Service of NFTs, disclosure orders against crypto exchanges and potential constructive fiduciary liability
Kate Gee is a lawyer at Signature Litigation LLPwhich specializes in crypto disputes, civil fraud and asset tracking.
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The recent, and highly publicized, volatility in the crypto markets has been accompanied by an increased level of fraudulent activity in the crypto space. Victims too often have little opportunity to recover digital assets that have been stolen from them – for various reasons. One of these reasons is the anonymity of the owner of the wallet where the assets are now kept – and therefore a would-be claimant would have to bring a case against unknown persons, or “unknown persons”.
In June this year, Justice Trowers delivered a landmark judgment in the English High Court which allowed the service of lawsuits against persons unknown via non-fungible tokens (NFTs). He also found that there is a good arguable case against the defendant crypto-asset exchanges for liability as a constructive trustee, which finding carries major potential implications for this and future claims. To support such a case, he ordered disclosure from the crypto exchanges. It is a landmark judgment that deserves to be unpacked.
The plaintiff: The case was filed in London by Fabrizio D’Aloia, an Italian engineer and founder of the online gambling company Microgamein an attempt to recover nearly £2 million (US$2.42 million) of stolen cryptocurrency from “persons unknown” in connection with a fraud allegedly perpetrated against him between December 2021 and May 2022.
The respondents: “Unknown persons” are persons behind a website with the name “tda-finan”. These people allegedly impersonate an online broker, TD Ameritradeby setting up a fake clone online brokerage: the website tda-finan.com (“tda finan“).
The scam: The fraudulent website impersonated a legitimate platform, misused a legitimate logo, and indicated that it was associated with the (legitimate) cryptocurrency business, TD Ameritrade. The cloned online broker encouraged investors to deposit cryptocurrency into wallets, which would then be used to enter into trades. Mr. D’Aloia deposited approximately 2.1 million tethers (USDT) and 230,000 USD coins (USDC) in two wallets, the addresses of which were registered on the tda-finance platform. When he later tried to execute trades, he found that the open trades on tda-finan were closed, and his account was blocked. After corresponding with a tda-finan email address, Mr. D’Aloia made further deposits to the fake platform.
D’Aloia said he had been “fooled” for months before finally realizing he was “a victim of fraudulent activity” in May.
The pocket books: Expert evidence given in court showed that almost all of Mr. D’Aloia’s assets had been transferred to a “number of private addresses” and exchanges operated by, or under the control of, five crypto exchanges (“Exchanges” and “Wallets“).
Relief sought: Mr D’Aloia sought:
- permission to announce the proceedings of NFT airdrop in the wallets;
- an interim injunction against persons unknown to freeze his assets in his wallet, to prevent further displacement of the assets, which would put them beyond his reach if successful at trial; and
- a Bankers Trust order against the exchanges to compel information to help with his tracing claim.
Service in alternative ways: The English Rules of Procedure contain a set of prescribed methods for effective service of proceedings; claimants have the right to apply for permission to donate in other ways in certain circumstances. Here, for the first time outside the US, the High Court granted Mr D’Aloia the right to serve legal documents on the unidentified fraudsters linked to Wallets over the blockchain of NFT. In granting such permission, Justice Trower said: ‘There can be no objection to that. Rather, it is likely to lead to a greater prospect of those behind the tda-finan website being notified that this order has been made, and that these proceedings will commence..’
It is the first time that permission has been given in Europe to serve legal proceedings against unknown fraudsters via an NFT on the blockchain and only the second time that such an order has been issued anywhere (the first was issued in June by the NYSC).
Freezing order: Mr Justice Trower found that there is a serious question to be tried in respect of D’Aloia’s claims of fraudulent misrepresentation and deception, unlawful means conspiracy and unjust enrichment against persons unknown. He therefore granted the requested freezing order.
Bankers’ trust orders against the exchanges: A Bankers’ trust orders can be issued against a bank (or other third party) that holds misused assets, or through which entity such assets passed. The purpose is to help the victim of fraud trace the movement of his/her misappropriated assets. These orders are not made lightly; the evidence of a fraud must be very strong and the applicant must demonstrate that there is a real prospect that the disclosure required of the third-party respondent will assist in the preservation of assets for purposes of the applicant’s property claim.
The judge said: ‘The final and important question is what impact the requested disclosure will have on any confidentiality obligations that may be imposed on third parties in respect of the information sought. Given that the information sought is information related to the provision of necessary information where there is a good argument; serious problem to be tried; on the question of whether or not the claimant has been defrauded by what appears to be a relatively simple claim in fraud, I am convinced that the balance tips in favor of granting the relief sought, notwithstanding any confidentiality obligations that may be imposed on third parties.’ The order was made.
What does this mean for the future?
These critical findings show that English courts have once again proved willing to embrace technology and to apply long-established legal concepts to modern claims involving cryptocurrencies and digital assets held on the blockchain by unknown fraudsters. The decision also marks an important milestone in the English court’s continued commitment to protecting victims of crypto fraud.
Crucially, by finding that there is a reasonable prospect of the Exchanges being held liable as “constructive fiduciaries”, this judgment creates wider ramifications for potential future claims. Therefore, crypto exchanges must now seriously consider the risk of claims against them for breach of trust, and take appropriate robust steps to delineate and protect identifiable cryptocurrency that is the subject of a dispute.
In addition, the claimant secured permission to serve the proceedings by transferring an NFT on the blockchain. In an area of litigation where cases are often brought against “unknown persons”, whose contact details are unidentifiable or have been disabled, this breaks down one of the most important practical barriers to bringing a claim. It also allows for service of other legal processes from DLT [Distributed Ledger Technology]and thus makes a permanent entry on the relevant ledger to register the service.
Given the current absence of consistent, widespread and coherent regulation in the global crypto sector, the innovative and flexible approach taken by UK courts will at least give investors some comfort and confidence for the time being.
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Learn more:
– UK court allows civil claimant to submit NFT legal documents
– UK Regulator Seeks International Crypto Regulation Coordination, Not Over-Regulation – Official
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– Professor warns SEC that its move against Coinbase is a ‘serious mistake’
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– ‘Most significant legal action’ against crypto in the US
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