown, who may have been domiciled outside the jurisdiction and (ii) when the NFT has to be located in the jurisdiction of England and Wales for these gateways to apply? It was suggested that the NFT, would need to have been within the jurisdiction when the application for permission to serve out is made, rather than when the cause of action arose. However, ultimately, the Court found that these were issues to be determined in due course in a  contested and fully argued case.

• Gateway 15(a) (constructive trust where the claim arises out of acts committed or events occurring within the jurisdiction): there is a question of construction of gateway 15(a) and specifically, which acts or events need to occur or be committed in England and Wales for the gateway to apply. This was again not determined and will, no doubt, be the subject of further litigation.

• Gateway 15 (claim against the defendant as constructive trustee where the claim is governed by English law): this was the gateway that was applied in these circumstances. It was strongly arguable that the constructive trust that was created when NFTs were transferred from the claimant’s wallet was governed by English law and consequently, that the question of whether the Identified Defendant and Unidentified Defendant in turn became constructive trustees when they received the NFTS, was also governed by English law.

Comment

The High Court continues to show a willingness to modernise legal mechanisms established long before the development of crypto assets, to ensure that England remains a key legal centre for disputes of this nature. The Court’s approach to the jurisdictional gateways considered in this case, demonstrates that this framework may also be ripe for modernisation in the face of an ever-changing technological landscape.

Whilst it has now been established that exclusive service by NFT is permissible in circumstances where there is no other method available to a claimant, it is yet to be seen whether the Court would permit exclusive service by NFT where other means of service are available to a claimant. Indeed, in this case, the Identified Claimant was served by NFT and email.

In the short term, at least,  it seems unlikely that the Court would look to expand the scope of exclusive service by NFT further, to permit exclusive service of NFT in any circumstances.

However, if crypto assets become more mainstream because, for example, stable coins gain widespread acceptance, then we would anticipate the use of service by NFT becoming widespread or even the norm for claims involving that type of asset.

If you require any further information or advice please get in touch with Nick Scott on nxs@blasermills.co.uk.

In the landmark decision of D’Aloia v Person Unknown & Others [2022] EWHC 1723 (Ch), the English High Court has, for the first time, granted permission for proceedings to be served by non-fungible token (“NFT”).

The case was brought by the victim of a scam who had been conned into transferring cryptocurrency to wallets operated by fraudsters, whose identities were unknown. The claimant sought, amongst other things, permission to effect alternative service of proceedings on the persons unknown by (i) email, which is now considered relatively mainstream and has generally been permitted for a number of decades and (ii) NFT in the form of an ‘airdrop’ into the wallets used to perpetrate the fraud, which would embed the service in the blockchain. 

The Court granted alternative service of the proceedings by email and NFT. In respect of service by NFT, Mr Justice Trower went as far as saying “There can be no objection to it; rather it is likely to lead to a greater prospect of those who are behind the [fraud] being put on notice of the making of this order, and the commencement of these proceedings”.

It remains unsettled whether service by NFT alone would be permissible. Whilst the Court was not asked to consider this issue, Mr Justice Trower did note that “I do not think it is appropriate… to make an order for service by alternative means in circumstances in which it would be sufficient, without serving by email as well.” However, given that in most instances a fraud would have been preceded by some form of correspondence/contact, there will likely be rare instances where a postal address or email address for service is unavailable, even if the identity of those behind the address is unknown.

It is notable that this decision was preceded by a judgment of the New York Court which permitted service of a freezing notice by NFT against an unknown defendant in a case concerning the theft of cryptocurrency.

D’Aloia is one of a number of decisions over the course of the last two years, in which the English High Court has shown a willingness to embrace crypto assets and modernise legal mechanisms established long before the development of this technology to ensure that England remains a key legal centre for disputes of this nature (for example see our articles: Crypto Assets – No Longer a Safe Haven for Fraudsters, Crypto Currencies: Too Volatile to Provide Security).

It will be interesting to see how the use of NFTs in legal proceedings evolves, given the benefits associated with blockchain recognition as referred to the Court in this case. For example, we could foresee a particular benefit in NFTs being incorporated into the electronic signing of Court related documents.

 If you require any further information or advice please get in touch with Nick Scott on nxs@blasermills.co.uk.