D’Aloia v Binance Holdings and others [2022] EWHC 1723 (Ch) is the first reported court decision of its kind outside the United States of America (and after the New York Supreme Court decision in LCX AG vs. John Doe Nos. 1-25) regarding the service of unknown persons on a blockchain via non-fungible tokens (NFT).

In this alert, special counsel and digital asset expert Tim Edwards and law graduate Tom Mirolo-Lynam discuss the D’Aloia decision and its implications for the future.

Background

D’Aloia concerned a request for an emergency injunction submitted by Mr. Fabrizio D’Aloia, an Italian engineer. Mr. D’Aloia alleged that the defendants fraudulently misappropriated cryptocurrency totaling approximately 2.1 million USDT and 230,000 USDC by unknown persons between December 2021 and May 2022.

Mr. D’Aloia brought the claim after discovering that his cryptocurrency had been misused by an unknown person or individuals operating a cloned online brokerage, encouraging investors to deposit cryptocurrency into wallets that would later perform transactions with deposited funds. The scammer impersonated a website, misused a legitimate logo, and claimed to be associated with a legitimate cryptocurrency company, TD Ameritrade.

Mr. D’Aloia himself fell victim to the scam, handing over millions to the brokerage imitation by transferring his cryptocurrency into two wallets held with the defendants. He then approached the High Court of England and Wales seeking an urgent injunction as well as a determination as to whether he could serve the defendants, who were outside the jurisdiction, with the documents necessary to seek substantial relief.

Decision

The Court held that Mr. D’Aloia was authorized to serve unknown persons with the proceedings by means of an NFT airdrop in the wallets in which the funds had been diverted and deposited.

Service by email was also permitted, although the Court noted that service via an NFT would be quite effective given its effect of embedding service of the process into the blockchain. This prints a verifiable service record on the blockchain, making any consistent objection to the service effectively impossible.

Interestingly, the Court also had reason to conclude that there was an arguable case that the entities controlling the defendant’s particular crypto exchanges held Mr. D’Aloia’s identifiable cryptocurrency in trust for him, as interpretive trustees.

Importance

This decision represents a new development in a traditional facet of the law. It demonstrates the ability of courts to adapt new technologies and apply them to legal practice, in order to help litigants obtain justice.

Indeed, in some cases, the immutability of the blockchain and its ability to provide almost instantaneous verification of a transaction or transmission of information can result in the effective digital service of acts or procedures without that no chance of service being eluded, a courier being diverted or documents “lost in the post”.

The Court’s view of the constructive trustee argument, while preliminary, is also extremely important. If a crypto exchange holds funds in constructive trust for a defrauded investor, that defrauded investor can bring a breach of trust action against the exchange and a direct way to seek redress against the exchange. This should give hope to victims of digital asset fraud, even when the identity of the scammers remains unknown. Crypto exchanges should follow this line of authority, as well as any similar cases following the lead of the New York Supreme Court or the High Court of England and Wales, very closely.