For the first time outside the United States and for only the second time worldwide, a court has allowed the service of proceedings via non-fungible token (NFT). The judgment of Trowers J in the High Court case of D’Aloia v Persons Unknown & Others (unreported, 24 June 2022) was initially the subject of reporting restrictions. Those restrictions have now been lifted and we provide our commentary on the judgment below. It is significant in showing that the Courts of England and Wales will embrace novel technologies, and it may persuade courts in other jurisdictions to do likewise.
The claimant alleged he was the victim of a scam to induce him to transfer cryptoassets to “Persons Unknown”, being persons behind a website with the name “tda-finan”. The website falsely appeared to be connected with a legitimate online brokerage.
The claimant deposited Tether (USDT) and USD Coins (USDC) into two wallets whose addresses were recorded on tda-finan’s platform (the TDA Wallets). He subsequently found that his open trades on tda-finan had been closed, and he submitted a withdrawal request to test the system. His account was then blocked. The claimant exchanged emails with a “tda” email address and was induced to make further deposits.
The claimant adduced expert evidence that the USDT and USDC had been transferred to private addresses and exchanges operated by, or under the control of, five cryptoexchanges (the Exchanges) and was held in certain wallets (the Exchange Wallets).
The claimant applied to the High Court for orders including an interim freezing injunction against Persons Unknown to prevent them from disposing of his cryptoassets, as well as a Banker’s Trust disclosure order against the Exchanges to compel them to provide him with documents that would help his claim to trace the cryptoassets. He also applied for permission to serve proceedings by NFT airdrop into the TDA Wallets.
Interim freezing order against Persons Unknown
An interim freezing injunction is a court order that prevents a party from disposing of assets. It is granted pending trial in time-critical situations.
When deciding whether to grant an interim freezing injunction, the court will consider the following (“American Cyanamid”) guidelines:
is there a serious issue to be tried?
would damages be an adequate remedy?
who does the balance of convenience favour? and
any special factors.
If the court grants an interim freezing injunction, it will normally require the applicant to give a cross-undertaking in damages. This reflects that the injunction has been granted without a full trial and is to compensate the defendant if it later transpires that it should not have been granted.
Trowers J granted an interim freezing order against Persons Unknown:
He considered the evidence that the claimant put forward that Persons Unknown had misappropriated his USDT and USDC satisfied the test that there was a serious issue to be tried. As part of this, he considered whether there was a good arguable case that this was an issue for the English courts (rather than the courts of another jurisdiction) and decided that there was, given that the claimant was domiciled in the UK and that the damage occurred in England (when the cryptoassets were misappropriated).
In coming to this conclusion, Trowers J noted that there was a good arguable case that the claimant had a claim against Persons Unknown in fraudulent misrepresentation and deceit, unlawful means conspiracy, and unjust enrichment. He also noted that there was a good arguable case that the claimant had a claim against Persons Unknown, and also against the Exchanges, in constructive trust.
He considered that damages would plainly not be an adequate remedy because they would not prevent further dissipation of the claimant’s cryptoassets.
He found that the balance of convenience came down firmly in favour of granting the injunction.
The claimant was required to give a cross-undertaking in damages.
Banker’s Trust disclosure order against the Exchanges
A Banker’s Trust disclosure order may be granted against a third party to a claim (normally a bank) who holds misappropriated or stolen funds, or through whom such funds passed. It can assist a victim of fraud who is in “hot pursuit” of stolen assets.
In deciding to make a Banker’s Trust disclosure order, the court must be satisfied that the evidence of a fraud against the applicant is very strong and that there is a real prospect that the information sought will lead to the location or preservation of funds against which the applicant might have a proprietary claim.
The applicant must give an undertaking in damages to pay the third party’s disclosure expenses and agree to use the disclosed documents solely for the purpose of tracing their funds.
Trowers J granted a Banker’s Trust disclosure Order against the Exchanges:
He was satisfied that the cryptoassets held in the Exchange Wallets belonged to the claimant.
He thought there was a real prospect that the information the claimant sought would lead to the preservation of those cryptoassets because it would help him to identify Persons Unknown.
He was satisfied that it was appropriate and proportionate to grant the order.
He considered the balance between the position of the claimant (in being deprived of his cryptoassets) and of the Exchanges (in responding to the order) lay in favour of the claimant. This was in circumstances where the claimant would pay the reasonable costs of the Exchanges in providing the information.
He considered the impact that the disclosure sought would have on any duties of confidentiality that the Exchanges might owe to third parties. He was satisfied that the balance came down in favour of granting the order given there was a serious issue to be tried and that the claimant appeared to have a good arguable case against Persons Unknown.
Trowers J granted permission for the Banker’s Trust disclosure order to be served against the Exchanges out of the jurisdiction, in line with previous decisions.
Permission to serve by alternative means
The Civil Procedure Rules governing English litigation set out prescribed methods by which proceedings can be served. In summary, proceedings can be served by first class post, by leaving them at specified places (e.g. the address of a defendant’s solicitors), or by fax or email (subject to the defendant indicating willingness to accept service by fax or email).
In a first for English proceedings, Trowers J granted permission for the Claimant to serve proceedings in this matter via NFT airdrop into the TDA Wallets. In doing so, he stated: “[t]here can be no objection to it; rather it is likely to lead to a greater prospect of those who are behind the tda-finan website being put on notice of the making of this order, and the commencement of these proceedings”. He also granted permission for the Claimant to serve proceedings via email.
Being second only to the Supreme Court of the State of New York in authorising service of proceedings via NFT airdrop, the High Court has demonstrated in D’Aloia that the English courts will embrace new technologies in the interests of justice. This is consistent with the English courts’ approach in previous cases of allowing service via formerly novel technologies like social media platforms.
The judgment will be of importance to victims of cryptoassets fraud, the number of whom will inevitably increase as the use of cryptocurrencies proliferates. It is often difficult for these victims to recover their assets from persons who may be unknown to them and who they may only be able to contact via the addresses into which they deposited their cryptoassets.
The case also raises the intriguing question of whether, at some point in the future, blockchain technologies may enter the mainstream to such an extent that they may ordinarily be used for service. This would be a tantalising prospect given these technologies’ potential regarding the immutability and verification of documents.