Haguy Kessel

In several recent precedent-setting rulings, courts in England and New York have allowed plaintiffs in fraud cases involving cryptographic assets to complete service of legal process to unknown defendants directly on the blockchain by depositing an NFT into a digital wallet to which the defendants have access. Said NFT will contain a link to the folder containing the legal documents. Plaintiffs will thus fulfill their obligation to inform the defendants and serve them the legal documents.

This is nothing short of a revolution when it comes to the judicial system adapting to reality in the digital age, where the number of litigation cases involving matters in the virtual and crypto arena is constantly rising and the use of cryptographic assets and currencies is steadily increasing.

A Digital Wallet as an Address for Service of Process

In June 2022, a London court handed down a precedent-setting ruling in a civil suit regarding the theft of cryptographic assets by unknown entities. The judge authorized the claimant to serve legal process to the defendants by transferring an NFT directly into a digital wallet controlled by them. According to the claimant, who is a private individual, he fell victim to a swindle when he deposited cryptographic currencies according to instructions he received on a website that impersonated a legitimate trading platform.

During the hearing of the claimant’s motion to execute “creative” service of process through an NFT, the judge ruled that he was convinced the defendants’ identity is unknown and undiscoverable. Therefore, the judge determined, the only way to serve the defendants was by airdropping an NFT with a link to the folder containing the documents directly into the digital wallet where the plaintiff originally deposited the cryptocurrency. In his ruling, the judge referred to the guiding principle when considering service of process, namely maximizing the likelihood that the litigant will be aware of the proceeding and of the injunctions issued within its framework.

This ruling means the English court has broadened the definition of “substituted service of process” in an innovative manner toward the use of blockchain. This is a necessary evolution of the courts’ approach, particularly as a tool to combat crypto fraud and other crimes committed in virtual space, which will naturally multiply in the coming years with the expansion of activities in the metaverse.

Courts Have Absolute Discretion

Justice Andrea Masley heard a similar case in New York. In the precedent-setting ruling she issued in August 2022, Justice Masley ruled that in circumstances in which the identity of a defendant in cryptographic asset fraud is unknown, a plaintiff may serve legal process to the defendant by depositing a token directly into the digital wallet from which the assets were stolen and withdrawn. This ruling also pertained to a civil suit about the theft of cryptographic currencies by unknown defendants. According to the plaintiff, a service provider and a licensed cryptographic assets exchange in Liechtenstein, it fell victim to a hack of its servers. The hackers subsequently stole about USD 8 million and transferred the funds to various digital wallets.

Like in Israel, New York law grants the courts absolute discretion regarding the method of service or substituted service depending upon the circumstances. This is especially true if proven there is no other way to complete service of process. After the plaintiff convinced the court that the defendants had continuing access to the wallet from which they stole the assets, and that the defendants’ “preferred” mode of communication was through the blockchain by depositing a service token, the court concurred that the only way to communicate with them was in this manner. In its ruling, the court agreed that this mode of communication, carried out by airdropping information in the form of a token directly into a digital wallet, is a prevalent mode of communication in the cryptographic market.

As stated, Israeli law grants courts absolute discretion regarding how to carry out substituted service of process in a way that it deems appropriate under the circumstances, and especially for service of process outside of Israel. It will be interesting to see how the Israeli judicial system, which is also obligated to do everything in its power to keep abreast of technological innovations, will contend with the filing of similar cases. Will it show the same willingness demonstrated by the judicial systems in England and New York to develop innovative judicial tools for combatting digital crimes?

***

Barnea Jaffa Lande Law Firm is at your service for further questions on Blockchain and Cryptographic Law and other related topics. 

***