John Browning looks at the evolution of service by NFT in both the US and UK courts
So you just had the opposing party served with process using a real, flesh and blood human being - how very quaint and 20th century of you. For more than ten years now, courts all over the world have permitted, under the right circumstances, substituted or alternative service to be accomplished using social media platforms. Courts in eight countries, including the United Kingdom and multiple jurisdictions within the United States, have permitted such service. Some American states, like Texas, have even passed statutes specifically addressing this form of service and setting forth rules governing the practice. As one federal judge in New York observed nearly ten years ago in blessing the "relatively novel concept" of service by Facebook, "history teaches that, as technology advances and modes of communication progress, courts must be open to considering request to authorize service via technological means of then-recent vintage, rather than dismissing them out of hand as novel."1
The judge's words have proven prophetic, since 2022 many have ushered in the next step in technology-assisted service of process: perfecting service via the transfer of non-fungible token (NFT) on the blockchain. On June 2, 2022, the Supreme Court of the State of New York granted an order permitting service of court documents via the airdropping of a token on the Ethereum blockchain in the case of LCX AG v. John Does Nos. 1-25. This "service token" was to be served on the anonymous person(s) controlling an Ethereum address via airdropping, with the token containing a hyperlink to a website on which the court papers were published.
The case itself features the plaintiff LCX, a Lichtenstein-based virtual currency exchange, bringing an action for unauthorised access to and theft of nearly $8 million worth of virtual assets from its digital wallets by 25 anonymous "John Doe" defendants. LCX's attorneys at Holland & Knight had traced a $1.3 million portion of the cryptocurrency to a single wallet address on the Ethereum blockchain, but were unable to identify who controlled that address. Ethereum blockchain uses smart contracts that hold the terms of agreements between buyer and seller directly written into lines of code, allowing participants to transact with each other without a central authority like the Federal Reserve System. Even though the defendants had taken various steps to obscure the transaction trail, LCX's lawyers were able to trace at least a portion of the stolen crypto assets.
Concerned that the defendants could sell or transfer the remaining virtual currency at any time, LCX's attorneys sought a preliminary injunction prohibiting such a transfer. They then had to convince a judge or the difficulty in serving the anonymous defendants, after demonstrating that the blockchain showed that the defendants had recently conducted transactions while holding the virtual currency. Fortunately, New York Supreme Court Justice Andrea Masley had educated herself on blockchain issues, and realised that LCX's counsel had provided the court with a mechanism by which the defendants would have notice of the proceedings. Justice Masley issued an Order to Show Cause, noting that the service token's hyperlink would take the defendants to a site with all court documents (including the Order itself, and that this service hyperlink included a means to track when a person clicks on the hyperlink. The court's order stated that "Such service shall constitute good and sufficient service for the purposes of jurisdiction under NY law on the person or persons controlling the Address."
Airdropping tokens from one wallet on the blockchain to another party's wallet is hardly new - it is a method used to transfer cryptoassets 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). But transmission of tokens on the blockchain was rarely, if ever, used for communication purposes. Yet as LCX's lawyers reasoned, there is no reason it cannot be done - after all, NFTs are simply digital packets of information, which may include links to media files hosted elsewhere online. This new method of service bypasses the weaknesses inherent in serving an anonymous defendant through in-person contact or even in a text message, since the location of the defendants and the smartphones they operate remains unknown.
As LCX's counsel explained afterward, their proactive and innovative use of "Web 3.0" was a necessity due to the nature of the crypto space. Frequently, in cases involving theft or fraudulent transfer of virtual assets, anonymity poses a challenge: the only identifier is the wallet address of the receiving entity. "We enacted a mechanism provided by the court that presumes that he will have notice of this, even if he does not ever access the address," they stated. "If he just sticks his head into the sand and never accesses it again, that's the equivalent of him saying 'I'm not going to open that email and that will prevent me from being served.'" As a result of the court's order, the defendants must appear and present evidence to contest the freezing of their assets stashed in the Ethereum blockchain address.
