A recent case heard in the High Court tested the extent to which the English courts are willing to adapt to the rapid pace of technological development. When it comes to cryptocurrency and crypto assets, the complexity of the methods being used by fraudsters is becoming ever more complex. As a result, the legal system is grappling to understand these technological complexities and make rulings accordingly. The case of D'Aloia v (1) Persons Unknown (2) Binance Holdings Limited & Others  EWHC 1723 (Ch) (June 2022) is a perfect recent example of the legal system's willingness to adapt to the latest techniques used by crypto fraudsters.
Background to the case
The case of D'Aloia involves an Italian engineer, Fabrizio D'Aloia, the founder of the online gaming business Microgame. Mr D'Aloia is suing 'persons unknown' who he says misappropriated ~£1.8m worth of the cryptocurrency 'Tether', in addition to ~£190,000 of the stablecoin 'USD Coin'. He says he was misled by criminals purporting to represent the cryptocurrency brokerage company TD Ameritrade using the website 'tda-finan.com', who induced him to transfer funds to the platform. Investigators representing Mr D'Aloia believe that these misappropriated funds have now been split up across several private addresses and crypto exchanges.
Mr D'Aloia filed a 'Part 8 claim' against five cryptocurrency exchanges; these included Binance, Poloniex, gate.io, OKX and Bitkub.
What did the High Court decide?
In an interim relief hearing in the Chancery Division of the High Court on 24th June 2022, the High Court issued an order to allow the service of court proceedings through the transfer of a non-fungible token (NFT) via 'airdrop' onto two digital wallets (on tda-finan.com) into which Mr D'Alolia initially placed his funds. NFTs are units of data located on a blockchain used to certify the uniqueness of digital assets.
Justifying the decision, Mr Justice Trower stated, "There can be no objection to it...Rather it is likely to lead to a greater prospect of those who are behind the tda-finan website being put on notice of the making of this order and the commencement of these proceedings".
Is the High Court's decision in D'Alolia significant?
Parties to such proceedings have always had the option to seek the court's permission to use alternative means of service if there is a good reason to do so. The courts have previously allowed the service of orders via websites such as Facebook and Instagram. As such, the decision in D'Alolia represents a further example of this type of permission being granted. There is no doubt, however, that this case demonstrates:
- a clear willingness of the courts in England and Wales to consider innovative ways to serve proceedings, and
- that the courts in England and Wages will consider the options available where people have been defrauded by the latest types of crypto 'Ponzi' schemes and scams.
This decision may also show that the courts are keen to impose a greater level of legal scrutiny and oversight over what has become the tech "Wild West". Indeed, we expect that the courts will continue to be under pressure to keep in lockstep with high-tech fraudsters.
The implications of crypto investment for high-net-worth individuals
There is no doubt that cryptocurrency and NFT are burgeoning asset classes. According to a Nasdaq survey of 500 financial advisors, 86% of respondents reported that they intended to increase their client's holdings of crypto assets in the coming year. A market report prepared by Art Basel and UBS also highlighted that nearly three-quarters of high-net-worth individuals have already purchased artwork-based NFTs based at a median price of $9,000. The recent fall in the value of Bitcoin and the sell-off by Tesla of its Bitcoin Holdings on 21st July 2022 is a timely reminder, however, of the sheer volatility and unpredictable nature of this asset class.
As more and more divert their wealth into digital assets, fraudsters are already seeking to take advantage of this trend; hence investors need to put in place measures to protect their digital interests. As digital assets form an ever-increasing proportion of our wealth, it is becoming more important to seek expert legal advice when it comes to matters such as estate planning, Wills, and probate. Thought should be given to:
- the use of a power of attorney with specific provisions for distributing digital assets
- ensuring that the executors of Wills have the necessary digital wallet access (i.e. private keys)
- how fiduciaries can access computing devices, storage devices, accounts, and data, allowing them to bypass, reset, or recover passwords to decrypt encrypted data
While the courts have demonstrated a willingness to keep pace with technological methods used by crypto fraudsters and will hopefully continue to do so, it is also essential that high-net-worth individuals with digital assets understand how to prevent this type of fraud and protect their interests. At Quastels, we have the crypto dispute resolution and private client expertise to protect your digital assets. We will ensure that your cryptocurrency and crypto assets are properly incorporated into your power of attorney, Will, and estate planning and other private client arrangements.
Originally published 28 July 2022
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.