Substituted service via NFTs: Coming soon to Australia? – Court Procedure

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).

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.