English High Court permits service by NFT

In what has been described as an ‘English legal first’, a claimant has been granted permission by the High Court of England and Wales to serve proceedings on ‘persons unknown’ over the blockchain by Non-Fungible Tokens (NFTs).

What are NFTs?

NFTs are digital assets that represent real-world objects such as artwork, music and videos. They are the art collections of the digital world!  

NFTs exist on the blockchain like fungible assets such as cryptocurrencies, but they are non-fungible, i.e. they are unique and cannot be exchanged for one another. 

D’Aloia v (1) Persons Unknown (2) Binance Holdings Limited and others

In this case, the claimant filed a claim in the English Courts against 5 cryptocurrency exchanges. The claimant alleged that his cryptocurrency was being misappropriated by ‘persons unknown’ who had imitated an online brokerage and encouraged him to transfer funds from his crypto wallets to trade on the platform. 

In the first order of its kind in Europe (and second only to an order of the State of New York in June this year), the English High Court granted the claimant permission to serve the proceedings on the persons unknown by way of an NFT airdrop to the two wallets into which the claimant had deposited his cryptocurrency.

The court also found that the cryptocurrency exchange defendants hold the claimant’s identifiable cryptocurrency as constructive trustees, meaning they are at risk of liability for breach of trust if they act contrary to the court’s order and fail to ringfence the identifiable cryptocurrency.

Why is this important?

As the digital world continues to develop and play an increasingly important role in all our lives, the methods of service[1] permitted by courts around the world have had to adapt.

This order is a welcome example of a court embracing new and evolving technology. It paves the way for victims of crypto asset fraud to pursue persons unknown in circumstances where they might not otherwise be able to.

It will be interesting to see whether courts around the world follow suit and allow digital service over the blockchain or other electronic means such as via social media to become the norm in favour of conventional means of service such as post and fax.

On the other hand, crypto exchanges will no doubt be on high alert for a potential increase in claims for breach of trust in respect of misappropriated funds held on their platforms.

What is happening in the UAE?

The UAE has taken a significant step forward in legalising cryptocurrencies and NFTs after His Highness Sheikh Mohammed bin Rashid Al Maktoum, Ruler of Dubai and Vice President and Prime Minister of the UAE, passed the first law to adopt and regulate virtual assets earlier this year.

The law, which applies throughout the Emirate of Dubai, including special development zones and free zones (except the DIFC), creates an advanced legal framework to protect investors and design international standards to govern the virtual asset industry. It also establishes the Dubai Virtual Asset Regulatory Authority (VARA) to regulate, supervise and control virtual asset services. 

This is a significant and exciting step forward in establishing the UAE’s position in the virtual assets sector.

Clyde & Co provides a range of crypto asset and cyber related legal services, including pre-breach cyber services to help companies prepare and reduce the likelihood of an attack being successful, as well as class-leading cyber breach response capabilities.

For more information please contact Lucy Nash and Alexandra Lester.