The UK Supreme Court allows litigation to be NFT Airdropped

In what is widely touted as the first of its kind in the UK, a recent order was placed D’Aloia v. Persons Unknown and others by the High Court marks an expansion of the potential methods of service of claims permitted for English proceedings by allowing proceedings to be served via Non-Fungible Token (NFT) airdrop. The ruling marks a helpful step forward for victims of fraud in the cryptoasset space.

Background for the claim

In the record, the claimant, Fabrizio D’Aloia, has made deposits of cryptocurrencies (USDT and USDC) from his existing wallets to the wallet of unknown persons, who operate a fake brokerage website “www.tda-finan.com” masquerading as TD Ameritrade. Mr D’Aloia believed he was trading using facilities provided by tda-finan, but the evidence suggested he had been fraudulently directed to make deposits for these trades by persons unknown.

When Mr D’Aloia became aware of what had happened, the account with tda-finan recorded the value of his investment as zero. The crypto funds he had initially transferred to trade with had been transferred to a number of private wallets. Mr D’Aloia was able to identify, through intelligence investigators, that the amounts had been transferred to accounts with stock exchanges operated by, or under the control of, six of the defendants.

The court, convinced by the investigative evidence that there was a serious issue to be tried, decided to grant D’Aloia’s application for an emergency injunction and allowed service of court documents outside the jurisdiction via alternative means. Importantly, this included service across a blockchain via NFT airdrop, into the two “wallets” where the misused funds had originally been deposited.

What does this mean and why does this matter?

The rules for service of English legal proceedings (set out in Part 6 of the Rules of Civil Procedure) mainly require physical delivery of paper documents. That process does not translate easily to the electronic, decentralized world of cryptoassets. According to the current rules, even service via e-mail requires prior agreement or the court’s permission.

By issuing and granting this order for service via NFT, the court has sent a clear message to potential applicants: the English court is willing to embrace technology and accommodate new developments if it enables real claims to be made effectively (service via social media has also been allowed in relevant cases). Recent developments, including this case, have shown that the English court will not shy away from applying established legal principles to enable claims involving crypto-assets to be pursued in this jurisdiction.

Ultimately, the service rules are concerned with making defendants to claims aware of the claim against them. In that context, it makes sense to allow service over the blockchain via an NFT, given that it has the nature and effect of instantaneous delivery of information in real time and was considered by the court to be “is likely to lead to a greater prospect of those behind the tda-finan website being notified of this order and these cases commencing.“.

Using alternative service via NFT is especially useful for victims of crypto scams, as the identity of the scammers is often unknown and invisible. The wallet into which the funds were transferred may be one of the only points of contact the potential claimant had with the fraudsters. By being able to use the wallets involved in the suspected fraud, this problematic obstacle can be avoided, at least at the service stage. That said, alternative service such as via NFT will not negate the need to investigate and see what information can be obtained about the identity and location of your potential defendants. It is worth noting that the Court was willing to give service via the NFT alongside service to the email address used to communicate with Mr D’Aloia, but did not think it would be sufficient to make this order without service via e-mail as well.

This is unlikely to be the last case of NFT service we see, although it may be some time before claimants will be able to use this method as part of standard practice without having to go back to the courts for written permission to serve. As long as claimants take steps to identify how to effectively notify defendants, it seems likely that they will find an attentive ear in the courts for the mechanism they ultimately seek to adopt.

Crypto exchanges as constructive trustee

The novelty of the service from NFT is not the only point in this decision. In granting the applications of D’Aloia in this case, the court concluded that there was a good argument against the crypto exchanges for liability as a constructive fiduciary. While this is a finding made in the context of an initial, no-notice application, it is a potentially significant development in the liability of crypto exchanges where improper properties can be traced to their exchange, as well as identifying a useful route of recovery for victims of crypto fraud. It will be important to see how the courts answer this question in future cases.