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Service by NFT: A new weapon to combat crypto fraud

Posted on 2 August 2022

Abstract technology backdrop

For the first time, the High Court has granted an order to serve proceedings by transferring a Non-Fungible Token ("NFT") onto unknown fraudsters' crypto wallets. Mr Justice Trower's order in the case of Fabrizio D’Aloia v. (1) Persons Unknown (2) Binance Holdings Limited & Others seems to have made good on the English Court's desire to embrace the digital environment, in which much litigation is now focused.

The need for such an embrace was advocated by the Master of the Rolls in his speech at the International Dispute Week earlier this year, who expressed the view that "dispute resolution will not be sustainable if it adheres to its analogue roots and shuns the digital environment". He suggested that changes to our justice system will be needed as "the facts to be found and the way fact finding is undertaken will be quite different in a digital age". It is clearly the will of the English courts to ensure that England and Wales remains the jurisdiction of choice for bringing litigation in the digital era.

Crypto assets and cryptocurrencies are becoming commonplace in society, with the courts seeing more litigants seeking redress for wrongs relating to them. As with any advancements in technology, the legal system must do what it can to ensure that it is nimble enough to advance with the times and provide the new legal tools and protections required to keep pace with a constantly evolving technological environment. As was touched on in a previous Fraud Insights article, the English courts have done much to develop the law to assist the victims of crypto related frauds. Permitting service by way of an NFT is a clear signal that there will be more such developments to come.

The facts

Mr D'Aloia is the founder of Microgame, a successful online gambling company based in Italy. In June of 2022 Mr D'Aloia became the subject of an alleged fraudulent misappropriation of his cryptocurrency by Persons Unknown. Mr D'Aloia alleged that Persons Unknown established a bogus brokerage to encourage investors to deposit cryptocurrency into particular wallets so that trades could be placed with it. Mr D'Aloia sought an interim proprietary injunction to seek to preserve, and ultimately recover the same. He argued that the crypto exchanges held his cryptocurrency as constructive trustees.

The order

Mr Justice Trower ordered that, given the identity of the alleged fraudsters was otherwise undiscoverable, the court documents could be served by airdropping an NFT into the wallets to which Mr D'Aloia had deposited his cryptocurrency. The intention behind this method of service is that the NFT contains a link which will direct the recipient to a website with the papers, and notify the claimant that they have been accessed.

Separately, the Court recognised that there was a good arguable case that the cryptocurrency was being held by the exchanges on constructive trust. This is significant as the exchanges risk being held liable for breach of trust if they fail to ringfence the cryptocurrency.  

The implications

The High Court has broadened what would constitute 'Alternative Service' for the purposes of CPR 6.15, thereby providing the victims of crypto fraud a means of serving proceedings against persons unknown. While it remains to be seen whether service of this kind will serve the intended purpose in practice or whether it will bring the victim any closer to recovery, it is clear that the High Court will do what it can to enable claimants to find novel solutions in the digital environment.

The High Court's findings in relation to constructive trusts are an encouraging sign for victims as well as the crypto space more generally. Much like the changes seen to banking procedures following the fallout from authorised push payment litigation, we suspect crypto exchanges will be similarly incentivised to invest in their internal systems and compliance infrastructure to prevent frauds from happening from the outset. These changes will give consumers more confidence in the platforms while limiting crypto exchanges' exposure to litigation.

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