D'Aloia v Binance Holdings & Others [2022] EWHC 1723 (Ch) is the first reported court decision of its kind outside of the United States of America (and after the Supreme Court of New York’s decision in LCX AG v John Doe Nos. 1-25) regarding the service of unknown persons over a blockchain via Non-Fungible Tokens (NFTs).
In this alert, Partner and Head of Digital Assets Tim Edwards and Solicitor Tom Mirolo-Lynam discuss the D’Aloia decision and its implications moving forward.
Background
D’Aloia concerned an application for urgent injunctive relief by Mr Fabrizio D’Aloia, an Italian engineer. Mr D’Aloia alleged that the defendants had fraudulently misappropriated cryptocurrency totalling approximately 2.1 million USDT and 230,000 USDC by unknown persons between December 2021 and May 2022.
Mr D’Aloia brought the application forward after discovering the misappropriation of his cryptocurrency by an unknown person or persons operating a cloned online brokerage, encouraging investors to deposit cryptocurrency into wallets that would later make trades with the deposited funds. The fraudster imitated a website, misused a legitimate logo, and represented that it was associated with a legitimate cryptocurrency business, TD Ameritrade.
Mr D’Aloia himself fell victim to the scam, handing over millions to the imitation brokerage by transferring his cryptocurrency to two wallets that were held with the defendants. He then approached the High Court of England and Wales seeking urgent injunctive relief, as well as a determination as to whether he could serve the defendants, who were outside the jurisdiction, with the documents needed to claim substantive relief.
Decision
The Court held that Mr D’Aloia was permitted to serve unknown persons with the proceedings by way of an NFT airdrop to the wallets that the funds were misappropriated and deposited into.
Service via email was also allowed, though the Court noted that service via an NFT would be quite effective given its effect of embedding the service of the proceedings into the blockchain. This imprints a verifiable record of service on the blockchain, making any coherent objection to service effectively impossible.
Interestingly, the Court was also given reason to find that there was an arguable case that the entities controlling the particular defendant crypto exchanges, held Mr D’Aloia’s identifiable cryptocurrency on trust for him, as constructive trustees.
Importance
This decision represents a novel development in a traditional facet of law. It demonstrates the ability of courts to adapt new technologies and apply them to legal practice, in order to assist people in pursuing justice.
Indeed, in some cases, the immutability of the blockchain and its ability to provide near-instant verification of a transaction, or transmission of information can result in the effective digital service of documents or proceedings without any chance of service being evaded, a courier being diverted, or documents being ‘lost in the post’.
The Court’s opinion in respect of the constructive trustee argument, albeit preliminarily, is also extremely significant. If a crypto exchange holds funds on constructive trust for a defrauded investor, that defrauded investor can have an action for breach of trust against the exchange and a direct avenue to seek relief against the exchange. This should provide hope for victims of digital asset fraud, even where the identities of scammers remain unknown. Crypto exchanges should follow this line of authority, as well as any similar cases following the lead of the Supreme Court of New York or the High Court of England and Wales, very closely indeed.
HopgoodGanim Lawyers has a specialist business unit which focuses on advising clients with business in Australia that relates in any way to; blockchain technology, cryptocurrencies, NFTs, or other digital assets more generally. Please contact Tim Edwards if you have an enquiry.