Crypto Asset Litigation: How Courts tackle procedural roadblocks

Introduction

The intricate, pseudonymous, and decentralised nature of crypto asset transactions has ushered in a new era of legal challenges, significantly diverging from traditional commercial litigation. Navigating this complex landscape, global courts have innovatively tackled procedural roadblocks to address the unique complexities associated with crypto asset litigation. A notable aspect of this legal evolution is the adaptation of existing remedies to meet the demands of the digital age. This article explores recent developments in crypto asset litigation, highlighting instances where courts have applied inventive measures to serve justice in cases involving persons unknown. From groundbreaking approaches to service of process, such as the use of Non-Fungible Tokens (NFTs) in English, New York, and Singapore courts, to disclosure and information orders compelling foreign cryptocurrency exchanges to disclose critical details, and enforcement strategies involving the conversion of crypto assets to fiat currency, the judicial responses underscore the dynamic nature of the legal landscape surrounding crypto assets. These cases not only exemplify the adaptability of legal systems but also underscore ongoing efforts to establish precedent in this rapidly evolving domain.

Service of Process

In D’Aloia v Persons Unknown [2022] EWHC 1723, the English High Court authorised the victim of a $2.3 million scam to serve claim documents and injunction orders to unidentified fraudsters by airdropping an NFT directly to the wallets where the victim had transferred his USDT and USDC. The Court justified the use of NFT airdrop for service, stating that it is expected to enhance the likelihood of those responsible for the scam being informed about the court’s order and the initiation of legal proceedings.

In LCX AG v John Doe Nos. 1-25 (Docket No. 154644/2022), the New York Supreme Court allowed LCX, a cryptocurrency exchange that fell victim to an $8 million hack, to serve claim documents and injunction orders to the unidentified hackers through an NFT airdrop. This involved sending an NFT containing a link to the court documents directly to the wallets associated with the majority of the stolen assets. The Court justified the use of NFT airdrop by emphasising that communication through the account using the Service Token represents the digital landscape favoured by the Doe Defendants, and employing a blockchain transaction is the sole available means of communication.

In an unreported case which we are involved in, Steve Kowalski v Persons Unknown (HC/S 400/2021), which was likely the first injunction against persons unknown in Singapore, the Singapore High Court authorised substituted service via email which was provided by the cryptocurrency exchange after a third-party disclosure order was secured against the cryptocurrency exchange. The Court accepted that since the email addresses were provided by the unknown defendants to open their accounts with the exchange, it would likely be effective to bring the legal proceedings to their attention. Moreover, the email addresses were the only known contact details of the unknown defendants.

In CLM v CLN [2022] SGHC 46, the Singapore High Court again authorised the victim of stolen cryptocurrency assets to employ substituted service, delivering court documents to the unidentified defendants via email. This approach became necessary as personal service of legal papers proved impractical, given the unknown physical locations facilitated by the use of VPNs. Similar to the case which we were involved in, the primary factor justifying this method was that the defendants had established their exchange accounts through email, making email addresses the crucial point of contact between them and the cryptocurrency exchanges. Consequently, serving the Writ via email was deemed effective in bringing the legal proceedings to their attention.

In Janesh s/o Rajkumar v Unknown Persons [2022] SGHC 264, the Singapore High Court permitted the victim of a stolen NFT to employ substituted service for court documents on the unidentified defendant through social media channels, specifically the defendant’s Twitter and Discord accounts. The Court, using its discretion, approved this alternative method, emphasising that refusing it would deny the claimant the only practical means of serving the defendant.

Adopting the approach of other foreign common law jurisdictions, earlier this year in May 2023, and in an unreported case, the Singapore High court granted permission for the client of a cryptocurrency exchange that fell victim to a $3 million hack, to serve claim documents and injunction order to unidentified hackers via NFTs. This involved sending a NFT containing a link to the court documents directly to the multiple wallets associated with majority of the stolen assets. This was likely the first time a Singapore Court has ordered service by way of transfer of NFT.

