It is estimated that $14 billion of cryptocurrency was misappropriated in 2021 through a combination of scams and thefts. Cryptocurrency’s (relatively) decentralised and anonymous nature creates obvious difficulties for those seeking redress through existing legal remedies. However, the High Court of England and Wales has shown itself willing to tackle the novel challenges associated with crypto disputes head on. By way of most recent example, in a first for the UK and Europe, the court in D’Aloia v Persons Unknown & Others ordered service on persons unknown by non-fungible token (‘NFT’).
The judgment is also of interest in that it establishes that there is a good arguable case that owners/controllers of exchanges into which misappropriated crypto assets are transferred are constructive trustees of those assets.
The claimant, Mr D’Aloia, alleged that he had been the victim of a scam to induce him to transfer over 2.3 million cryptocurrency coins to a website fraudulently representing itself to be connected with a US-regulated online broker, TD Ameritrade. The website and associated email address were in fact registered in Hong Kong, had no connection with TD Ameritrade, and were operated by persons unknown.
Mr D’Aloia made numerous deposits into two named wallets and traded using the website’s facilities, which reflected the gains and losses arising from the trades as expected. After some time, Mr D’Aloia’s open trades were unexpectedly closed. Having submitted a withdrawal request from his trading account, Mr D’Aloia was blocked from his account, which subsequently showed a zero balance.
An investigative report commissioned by Mr D’Aloia established that over 2 million of the coins deposited by Mr D’Aloia had been transferred to a number of private addresses and exchanges operated by, or under the control of the second to seventh defendants.
Mr D’Aloia issued proceedings against the first defendant for fraudulent misrepresentation and deceit, unlawful means conspiracy, and unjust enrichment, and against the second to seventh defendants as constructive trustees of the misappropriated coins transferred to their exchanges. He then made an application for (among other things) service on the first defendant by alternative means and service on the second to seventh defendant out of the jurisdiction.
Service of proceedings by alternative means
Civil Procedure Rule (‘CPR’) 6.3 sets out permitted methods of service, namely: personal service, first class post, document exchange, leaving it at a specified place, fax or other means of electronic communication.
Where service is not possible in accordance with those specified methods, CPR 6.15 provides for the court to make an order permitting service by an alternative method or at an alternative place ‘where it appears to the court that there is a good reason’ to do so.
Prior to this judgment, the courts have permitted service via Instagram, Facebook, and a contact page on a defendant’s website. In this case, it was submitted that service via NFT was the most appropriate method of bringing the proceedings to the attention of the first defendant. The NFT containing a link to the court documents could be airdropped into the two digital wallets into which Mr D’Aloia had transferred his cryptocurrency, thereby embedding the service in the blockchain. The court concluded that this was an appropriate method of service in light of the difficulties that would otherwise arise in attempting to serve the persons unknown.
While this method of service had been adopted just days before in proceedings in the Supreme Court of the State of New York, this was a first in the UK and Europe.
Permission to serve out of the jurisdiction
For an English court to grant permission to serve out of the jurisdiction, it must be satisfied of the following:
- that there is a serious issue to be tried;
- that one of the ‘jurisdictional gateways’ applies; and
- that there is sufficient connection to the jurisdiction.
Regarding the serious issue to be tried as against the second to seventh defendants, prior to this judgment, the English courts had not considered the question of whether owners and/or controls of digital asset exchanges could be deemed to be constructive trustees of misappropriated assets transferred to them. However, the court dispensed with the point surprisingly briefly, finding that ‘there is a good arguable case to that effect’.
Regarding the application of a jurisdictional gateway, CPR Practice Direction 6B paragraph 3.1(15) provides a gateway for claims made against defendants as constructive trustees.
Regarding the sufficient connection to this jurisdiction, the court noted that the lex situs of a crypto asset is the place where the person who owns it is domiciled (as discussed in Ion Science Limited & Duncan John v Persons Unknown & Others (unreported)  (Comm), paragraph 13). Accordingly, as Mr D’Aloia had at all material times been present in England, there was a good arguable case that the misrepresentations were made to him in England in respect of assets located in England.
As all three criteria had been met, the court granted permission to serve the proceedings out of the jurisdiction.
This judgment signals a welcome enthusiasm to embrace new technologies in the advancement of access to justice in crypto disputes. While the circumstances of this case made service by blockchain technology an obvious (albeit novel) choice, it remains to be seen whether service by this alternative method will be granted in disputes not involving crypto assets.
The finding that there was a good arguable case that the exchanges are constructive trustees of misappropriated assets is significant. The final determination of this issue is eagerly awaited.
 Chainalysis, 2021 Crypto Crime Report
  EWHC 1723 (Ch)