Breaking News - Service by NFT and Cryptocurrency Exchanges recognised as Constructive Trustees of Misappropriated Cryptocurrency

  [D’Aloia v. (1) Persons Unknown (2) Binance Holdings Limited and others]

On 24 June 2022, the High Court of England and Wales granted an order permitting service of court proceedings via the transfer of a token on the blockchain in the case of D’Aloia v. (1) Persons Unknown (2) Binance Holdings Limited & Others.

Giambrone & Partners LLP instructed Dean Armstrong QC and Racheal Muldoon of The 36 Group (36 Commercial) to secure the first order of its kind outside of the United States granting permission to serve proceedings on Persons Unknown connected with two digital wallets over the blockchain by non-fungible token or ‘NFT’.

This order is a noteworthy development in the area of service of court documents and a welcome example of a court embracing new technology. It is also a significant judgment as it demonstrates how England and Wales is one of the best jurisdictions in the world, if not the best, when it comes to protecting victims of cryptoasset fraud.  

Whilst the English Courts have embraced technology in recent years, the methods of service permitted by Part 6 of the CPR remain peculiar. CPR 6.3 permits service of a claim form via: (a) personal service, (b) first class post; (c) leaving it at a certain address and (d) fax or means of other electronic communication. Service by fax or electronic means is only permitted where the party to be served or their solicitor has indicated in writing a willingness to be served by such means, so these methods are generally not viable for claims brought urgently or on a without notice basis.

Where a party wishes to serve by means other than those stated above, they may apply to the Court under CPR 6.15 for an order for alternative service. The Court will only make an order for alternative service if there is a “good reason” to do so. Alternative service via various online methods has previously been authorised by the English Courts under CPR 6.15, including Instagram, Facebook and via a “contact” section of the Defendant’s website, but never before by means of Distributed Ledger Technology or ‘DLT’.

Fabrizio D’Aloia v. (1) Persons Unknown (2) Binance Holdings Limited & Others saw the Claimant, Mr D’Aloia, apply for an urgent interim proprietary injunction at an ex parte without notice hearing held in private before Trower J sitting in the Chancery Division of the High Court on 24 June of this year.

Mr D’Aloia, an Italian engineer and founder of online gambling joint stock company Microgame, filed a Part 8 claim on 24 June against five cryptocurrency exchanges – Binance, Poloniex, gate.io, OKX (formerly OKEx) and Bitkub. The application arose because of Mr D’Aloia’s cryptocurrency being misappropriated by Persons Unknown operating a fraudulent clone online brokerage encouraging would be investors to deposit cryptocurrency into two wallets so that ‘trades’ could be placed with it.

The Order is significant on two fronts. Firstly, it granted permission for the Claimant to serve proceedings by way of NFT airdrop to the two wallets into which Mr D’Aloia initially deposited his cryptocurrency, in addition to service by email. And secondly, it recognised that the five cryptocurrency exchange defendants hold Mr D’Aloia’s identifiable cryptocurrency (followed, rather than traced in Equity) as constructive trustees. 

This judgment paves the way for other victims of cryptoasset fraud to pursue persons unknown who have misappropriated their cryptocurrency in situations where they otherwise would not be able to – for instance, where the contact details for fraudulent platforms are no longer active, which is often the case. It also poses the potential for digital service over the blockchain, with all the benefits of immutability and verification, to become the norm in favour of conventional means of service, such as post where parties can blame lost, delayed, or redirected mail, for example.

“The importance of the Court’s finding of a good arguable case of constructive trustee liability cannot be overstated – says Joanna Bailey, Associate in the Financial Services Dispute Resolution Team in London - Should cryptocurrency exchanges act contrary to such orders and fail to ringfence the identifiable cryptocurrency, they risk being held liable for breach of trust”

Given that worldwide legislators and regulators are perceived by many to be failing to exert control over cryptocurrency exchanges, this is a welcome step towards greater consumer protections and responsible practice.   

Trower J’s order is second only to that of the Supreme Court of the State of New York’s on 2 June this year in LCX AG, -v- John Does Nos. 1 – 25.