Information and Disclosure Orders

In Ion Science Ltd v Persons Unknown (unreported, 21 December 2020), the English High Court issued disclosure orders under the Bankers Trust jurisdiction and/or CPR 25.1(g) against various foreign cryptocurrency exchanges. This action aimed to uncover the true identities of individuals implicated in an alleged fraud. A notable feature of this case was the unique circumstance wherein these orders were pursued against entities located outside the UK independently, without seeking any positive remedy from the cryptocurrency exchanges aside from obtaining information. The court justified this decision based on three primary considerations: firstly, there were substantial grounds to believe that the crypto assets belonged to the claimants; secondly, there was a genuine prospect that the sought information would facilitate locating and safeguarding the property, as well as identifying the recipients of said property; and thirdly, the benefits to the claimants outweighed any potential detriment to the cryptocurrency exchanges. In aligning with the third consideration, the court specified that the claimants must commit to using the disclosed documents solely for the specified purpose, cover the cryptocurrency exchanges’ compliance expenses, and provide compensation for any loss incurred if the interim order was later found to be wrongly made.

In the case of Steve Kowalski v Persons Unknown (HC/S 400/2021) which we are involved in, in addition to securing a worldwide freezing injunction to prevent the unknown defendants from dissipating their assets, we had also applied for and obtained third party disclosure and information orders from the cryptocurrency exchange, its related entities, and its representatives. This is likely the first case in Singapore where third party disclosure orders had been secured against (i) a foreign cryptocurrency exchange, (ii) an employee acting in the capacity as an agent of its employer, and (iii) the controller of a social media account.

Enforcement via Conversion of Crypto Currency to Fiat Currency

In Joseph Keen Shing Law v Persons Unknown & Huobi Global Limited [2023] 1 WLUK 577, the English High Court ordered a cryptocurrency exchange to transfer a defendant’s cryptocurrency (which was held outside the jurisdiction) into the jurisdiction. This action was taken to facilitate the claimant’s efforts in enforcing a judgment against those assets. Per the court’s directive, the cryptocurrency was to be initially converted into fiat currency and then transferred to the Court Funds Office, either directly or through the claimant’s solicitors. The exchange neither consented to nor contested the order. The court justified this exceptional measure, citing the potential for circumstances to change to the detriment of the claimant, despite the exchange’s current cooperation in preventing other defendants, who defrauded the claimant, from accessing their accounts. The court expressed concern that, given the exchange’s location outside England and Wales, it lacked control over potential future developments.

Conclusion

In summary, crypto asset litigation reflects a dynamic legal landscape adapting to the challenges of decentralised transactions. From innovative service methods like NFT airdrops to strategic disclosure and information orders targeting foreign exchanges, global courts demonstrate agility in addressing the complexities of this evolving field. Cases exemplifying a commitment to justice through inventive approaches underscore the adaptability of judicial systems. The nuanced handling of information orders reflects a keen understanding of the need for cooperation from foreign entities, showcasing a meticulous balance between claimant’s rights and potential harm to cryptocurrency exchanges. These cases serve as pivotal markers in establishing a framework for handling disputes, emphasising ongoing efforts to strike a balance between innovation and accountability in the evolving realm of crypto asset litigation.

This article was authored by our Managing Partner and Head of Dispute Resolution, Bazul Ashhab, and Partner Lionel Chan. The authors thank Brandon Lim, from the University of Cambridge for his valuable assistance with the article.

 Oon & Bazul LLP have substantial experience in tracing and recovering stolen or lost cryptocurrencies. This can often be complex due to the pseudonymous nature of blockchain transactions. We employ various techniques such as blockchain analysis, data analytics, and cooperation with law enforcement and cybersecurity experts which aids us in identifying the perpetrators and tracing the flow of funds. We can help you in the recovery process by collaborating with cryptocurrency exchanges and authorities to freeze and retrieve stolen assets.

 You may visit our Blockchain and Cryptocurrency Disputes page to learn more about our practice.