For the first time in the UK, in D’Aloia v Persons Unknown, Binance Holdings Limited & Others, the High Court of England and Wales granted an order permitting the service of court documents via an NFT on the blockchain. In said order, the High Court also ruled that exchanges holding cryptoassets could be constructive trustees of the cryptoassets deposited within their infrastructure.
The Case
Mr D’Aloia, the Claimant, applied for an urgent interim proprietary injunction at an ex parte hearing without notice. He claimed that he had been the victim of an embezzlement perpetuated by persons unknown. These persons were operating an online fraudulent cloning brokerage. They encouraged people to deposit cryptocurrency within two wallets for the purposes of fraudulently cloning the funds. These wallets were held on various cryptocurrency exchanges.
Order for Service
The High Court granted an order to serve documents on persons unknown via the blockchain and via email.
Generally, the rules for the service of court documents are quite strict. The Civil Procedure Rules permit service via, among others, personal service, first class post, fax or other electronic means. Where a party wishes to serve documents by a different manner, they must apply to the court for alternative service. There must be a “good reason” to approve such a request.
In previous cases, courts have permitted alternative service over social media channels and instant messaging systems, but this was the first time the court approved service via distribute ledger technology. Such service would be achieved by air-dropping the court documents into the two wallets where Mr D’Aloia alleges to have suffered the fraud in the form of an NFT.
While the order has not been made publically available, it is easy to guess the High Court’s reasoning for this order. The two wallets are the only means of contacting persons unknown. Their identities and contact details are not currently known, which means that, without the wallets, no documents could be served on them. Had the High Court not allowed for service via the wallets, Mr D’Aloia and other alleged victims of fraud would face significant barriers in bringing legal action.
As such, future claimants of crypto-related fraud should now find it much easier to serve proceedings on persons unknown. While applications for alternative service will still be required, this order could be used in support of their request. In theory, this could lead to the blockchain being used for the service of documents on a more common basis, particularly as cryptoassets become more ingrained and commonplace in society.
Constructive Trustees
The High Court also held that the relevant exchanges were also constructive trustees of the stolen cryptocurrency. This is because the private keys and funds deposited within the wallet are managed and secured by their infrastructure. As their platform was used to move the assets, the exchanges had a commitment not to allow the fraudulent movement or withdrawal of the funds.
This should provide investors with some additional degree of protection. The ruling is clear that exchanges are responsible for making sure that the funds are not moved on or withdrawn from their exchanges without proper authorisation. This should make it more difficult for fraudsters and other bad actors to illegitimately obtain cryptoassets. In terms of the effect on exchanges, it suggests that crypto-exchanges will need to introduce systems and controls to ensure that such unauthorised withdrawals do not take place.
Next Steps
It is not yet clear if the Claimant has served the relevant claim documents through the blockchain, or by other means. It is also not yet clear if the case will proceed to trial and, if so, when the trial will be heard. Our expectation is that it will follow previous UK cases – namely that cryptoassets can be property and can be the subject of various injunctions, including freezing and other proprietary injunctions.
