New Method of Serving Claim in Cryptocurrency Legal Dispute
Problem: Given the private nature of cryptocurrency and the anonymity it provides holders, it has become problematic for those wishing to pursue legal claims against fraudsters who steal cryptocurrency (often persons unknown)
Outcome: in a welcome judgment, a UK Court has allowed for legal proceedings to be served on the fraudsters by way of NFT
In a ground-breaking judgment, the High Court has granted an application made by a victim of cryptocurrency fraud to service legal proceedings by NFT. It is the first decision of its kind in England & Wales and will likely set a trend and precedent for other victims of cryptocurrency and blockchain fraud to serve proceedings by alternative means as fraudsters find new and novel ways to go undetected. In this article we look at the current rules on service in England & Wales which are governed by the CPR and why the judgment in D’Aloia v Persons Unknown & Binance Holdings [2022] EWHC 1723 (Ch) is important.
The Civil Procedure Rules on service of proceedings
The Civil Procedure Rules (CPR) provide strict provisions as to the method and time period for service of claim form, particulars of claim and other documents these include:
- Individual – service at the usual or last known residence
- Individual being sued in the name of a business – service at the usual or last known residence of the individual; or principal or last known place of business.
- Individual being sued in the business name of a partnership – service at the usual or last known residence of the individual; or principal or last known place of business of the partnership.
- Limited liability partnership – service at the principal office of the partnership; or any place of business of the partnership within the jurisdiction which has a real connection with the claim.
- Corporation (other than a company) incorporated in England and Wales – service at the principal office of the corporation; or any place within the jurisdiction where the corporation carries on its activities and where it has a real connection with the claim.
- Company registered in England and Wales – service at the principal office of the company; or any place of business of the company within the jurisdiction which has a real connection with the claim.
- Any other company or corporation – service permitted at any place within the jurisdiction where the corporation carries on its activities; or any place of business of the company within the jurisdiction.
The Main Issue as it relates to Cryptocurrency Disputes
Very often in cryptocurrency fraud claims the claims are made against persons unknown and against fraudsters that have seemingly disappeared. In those circumstances, the question has arisen in the UK Courts as to whether the Court will give permission for claimants and victims of such digital frauds to serve the defendants outside of the jurisdiction and by other means not otherwise permitted under the CPR (such as email, Instagram, Facebook, and NFTs on the blockchain for example). Some recent case law has developed in this area which shows that the UK Courts are willing to assist victims to allow service by new and novel means such as by way of NFT or via the cryptocurrency exchange. However, the applications for service outside of the jurisdiction and alternative means are considered on a case-by-case basis and an application will need to be made to the Court.
In CMOC v Persons Unknown [2018] EWHC 2230 (Comm) the English court is willing and able to adopt novel approaches to service, particularly in cases of fraud. The claimant, CMOC is an English company. Its business is the sale and purchase of Niobium, which is a soft metal predominantly found in Brazil and used in alloys such as special steel and gas pipelines. In October 2017, the claimant discovered it was the victim of a business email compromise fraud whereby the perpetrators of the fraud had hacked into its email system and caused its bank, Bank of China in London, to pay US$6.91 million and €1.27 million out of its bank account by means of twenty separate transfers.
The Court held that, given the nature of these type of cryptocurrency disputes, that while the fraud is obvious, the identity of the defendants and the actual recipients of the funds is not. The Court accepted service by means of email, Facebook and other novel means as constituting good service and that the defendants had made an informed choice not to engage in the proceedings.
The Case
D’Aloia v Persons Unknown & Binance Holdings [2022] EWHC 1723 (Ch) the High Court granted an order permitting service of proceedings on persons unknown via a non-fungible token (“NFT”) on the blockchain. The High Court also recognised that there is a good arguable case that crypto exchanges hold stolen crypto-assets as constructive trustees for the benefit of victims of crypto-asset fraud.
The claimant, Mr Fabrizio D’Aloia, started legal proceedings against persons unknown, several cryptocurrency exchanges and others arising out of what he alleges to be the fraudulent misappropriation of cryptocurrency in the sum of 2.1 million USD Tether and 230,000 USD Coin. Tether and USD Coin are “stablecoins” which seek to “peg” their value to the US Dollar, and are less volatile than other cryptocurrencies.
Mr D’Aloia alleged that he had been the victim of a scam which caused him to transfer the cryptocurrency held in his exchange accounts at Coinbase and Crypto.com to accounts controlled by persons unknown who were operating behind a website with the name “www.tda-finan.com” (the “TDA Accounts”). It having subsequently become apparent to Mr D’Aloia that he had been a victim of fraud, he hired intelligence investigators and lawyers, who concluded that it was highly likely that those behind the website had been using it as a way of imitating a well-known brokerage – TD Ameritrade – to convince and induce unsuspecting investors, such as the claimant, out of their cryptocurrency.
Mr D’Aloia made claimed against the fraudsters in fraudulent misrepresentation and deceit, unlawful means conspiracy and unjust enrichment against the operators of the website, who were persons unknown; and proprietary claims against six other companies as constructive trustees, who he alleged were the controllers or operators of the crypto exchanges into which (according to the asset report produced) it was possible to trace the relevant crypto-assets.
In addition to this, the claimant applied to the Court for an interim freezing injunction to prevent the defendants from transferring the cryptocurrency, as well as a Banker’s Trust disclosure order to compel the crypto exchanges to provide documents that would help him trace the cryptocurrency.
There was clear evidence that all the defendants, except for the third defendant, were located outside of the UK. The location of the fraudsters was however unknown, but there was some evidence to suggest that they may be domiciled in Hong Kong. Mr D’Aloia accordingly applied for permission to serve out of the jurisdiction on all of the defendants (with the exception of the third defendant), and by an alternative means.
The Decision
The Court granted the claimant’s applications (see further above where we analyse the jurisdiction arguments considerations in this case). As to permission to serve out of the jurisdiction and by alternative means, the claimant argued that it was necessary for the court to consider whether it was appropriate to grant permission to serve out in respect of the substantive relief sought by email and via NFT, which the Judge described as a “form of airdrop” into the TDA Accounts into which the claimant first made his transfers to those behind the website.
It was contended that this was a novel form of service, with the advantage being that the claimant would be “embracing the Blockchain technology” because the effect of service via NFT would be to embed the service in a blockchain.
The Court granted permission for the claimant to serve outside of the jurisdiction and to serve proceedings by email and NFT on the basis that it was likely to lead to a greater prospect of those who were behind the website being put on notice of the making of the order and the commencement of the proceedings.
Free Consultation with Expert Cryptocurrency Lawyers
This is an interesting judgment that further reinforces that the English courts are looking to help victims of cryptocurrency scams by allowing the service of legal proceedings by alternative means. It remains to be seen whether the Civil Procedure Rules which govern the procedure for litigation in England and Wales will be amended to take into account growing fraud and allow service by new and alternative means without the need for a costly court application to be made by the victims which will put a greater burden on those victims to fund their claim.
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