As the use of cryptocurrencies and tokens for investment grows in popularity, courts have been forced to adapt their approach to traditional laws pertaining to fraud and tracing of funds involving crypto assets.

This is due to the fact that offenders in these cases often remain unknown preferring anonymity; reside in different or unknown jurisdictions; or actively evade service of court proceedings. In response, courts in the United States and United Kingdom have recently endorsed the innovative method of substituted service over the blockchain by way of Non-Fungible Tokens ("NFTs").1 This involves sending NFTs to the wallets believed to contain the stolen cryptocurrency, thus providing a unique and effective means of serving legal documents to respondents when their identity remains unknown.

These two recent cases are discussed below and raise some interesting issues that are yet to be answered in Australia. Nonetheless, it is hoped that these decisions cast further light on the possibility of substituted service over the blockchain by way of NFTs under Australian jurisprudence.


LCX AG v John Doe Nos. 1-25 (the "LCX AG Case") 2

On 2 June 2022, the Supreme Court of New York issued an order allowing the service of legal documents via an Ethereum-based token, referred to as the "Service Token". This token was delivered to a specific blockchain wallet via airdrop3 and contained a hyperlink leading to a website publishing the relevant legal documents. The Service Token was designed to trigger upon being accessed or opened, which allowed a server to demonstrate that the documents had come to the attention of the defendants and thus that service had been affected.

This order was made in the context of a case brought by LCX AG, an Irish incorporated company, against unknown individuals (referred to as "John Doe or Does") for the theft of nearly US$8 million worth of virtual assets. LCX AG operated an internet exchange website known as the "LCX Exchange" and stored its assets in digital wallets. On 8 January 2022, the defendants gained unauthorised access to LCX AG's primary wallet and transferred approximately US$7.94 million of virtual assets to an address under their control. LCX AG attempted to trace the stolen assets through the trail left on the Ethereum blockchain, which led them to recover the funds in the United States. However, due to measures taken by the defendants to conceal their identity, their identities and location remain unknown.

In such circumstances, the US Supreme Court was satisfied that service via the blockchain address would be sufficient to effect service in accordance with relevant civil procedure rules. This decision was a ground-breaking step in protecting victims of crypto-asset fraud, when traditional modes of service would have been thwarted or indeed impossible.


D'Aloia v Binance Holdings & Others [2022] EWHC 1723 (Ch) (the "D'Aloia Case") 4

In a case following the US LCX AG decision, the High Court of England and Wales has recently issued an order permitting the service of court proceedings on unknown individuals through a blockchain by way of Non-Fungible Tokens (NFTs).

This decision came as a result of an urgent application for injunctive relief filed by Mr Fabrizio D'Aloia, who alleged that the defendants had fraudulently taken his cryptocurrency. The defendants were identified as "Persons Unknown" and operated under the guise of being a legitimate online brokerage website, convincing investors to deposit cryptocurrency into specific wallets for the purpose of those funds being traded in the future. Mr D'Aloia fell prey to this alleged scam and, over the course of four months, the defendants allegedly misappropriated approximately 2.1 million USDT5 and 230,000 USDC6 of his cryptocurrency. Given that the defendants were located outside of the relevant jurisdiction, Mr D'Aloia's application not only sought injunctive relief but also a ruling on his ability to serve necessary court documents to the defendants via NFT.

The High Court granted the order for service on the Persons Unknown through "alternative methods", including email, and most notably, an NFT airdrop to the wallets into which Mr D'Aloia had originally transferred the misappropriated cryptocurrency. The High Court stated that service through an NFT would be effective given its effect of imprinting a verifiable record of service on the blockchain. The High Court also found there was an arguable case that the entities controlling the defendant crypto exchanges were holding Mr D'Alogia's identifiable cryptocurrency in trust for him as constructive trustees. While this is a preliminary finding, it is significant because the exchanges themselves may be liable for breach of trust if they act contrary to the High Court's Orders and fail to ring-fence Mr D'Alogia's identifiable cryptocurrency.


A notable difference between the two approaches to service via NFTs

In the LCX AG case, it was determined that service was affected when the recipient accessed or opened the token, even though the token only contained a hyperlink to the legal documents and not the documents themselves. The US Supreme Court deemed that the defendants' knowledge of the hyperlink was enough to establish that the legal documents had been brought to their attention, and no evidence was required to prove that the hyperlink had been accessed or opened.