As novel as this approach is, the questions remains - would other courts, including those in the United Kingdom, be similarly receptive? As it turns out, the answer is yes. After all, as far back as October 2009, in an unreported case (Blaney v. Persons Unknown), Lewison J. permitted service of an injunction via Twitter. Alternative service via Facebook, Instagram, and the "contact" section of a defendant's website has been authorised as well under CPR 6.15.2 And in recent cases involving cryptocurrency fraud, a British court has ordered alternative service by email.3 While this form of service might be viable in cases where the claim is against a cryptocurrency exchange or against a wallet for whom the exchange holds personal information like the user's email address, it will not work in situations where the wallet address itself is the only form of identifier.
In July 2022, in the case of D'Aloia v. Binance Holdings and Others, the High Court of England and Wales addressed the anonymous defendant issue, and granted an order permitting service of court proceedings via the transfer of an NFT on the blockchain. Fabrizio D'Aloia, an Italian engineer and the founder of Microgame (an online gambling joint stock company) asserted claims against four cryptocurrency exchanges holding virtual funds of his - Binance, Polo Digital Assets, Aux Caves Fintech, and Bitkub Online - along with software company Gate Technology. The order issued by the Court granted permission for D'Aloia to serve the five cryptocurrency exchanges by means of an NFT airdropped to the two wallets into which he had initially deposited his cryptocurrency (in addition to service by email).
Both the U.S. and U.K. cases are significant for a number of reasons. First, much like earlier cases in which alternative service via email and, later, social media was permitted, service via NFT on the blockchain breaks down one of the key barriers in bringing a claim - being able to locate the anonymous defendant. Such cases also open the door to potentially wider tamper-free disclosure of documents, digital signatures (private key signatures could eliminate arguments of fraud or false signatures), and even dispute resolution on smart contract platforms. Finally, the use of NFTs under the right circumstances removes the need for third-party verification, just as blockchain itself has helped transform the definition of "ownership" as we know it today. In the future, parties might even contractually agree to be served in this manner; conceivably, such a clause could be embedded as code with smart contracts, in which the parties authorize service of court papers on a specific wallet address. In the United Kingdom, for example CPR 6.11(1) allows service "by a method or at a place specified in the contract."
But perhaps the greatest significance of both of these 2022 cases is that they reflect a continued willingness on the part of the courts to tackle the challenges that emerging technologies can present to the legal system, at least in the sense of adapting our means of service to match technology. While the law can never hope to keep pace with technological innovation, it has to at least try. Indeed, in cases with fact scenarios like the LCX and D'Aloia, the fact that the defendants could not be identified and all the complaining party had was a number left very few options but to proceed with alternative service.
There are still questions to be raised regarding service of process via NFT. For example, when is service deemed effective - upon transmission of the token into the defendant's wallet, or not until the recipient clicks on the service hyperlink? According to the approach taken by both the U.S. and U.K. courts, transmission is the necessary step for service to be perfected, but other courts may be more insistent on evidence of the defendant's interaction with the token. This may present a problem, since it is becoming increasingly common for blockchain wallet owners to see malicious tokens being airdropped into their wallets in a Web 3.0 version of phishing. Wary wallet owners can hardly be faulted for their hesitance in interacting with airdropped NFTs or in clicking on hyperlinks from unfamiliar sources. Under such circumstances, how effective will an airdropped token be at providing actual notice of the proceedings or the court documents being served?
Traditional forms of service are not going away anytime soon. Yet as we have already seen with service of process via social media, it is important for lawyers and judges to remain open-minded about technology's benefits and clear-eyed about its risks.
1 Fed. Trade Comm'n v. PCCare247, Inc., 2013 WL 841037 (S.D.N.Y Mar. 7, 2013).
2 See, e.g., Pirtek (UK) Ltd. v. Jackson (2017) EWHC2834 (QB).
3 Danisz v. Persons Unknown and Huobi Global Ltd. (T/A Huobi) (2022).
Hon. John G. Browning is a partner in the national law firm Spencer Fane, as well as Distinguished Jurist in Residence at Faulkner University's Thomas Goode Jones School of Law. A former Justice on Texas' Fifth Court of Appeals, he is the author of several books and numerous articles on law and technology. Justice Browning serves as Chair of the Institute for Law & Technology at the Center for American and International Law, and he is a past chair of the Computer & Technology Section of the State Bar of Texas.