Cryptocurrency fraud and disputes – service of court documents via NFT airdrop

The rise in cyber fraud and cybercrime featuring cryptocurrencies, like Bitcoin or Ether, has resulted in an increasing number of legal issues which require the Courts around the world to demonstrate a good understanding of technology and willingness to embrace technology.

Guidance on technical aspects of cryptocurrency

A recent notable case is Yan Yu Ying v Leung Wing Hei [2022] HKCFI 1660, where the Hong Kong court, among other things, granted a proprietary injunction over the Bitcoins which are the subject of a civil dispute. It is worth noting that in the decision dated 7 June 2022, the Court explained (in very understandable terms) the features of Bitcoin, the digital keys, their storage in cryptocurrency wallets, the differentiation between a “hot” cryptocurrency wallet and a “cold” cryptocurrency wallet, etc. An example of a hot cryptocurrency wallet is an account in a web-based cryptocurrency exchange, while an example of a cold cryptocurrency wallet is a hardware wallet which is not connected to the Internet. In this case, the dispute relates to a cold cryptocurrency wallet which can receive and send Bitcoin.

This explanation of technical terminologies in the judgment would likely be a helpful guidance for the courts and legal practitioners when dealing with disputes involving cryptocurrencies in the future.

Alternative Service on anonymous defendants

Another development to watch is that cryptocurrency fraud has become more common. Courts in some jurisdictions have adopted technology to address the difficulties of serving court documents on defendants involved in cryptocurrency fraud, particularly where the identities and addresses of the defendants are not known.

In the United States, in a case about alleged theft of cryptocurrency, the Supreme Court of the State of New York on 2 June 2022 authorised the plaintiff to serve the court’s order and other court papers upon the person(s) controlling a cryptocurrency wallet address via “airdrop” of a non-fungible token (NFT airdrop) (the “Service Token“) on the Ethereum blockchain to that wallet address. Airdrops involve the distribution of tokens to wallets, and have been used for marketing or promotion purposes. In this case, the Service Token contains a hyperlink to a website where the order and other legal papers for service can be accessed. (see LCX AG v. John Doe Nos. 1-25 (Dkt.No.,154644/2022) (N.Y. Supreme, Ct., NY County))

In the United Kingdom, it has been reported that on 24 June 2022, the High Court of England and Wales also granted an order permitting service of court proceedings by way of NFT airdrop in the case of D’Aloia v Binance Holdings & Others [2022] EWHC 1723 (Ch).

Victims of cryptocurrency fraud will be pleased to know that the courts in some jurisdictions have adopted and embraced technology by allowing alternative service of court documents using blockchain technology. When the right case comes, the Hong Kong court will consider whether blockchain technology (e.g. NFT airdrop) can be adopted for service of court documents.

30 August 2022
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