Blockchain – Crypto Theft – Alternative Service on Anonymous Defendants
Jurisdictions around the world are seeing a marked increase in civil cases related to crypto theft, fraud, and misrepresentation. However, a major stumbling block for plaintiffs is how to serve court documents on anonymous defendants of unknown nationality. A recent case in the United States has set an interesting precedent in dealing with this issue that will likely be reflected in other jurisdictions. The New York State Supreme Court has ordered that documents be served on the anonymous person(s) controlling an Ethereum address by means of a “service token” airdropped into the address (the “Service Token”) . The service token contained a hyperlink to a website where the court documents were posted.
Facts of the case
Plaintiff, LCX AG (“Claimant”), a Liechtenstein-based virtual currency exchange, brought an action for theft of virtual assets against 25 anonymous defendants “John Doe” (“Defendants”). The alleged theft resulted from a hack of one of Plaintiff’s digital wallets, with Defendants transferring approximately US$8 million in virtual assets (the “Stolen Assets”).
Defendants then took numerous steps to obscure the resulting transaction trail, including transferring the stolen assets to Tornado Cash, a mixing service that effectively “washes” crypto assets by breaking the chain link between source addresses. and destination.
Despite these measures, the plaintiff was able to trace the stolen assets through expert tracing services. US$1.3 million of the stolen assets ended up being stored in the cryptocurrency stablecoin known as USD Coin (“USDC”) at a single address on the Ethereum blockchain (the “Address”). The controller of the address was unknown to the applicant.
Center Consortium LLC (CCL) is the entity that governs the USDC protocol and has the power to block individual Ethereum addresses from sending and receiving USDC, a practice known as “blacklisting”. CCL was added as a non-interested party.
Plaintiff, concerned that defendants could sell or transfer the remaining USDC at any time, sought a preliminary injunction and temporary restraining order (1) restraining defendants from disposing of the stolen assets, including those held at the address, and (2) instructing CCL to block the address.
On June 2, 2022, the Supreme Court ordered the defendants to show cause why a preliminary injunction on the terms requested should not be issued (the “Show Cause Order”). Most interestingly, the plaintiff was ordered to serve a copy of the show cause order, along with all related documents, on:
“…the person or persons controlling the address via an Ethereum-based special purpose token (the service token) delivered – air-dropped – into the address. The service token will contain a hyperlink (the hyperlink service) to a website created by [Plaintiff’s attorneys], in which the plaintiff’s lawyers must publish this show cause order and all the documents on which it is based. The Service Hyperlink will include a mechanism to track when a person clicks on the Service Hyperlink. Any such service shall constitute good and sufficient service for the purposes of jurisdiction under New York law over the person or persons controlling the address (the “Service Order”). »
Due to its virtual nature and anti-establishment underpinnings, the crypto space is filled with completely anonymous players. Often, in cases of theft or fraud involving a transfer of assets, the only identifier is the receiving entity’s wallet address. This creates significant problems in serving these anonymous defendants with court documents in a way that establishes a court’s jurisdiction. The service order is a proactive and innovative solution to this problem.
“Airdropping” is a process by which a digital token is sent to a wallet address. The wallet address controller cannot block the airdrop. In this way, an anonymous defendant can receive notice of legal proceedings, whether they want it or not.
In DIFC courts (and other common law courts with similar rules), a potential hurdle is that for a court to order service by alternative means, the court must be satisfied that the alternative means will carry the documents. to the attention of the receiving party. The service token here was a hyperlink to a website, and it is the website that stores the documents to be served. If the portfolio monitor never clicks on the link, have the documents been brought to his attention? Is the service effective in this scenario? This problem is particularly acute in the tech-savvy crypto space, where many avoid clicking on links for fear of hacking and theft of their virtual assets.
In order to circumvent this problem, a plaintiff may consider converting digital scans of Court documents into non-fungible tokens (“NFTs”) and airdropping the NFTs themselves. Arguably, this method means that the court documents were actually received at the address, and not simply linked. Evidence that the wallet is frequently used would also be helpful.
Overall, the New York State Supreme Court should be commended for tackling this difficult issue head-on and seeking to evolve the means of service to match technology. We expect to see similar requests for permission to serve via air-dropped tokens in jurisdictions around the world.