The D'Aloia case took a slightly different approach, with the legal documents being enclosed within the token, eliminating the need for the recipient to click on a hyperlink to access them. This approach highlights that different courts may have different interpretations on what constitutes effective service via NFTs and that the method of service may need to be tailored to the specific case.


Will Australia adopt a similar approach?

Australian courts have specific protocols for serving legal documents in accordance with the court's relevant civil procedure rules. Typically, this involves personal service for individuals and service at a company's registered office for companies, with the aim of ensuring that the recipient has received and is aware of the legal document.

In situations where a party is avoiding traditional service or is located in a different jurisdiction, a court can make an order for substituted service. Australian courts have already acknowledged the benefits of using technology to effect service, extending methods of substituted service to include email and/or social media.

For example, in the decision of Societe Des Produits Nestle South Australia v Christian [2014] FCCA 367, the Federal Circuit Court of Australia granted an order of substituted service and deemed that service was taken to have occurred on the date on which the relevant legal documents had been sent to the defendant's known email address. Here, the defendant was known and believed to be within the jurisdiction but was avoiding personal service. The court was ultimately satisfied that service via email, in combination with the plaintiff's other efforts, would bring the documents to the defendant's attention.

In the more recent decision of Callan v Chawk [2021] FCA 1182, the Federal Court of Australia granted an order of substituted service by means of sending the relevant legal documents to the defendant via email and registered post (to his residential and business address) as well as a message to the defendant's apparent Facebook account. Again, the defendant was known and believed to be within the jurisdiction but was avoiding personal service. The court was satisfied that the documents, and the proceedings, would come to the attention of the defendant by means of email and Facebook message.


The Rules

In respect of the Federal Court of Australia, the Federal Courts Rules 2011 (Cth) (Rules) allow a party to make an application to Court for an order that a document is taken to have been served on a person if it is not practicable to serve a document on the person in a way required by the Rules and the party provides evidence that the document has been brought to the attention of the person to be served.7 The Rules also allow a party to make an application to Court where it is not practicable to serve a document on a person in a way required by the Rules for an order substituting another method of service; or specifying that, instead of being served, certain steps be taken to bring the document to the attention of the person; or specifying that the document is taken to have been served on the happening of a specified event or at the end of a specified time.8

Given the increased number of disputes where the identity of the alleged wrongdoer is unknown and the mechanisms already available under the existing Rules (at least in the Federal Court), it seems likely that substituted or deemed service via NFTs will become before the Court for consideration before much longer and may provide a viable option for serving legal documents in Australian court proceedings. This is especially true for cases concerning crypto-asset fraud where traditional service methods are often impractical or simply impossible. As the technology becomes more widely adopted and understood, it is possible that service using NFTs will soon be accepted as a method of substituted or deemed service under the current civil procedure rules.

We look forward to seeing how Australian courts will tackle issues involving service in cases of crypto-asset fraud (and indeed other causes of action when anonymity of the wrongdoer is a factor). A remaining question is raised however, that if service via NFTs is accepted as an appropriate method of substituted or deemed service, will a similar approach be taken to that of the United States or the United Kingdom in respect of whether it would be sufficient for the legal documents to be accessed via hyperlink or are they to be embedded in the blockchain itself?

Footnotes

1 For a more detailed technical discussion of NFTs please refer to our earlier article "The NFT - perils and pitfalls in the commercialisation of copyright works" at https://www.bennettphilp.com.au/blog/nfts-perils-and-pitfalls-in-the-commercialisation-of-copyright-works

2 https://www.hklaw.com/-/media/files/generalpages/lcx-ag-v-doe/complaint_2.pdf?la=en

3 Airdropping tokens from one wallet on the blockchain to another party's wallet is a method used to transfer crypto assets to existing holders of NFTs, often as a goodwill gesture (as when holders of the notorious "Bored Ape Yacht Club" NFTs were airdropped a proprietary "Ape Coin" token in March 2022).

4 https://www.casemine.com/judgement/uk/62e2d868b50db92150dadd60

5 USDT is a digital cryptocurrency, also known as a stablecoin created by Tether Limited.

6 USDC is a digital cryptocurrency, also known as a stablecoin pegged to the United States dollar.

7 Rule 10.23 of the Federal Court Rules 2011 (Cth).

8 Rule 10.24 of the Federal Court Rules 2011 (Cth).

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