Crypto fraud: Judge grants service, through NFTs, on unknown defendants

Cryptocurrency is yet another revolutionary invention in the online world. However, with innovation comes uncertainties, particularly in the legal field. This innovation requires us, like it, to redefine the parameters set in the past in the name of advancement. For litigation this means having to find new boundaries for elements like jurisdiction and service.

29 Aug 2023 4 min read Dispute Resolution Alert Article

At a glance

  • In the recent case of D’Aloia v Persons Unknown [2022] EWHC 1723 (Ch), the High Court of England and Wales had to address issues of jurisdiction over and service on unknown defendants in relation to crypto fraud.
  • The court granted an injunction preventing the disposal of the fraud victim's cryptocurrency, and approved his application to have Binance Market Limited, an English company dealing in cryptocurrency exchanges, disclose information to help the fraud victim identify the unknown defrauders. The balance of convenience weighed in favour of disclosure, as the benefits outweighed the duty of confidentiality owed to third parties.
  • In South Africa, where the cryptocurrency industry remains largely unregulated, this trailblazing decision by the English court can potentially pave the way for South African courts to apply similar decision-making.

This is particularly true where the defendants are unknown to the complainant, as is often the case with instances of crypto forms of digital fraud. Issues of jurisdiction over and service on unknown defendants was recently tackled in the High Court of England and Wales in the case of D’Aloia v Persons Unknown [2022] EWHC 1723 (Ch), where (i) an order for disclosure and substituted service was sought against, inter alia, certain unknown persons; and (ii) alternative service was requested via non-fungible tokens (NFTs). A NFT involves airdropping documents into a cryptocurrency wallet. This case is one of the first, if not the first, instances where courts have permitted service through a NFT, and at the same time granted permission to litigate and serve on as yet unidentified entities. In terms of online and digital fraud this is a welcome development where the identity of defendants are often unknown.

Mr D’Aloia discovered that his cryptocurrency, worth USDT 2,100,000 (approximately R36,205,470) and USDC 230,000 (approximately R3,972,327), had been misappropriated by unknown persons under the guise of a well-known online brokerage. Investors were encouraged to deposit cryptocurrency into wallets for trading purposes. While D’Aloia was able to trade on the platform, when he tried to make a withdrawal from the platform he was immediately blocked from his account. Later investigations revealed that his account was later cleared of all its currency, which had likely been transferred to wallets held at Binance Market Limited (Binance), an English company also dealing in cryptocurrency exchanges. What the investigation did not reveal was the true identity of the entity which defrauded D’Aloia. This notwithstanding, D’Aloia turned to the English courts for help.

His crypto wallet scammers were likely located in Hong Kong, but without sufficient evidence to prove exactly where they were or who they were, service and jurisdiction became a concern in the recovery of his cryptocurrency. D’Aloia approached the High Court for an interim freezing injunction to prevent the defendants, including Binance, from disposing of his misappropriated assets. In addition to the freezing injunction, he also sought a disclosure order against Binance to compel it to provide him with the necessary information to trace his crypto assets.

The court held that despite the fact that the unknown persons were likely in Hong Kong (based on a tracing report), it could exercise jurisdiction over the claim as the cryptocurrency was held in England, where D’Aloia was domiciled and where the damage occurred. While the court cleared Binance of any wrongdoing based in the evidence before it, it did hold that the applicant also had a claim against Binance in its capacity as the constructive trustee of the cryptocurrency because it controlled and operated the exchanges which D’Aloia’s cryptocurrency could be traced through. The constructive trust came into effect by way of the transfer of the cryptocurrency occurring in England and the cryptocurrency exchanges operating as trustees holding the stolen cryptocurrency for the benefit of the victims of cryptocurrency fraud. Interestingly, the court also held that a claim for damages, a possible and less invasive alternative to a freezing injunction, was not an appropriate remedy as it would in no way assist in preventing the disposal of the cryptocurrency.

The injunction preventing the disposal of D’Aloia’s cryptocurrency was granted, together with the application for disclosure to help D’Aloia identify the unknown defrauders. The balance of convenience weighed in favour of disclosure, as the benefits of disclosure outweighed the duty of confidentiality owed to third parties and D’Aloia had the means to pay an unlikely successful damages claim flowing from the injunction.

That left the question of service of the judgment and further proceedings on unknown persons, who were likely based outside of England. In this instance the court allowed for the use of the defrauders’ own technology platform for service purposes and granted permission for service to occur by way of (i) NFT airdrop to the unknown persons – the airdrop would be made to the “wallets” where the cryptocurrency had originally been deposited into; and (ii) by email – using the email addresses which had been used to engage with D’Aloia when he originally reported the fact that he had been blocked from the exchange platform.

Email service has been permitted for a relatively long time now. However, allowing for NFT service is a significant advancement as it provides relief in an instance where victims of cryptocurrency fraud would have previously been unable to effect service and/or enforce their order against unknown defendants. Delivery of documents by NFT also ensures verified receipt, making it an ideal form of service. This judgment paves the way for the use of NFTs and similar technology in other legal proceedings where the whereabouts of one of the parties is unknown. However, given that this form of service is not standard, claimants will still have to apply to court for permission to use it.

The court’s finding that the cryptocurrency exchanges are to be regarded as constructive trustees is also significant as, should the exchanges act contrary to the order, they will be liable for breach of trust, necessitating cryptocurrency exchanges to take additional steps to protect cryptocurrency that is the subject of a legal dispute. These steps afford the crypto consumer greater protection. In South Africa, where the cryptocurrency industry remains largely unregulated, this trailblazing decision by the High Court of England and Wales potentially paves the way for South African courts to apply similar decision-making.

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