The English court allows service of the proceedings of the NFT | Dechert LLP

The English court allows service of the proceedings of the NFT |  Dechert LLP
The English court allows service of the proceedings of the NFT |  Dechert LLP

In a recent groundbreaking ruling,1 the English High Court has permitted a claim to be served on a defendant by means of non-fungible tokens (NFTs),2 embrace blockchain technology and take a pragmatic view of the most effective ways to make parties aware.

The facts

Fabrizio D’Aloia (the claimant), an Italian engineer and founder of Microgame (an online gambling technology business), transferred a total cryptocurrency equivalent to around USD 2 million to a trading account via the website between December 2021 and May 2022. The website is alleged to to have been a scam, advertised as being linked to the US-regulated trading platform TD Ameritrade. When the claimant’s trades were closed in February 2022, he submitted a withdrawal request. The account was later blocked and communication with an email address linked to tda-finan prompted the claimant to make a number of further deposits. In May 2022, the claimant realized that he had been the victim of fraudulent activity and instructed an intelligence investigator, who found that the assets had been transferred to several private addresses operated or controlled by five crypto exchanges located in different parts of the world.

The plaintiff sued the stock exchanges and unknown persons responsible for tda-finan, and made claims for, among other things, fraudulent misrepresentation and unjust enrichment. The plaintiff submitted, without notice, applications for:

  • freezing injunctions in respect of the assets transferred to the various wallets;
  • disclosure orders requiring the exchanges to provide information to enable the creditor to trace the assets and/or identify the unknown persons;
  • permission to serve the defendants outside the jurisdiction; and
  • permission to serve the persons unknown by NFT airdrop into tda-finan wallets.
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The decision

Recognizing the urgency of the application, the court granted the orders sought by the claimant (except for a freezing order against one of the defendants). In reaching this decision, the Court made the following main findings:

  1. Service on the unknowns was allowed by means of an NFT airdrop to the crypto wallets that the claimant first made transfers to tda-finan. This form of service, combined with service via e-mail, will increase the likelihood that the operators of the website will be notified of the proceedings. The judge did not think that service from the NFT alone would be appropriate.

  2. Damages will not be a sufficient remedy to compensate the injured party. Any remedy available to the claimant will be “rendered worthless” in the absence of relief limiting the destruction of the assets.

  3. There was a good argument that the assets were held in constructive trust by both the alleged perpetrator(s) of the fraud and the exchanges.3 This is in line with previous preliminary findings from the English courts that we have reported on (available here), but goes further by imposing a constructive trust on the exchanges and the unknown fraudsters. This followed findings by the claimant’s investigator that the assets could be traced to wallets held by the exchanges.

  4. The decision followed previous authorities in finding that the location of a crypto-asset is determined by the location of the owner’s domicile (see, for example, our previous OnPoint, available here). As the owner was domiciled in England, there was a good argument that English law would apply to the dispute as the damage occurred in England when the assets were misused.

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The English courts have long taken a practical view of service, allowing it in new ways, including Twitter, Facebook and text messaging where appropriate.4 This decision further confirms the courts’ willingness to apply existing legal principles to new technologies, and to act quickly to provide remedies to victims of crypto fraud. The option to earn from NFTs in a crypto wallet is a particularly welcome development for claimants where the identity of the defendant is unknown. Furthermore, execution of service via the blockchain provides immutable proof that the service has been executed.

The granting of permission to serve the proceedings by the NFT is believed to be the first in England, and the second in the world only to New York, where in June 2022 a claimant’s lawyers were allowed to serve documents using an NFT linked to the claimant’s representatives website.5 In the New York case – concerning the alleged theft of digital assets worth nearly US$8 million – the order specified that the documents linked from the NFT would use a mechanism to track if and when the link in the NFT had been clicked. Although the English court in the D’Aloia case was only willing to allow service by NFT in connection with service by email, parties may wish to consider the availability of tracking mechanisms when served by NFT (or other alternative means), to strengthen their arguments that the defendant has been made aware of the proceedings.

The authors are grateful to Jennifer Hutchings, trainee solicitor in London, for her valuable contribution to this OnPoint.

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1) D’Aloia v. persons unknown and others [2022] EWHC 1723 (Ch)

2) An NFT is a unique, non-divisible token, usually attached to digital files (such as digital art, or in the case of serving legal proceedings, court documents), that uses blockchain technology to record ownership and validate authenticity.

3) In summary, when property is obtained by fraud, a constructive trust is imposed on the beneficiary so that they have legal title to the assets held in trust for the victim.

4) Blaney v. Persons Unknown [2009] (unreported); AKO Capital LLP & Another v TFS Derivatives & Others [2012] (unreported); and NPV v QEL and another [2018] EWHC 703 (QB).

5) LCX AG v. John Doe No. 1-25

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