In cases involving digital assets, especially those with anonymous, unlocatable, or international parties, service of process can pose an existential challenge. Recent decisions arising out of cryptocurrency-related litigation in the United States and United Kingdom indicate that courts are increasingly embracing a flexible approach to service of process, which could alter the legal landscape in cases related and unrelated to digital assets.
AN INCREASE IN CRYPTOCURRENCY LITIGATION
Throughout 2022, litigation related to cryptocurrency and other digital assets has consistently increased. During the recent “crypto winter,” the potential for fraud, manipulation, and self-dealing in the digital asset space has become apparent, and investors and others affected by such activity are turning to courts to recover lost investments. These developments suggest that cryptocurrency-related litigation may soon resemble established forms of financial litigation, such as securities class actions and market manipulation lawsuits.
One of the principal appeals of digital assets—including cryptocurrencies and other coins—is that they often do not have a central authority, payment processor, or corporate leadership. This can allow for easier peer‑to‑peer transactions, additional (cryptography‑based) security, and confidentiality. These benefits, together with the significant returns offered by many cryptoassets in recent years, has led funds, individuals, and other entities to invest massive sums in cryptoassets.
At the same time, the volatility of many crypto markets, coupled with an unsettled regulatory landscape and the often-anonymous nature of crypto transactions, has provided openings for illicit actors to exploit cryptocurrency investors. The non-physical nature of cryptoassets means that clever criminals can steal hundreds of millions of dollars by tricking an investor into digitally signing a fake transaction, or use a range of market manipulation tools, like wash trading, to distort the price of an asset.
Thefts of cryptoassets can happen in a number of ways, but most instances of crypto theft have involved the crypto exchanges being hacked or the individual owner making mistakes (i.e., being manipulated into transferring their assets to the fraudster). Furthermore, the very benefits of cryptoassets—particularly the confidentiality built into the transactions—also appeal to illicit actors, who look to use the anonymity of crypto transactions (including tools like coin mixing services) to hide their identities and siphon off the assets.
Government enforcement agencies, such as the US Department of Justice and Securities and Exchange Commission, have focused on crypto-related crime in recent months, and have managed to seize and recover assets on occasion. However, for many crypto investors, private litigation to obtain compensation may be the best method of protecting their rights and recovering lost investments.
Service of process has traditionally posed a challenge where defendants’ whereabouts and identities are uncertain, and unless a complaint or other document can be served, investors and other plaintiffs are unable to initiate an action and obtain an enforceable judgment. While US federal and state laws often set out specific rules for service of process in civil and criminal cases, a court’s willingness to depart from established principles related to service of process is never certain.
The decisions discussed below—one from a US state court and one from a UK court—suggest that courts are willing to accept creative approaches to service of process, which may make cryptocurrency-related litigation more viable in the future.
US DEVELOPMENT: NEW YORK COURT RECOGNIZES ALTERNATIVE SERVICE METHOD
In January 2022, LCX AG, a cryptocurrency exchange based in Lichtenstein, had around $7.94 million of various cryptoassets based on the Ethereum blockchain stolen from various digital wallets. LCX promptly began an investigation into the theft and collaborated with analysts to trace the stolen assets and to seek to identify the thief.
While the unidentified thief sought to use a coin mixing service to disguise the transactions on the public ledger, LCX was able to trace the stolen cryptoassets to a USD Coin digital wallet governed by Centre Consortium LLC (CCL) and/or Circle Internet Financial Inc. (CIF). CCL is the entity governing the protocol (i.e., the software rules) that apply to USD Coin. While a significant amount of the value of the cryptoassets had already been dissipated, $1.27 million of cryptoassets were identified as still being held in that digital wallet. LCX filed a complaint against anonymous defendants in a New York court.[1]
In order to proceed—and to ensure that the funds were not dissipated before LCX could recover them—LCX was required by law to provide notice to the unidentified thief. In what is believed to be a global first, LCX successfully argued that it should be allowed to provide legal notice of an asset freeze on the digital wallet by embedding a hyperlink to the notice in a non‑fungible token (NFT) that would be sent to the digital wallet/blockchain address. This method, known in the crypto community as airdropping, is possible because, while users must consent to moving assets out of their wallets, assets can be transferred into any wallet—without the receiver’s consent—as long as the sender knows the receiver’s public wallet address.
Alternative methods of service are not new in the United States: the US Supreme Court has previously allowed service by the publication of the legal notice in a newspaper where the exact addresses of the interested parties were unknown, and the Federal Rules of Civil and Criminal Procedure offer judges flexibility in unusual circumstances. Since it is often difficult, if not impossible, to identify potential defendants in crypto-related litigation, this novel method of service could significantly assist potential claimants to get over the initial hurdles of litigation. As with the English case examined below, it is likely that where the defendant(s) are otherwise identifiable (i.e., by way of a mail or email address) those methods of service will be preferred and/or required in conjunction with the NFT method.
UK DEVELOPMENTS
Following in the footsteps of the LCX case, the High Court of England and Wales similarly granted an order permitting service of court proceedings on unidentified defendants connected with two digital wallets by way of NFTs.[2]
Under English law, service of a claim form is permitted by way of (1) personal service, (2) post, (3) leaving it at certain specified address, or (4) by fax or other means of electronic communication. However, service by fax or electronic means is only permitted where the recipient (or their solicitor) has indicated in writing that they are willing to be served by such means.
Accordingly, electronic means are generally not viable for claims brought urgently or on a “without notice” basis. Where necessary, it is also possible to apply to the English court for an order for alternative service under CPR 6.15. However, the claimant(s) will need to show that there is a “good reason” for allowing such alternative service. Previous examples of permitted alternative service have included by way of Facebook and Instagram.
The recent English case relates to a claim filed by Mr. Fabrizio D’Aloia against “persons unknown,” four cryptocurrency exchanges and one software company. The “persons unknown” had misappropriated Mr. D’Aloia’s digital assets by operating a fraudulent clone online brokerage (i.e., by imitating the website and logo) in order to persuade would-be investors to deposit cryptoassets into two wallets for purported trades. Mr. D’Alioa fell victim to the phishing scam and transferred millions in assets to the fraudulent brokerage.
Similar to the United States, the High Court of England and Wales allowed service of the proceedings by way of airdropping an NFT into the two wallets in which Mr. D’Aloia had initially deposited his cryptocurrency, together with service by email. The High Court noted that, in this instance, service by NFT would be effective given its effect of imprinting a verifiable record of service on the blockchain.
The High Court also further determined that the cryptocurrency exchanges arguably held Mr. D’Aloia’s identifiable cryptoassets as constructive trustees. While this is a preliminary finding, it is highly important since it means that, should the exchanges act contrary to the High Court’s orders and fail to ringfence the identifiable cryptoassets, the exchanges risk being held liable for breach of trust.
KEY TAKEAWAYS: GREATER POSSIBILITIES FOR CRYPTOCURRENCY AND OTHER LITIGATION
This remains a rapidly developing area of law. However, these cases show that courts, particularly in the United States and the United Kingdom, are willing to grapple with these novel issues to find innovative ways to provide investors in the crypto space with legal recourse. Investors who are exposed to fraud, manipulation, and other suspicious activity in markets should consider what options are available to them—even in situations where the perpetrators are anonymous.
[1] LCX AG v. John Doe Nos. 1-25, case number 154644/2022, in the Supreme Court of the State of New York, County of New York
[2] D’Aloia v. (1) Persons Unknown (2) Binance Holdings Limited and others
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