In a recent innovative ruling,1 the English High Court has granted permission for a claim to be served on a defendant by non-fungible token (NFT),2 embracing blockchain technology and taking a pragmatic view on the most efficient means of drawing proceedings to parties’ attention.
Mr Fabrizio D’Aloia (the claimant), an Italian engineer and founder of Microgame (an online gambling technology business), transferred a total cryptocurrency equivalent of around US$2 million into a trading account via the website tda-finan.com between December 2021 and May 2022. The website is alleged to have been a scam, passed off as being linked to the US-regulated trading platform TD Ameritrade. When the claimant’s trades were closed in February 2022, he submitted a withdrawal request. The account was subsequently blocked and communications with an email address associated with tda-finan induced the claimant to make a number of further deposits. In May 2022, the claimant realised that he had been the victim of fraudulent activity and instructed an intelligence investigator, who found that the assets had been transferred to several private addresses operated or controlled by five crypto exchanges located in different parts of the world.
The claimant issued proceedings against the exchanges and persons unknown responsible for tda-finan, making claims for, amongst other things, fraudulent misrepresentation and unjust enrichment. The claimant made without notice applications for:
- freezing injunctions in respect of the assets transferred to the various wallets;
- disclosure orders requiring the exchanges to provide information to enable the claimant to trace the assets and/or identify the persons unknown;
- permission to serve the defendants out of the jurisdiction; and
- permission to serve the persons unknown by NFT airdrop into the tda-finan wallets.
Recognising the urgency of the application, the court granted the orders sought by the claimant (save for a freezing injunction against one of the exchange defendants). In reaching this decision, the court made the following key findings:
Service on the persons unknown was permitted by way of an NFT airdrop to the crypto wallets into which the claimant first made transfers to tda-finan. This form of service, combined with service by email, would increase the likelihood of the operators of the tda-finan.com website being put on notice of the proceedings. The judge did not consider that service by NFT alone would have been appropriate.
Damages would not be an adequate remedy to compensate the claimant. Any remedy available to the claimant would be “rendered worthless” in the absence of relief restraining the dissipation of the assets.
There was a good arguable case that the assets were held on constructive trust by both the alleged perpetrator(s) of the fraud and the exchanges.3 This is in line with previous interim findings by the English courts on which we have reported (accessible here), but goes further by imposing a constructive trust on the exchanges as well as the unknown fraudsters. This followed findings from the claimant’s investigator that the assets could be traced to wallets held by the exchanges.
The decision followed earlier authorities in finding that the location of a crypto asset is determined by the location of its owner’s domicile (see for example our previous OnPoint, accessible here). As the owner was domiciled in England, there was a good arguable case that English law would apply to the dispute as the damage occurred in England when the assets were misappropriated.
The English courts have long taken a practical view of service, allowing it by novel means including Twitter, Facebook and text message where appropriate.4 This decision further affirms the courts’ willingness to apply existing legal principles to new technologies, and to act swiftly to provide remedies to victims of crypto fraud. The option to serve by NFT into a crypto wallet is a particularly welcome development for claimants where the identity of the defendant is unknown. Further, effecting service via the blockchain provides immutable proof that service has been effected.
The grant of permission to serve proceedings by NFT is thought to be a first in England, and second in the world only to New York, where in June 2022 a claimant’s lawyers were permitted to serve documents using an NFT which linked to the claimant’s representatives’ website.5 In the New York case – concerning the alleged theft of almost US$8 million worth of digital assets – the order specified that the documents linked from the NFT were to utilise a mechanism to track whether and when the link in the NFT had been clicked on. Although in the D'Aloia case the English court was only prepared to allow service by NFT in conjunction with service by email, parties might wish to consider the availability of tracking mechanisms when serving by NFT (or other alternative means), to enhance their arguments that defendants have been made aware of the proceedings.
Dechert’s international litigation team has a breadth and depth of experience in dealing with the types of urgent remedies described in this OnPoint.
The authors are grateful to Jennifer Hutchings, trainee solicitor in London, for her valuable contribution to this OnPoint.