Locke Lord QuickStudy: Service of Proceedings via NFT on the ‎Blockchain – a Novel Fad or the Future of Civil ‎Procedure?‎

Locke Lord LLP
June 21, 2022

On 2 June 2022, the Supreme Court of the State of New York granted an order permitting service of court proceedings via the transfer of a token on the Ethereum blockchain in the case of LCX AG, -v- John Does Nos. 1 – 25.

This order is a noteworthy development in the area of service of court documents and a welcome example of a court embracing new technology. In granting the order, the Court permitted service via the so-called realm of “Web 3.0”,[1] by way of ordering that a non-fungible token (“NFT”) be airdropped into a wallet controlled by the anonymous defendant. This approach is a step beyond methods of service from the Web 2.0 era which have been considered novel until recently, such as service of proceedings via social media or online messaging.

This article explores the factual and legal aspects of the LCX decision and considers in particular:

  • whether service by way of an airdropped token on the blockchain will always be viable or effective in practice;
  • whether the English Courts could take similar steps to authorise or recognise service on the blockchain; and
  • to what extent blockchain technology could be deployed in civil litigation more generally going forward.

Background facts

The Plaintiff LCX AG (“LCX”), a cryptoasset exchange based in Liechtenstein, brought proceedings against several anonymous defendants relating to the alleged theft of US$ 8 million in cryptocurrency from one of its digital wallets. LCX traced a US$ 1.3 million portion of the stolen cryptocurrency to a single wallet address on the Ethereum blockchain but was unable to identify the controller of that address, due to the largely anonymous nature of the blockchain network.[2]

LCX applied for a preliminary injunction and restraining order, amongst other things, in order to prevent any further transactions involving the stolen cryptocurrency. LCX’s application was granted, but the most significant aspect of the order[3] was the provision for service, which ordered that:

“… Holland & Knight LLP, Plaintiff’s attorneys, shall serve a copy of this Order to Show Cause, together with a copy of the papers upon which it is based, on or before June 8, 2022, upon the person or persons controlling the Address via a special-purpose Ethereum-based token (the Service Token) delivered-airdropped into the Address. The Service Token will contain a hyperlink (the Service Hyperlink) to a website created by Holland & Knight LLP, wherein Plaintiff’s attorneys shall publish this Order to Show Cause and all papers upon which it is based. The Service Hyperlink will include a mechanism to track when a person clicks on the Service Hyperlink. Such service shall constitute good and sufficient service for the purposes of jurisdiction under NY law on the person or persons controlling the Address.” (Emphasis added)

In simple terms, delivery of a token by “airdrop” involves a party sending that token from one wallet on the blockchain to another party’s wallet on the blockchain, typically on an unsolicited and unexpected basis. The airdrop mechanism has been used in recent times primarily as a way to gift new tokens or other cryptoassets to existing holders of cryptocurrency or NFTs, typically as a gesture of goodwill for their support of the existing token.[4] The transmission of tokens on the blockchain is rarely, if ever, used for communication purposes in the way that fax or email technology is used, but there is no reason in principle why blockchain cannot be used for such purposes – after all, tokens are simply digital packets of information (which can include links to media files hosted elsewhere on the internet, if not embedded in the token itself).

Potential issues with the Service Token mechanism

The transmission of court documents (or a link thereto) in the LCX case seems to have been the only way to effect service of the court documents on the alleged wrongdoer in the circumstances, i.e. where the identity and residence of the party controlling the wallet address was unknown.

However, this method of service raises a number questions:

  • When service takes effect: The language of the order is ambiguous as to whether service takes effect upon (a) transmission of the token into the Defendant’s wallet, or (b) the recipient clicking on the Service Hyperlink. However, it is understood that the Court viewed transmission as the relevant step for service to take effect. This is the pragmatic approach and reflects how rules on service generally operate. In many jurisdictions the serving party need only take a specified step (e.g. placing a letter in a post box or sending an email). Under English law, there is no obligation to ensure that the party being served actually reads the court documents, although it is good practice to obtain evidence of transmission/delivery in any event.
  • If/when the Defendant will discover the token: The recipient of a Service Token may not realise that they have received it. Owners of wallet addresses do not typically receive an alert when a token is transferred to their wallet. Indeed, many conventional wallet interfaces (e.g. Metamask) will not always show a token in a wallet unless the user manually adds it to their wallet as a custom token. In practice, a user may therefore only discover the token by chance when viewing the contents of their wallet on a blockchain explorer, [5] or via an NFT marketplace that displays all tokens in their wallet.[6]
  • Best practice to avoid interacting with tokens: It is increasingly common for blockchain wallet owners to see malicious or spam tokens airdropped into their wallets[7], in what is essentially a Web 3.0 version of phishing. If malicious tokens are interacted with, they can do anything from directing wallet owners to fraudulent websites, to executing smart contracts that dissipate the entire contents of an owner’s wallet. It is therefore good practice for parties in control of a wallet never to interact with airdropped NFTs or click on hyperlinks from unfamiliar sources. With this in mind, the transmission of important legal documents via an airdropped NFT may well be ignored by the recipient.[8] Although the Service Hyperlink in the LCX case will show if/when the token is interacted with, it would be a logical starting point to assume that any prudent, security-conscious recipient would be minded not to interact with the token. As such, it is debatable as to how effective a token airdrop would be to give the recipient actual notice of the proceedings or court documents being served. The mechanism is likely to rely on constructive notice, much in the same way that serving documents by post or email work (i.e. it does not matter whether the party being served has actually seen the documents, so long as the serving party has taken the relevant step to effect service).
  • Privacy law issues: There may be further difficulty implementing the token and tracking mechanism lawfully in the UK and EU due to privacy legislation, including the Data Protection Act 2018, the General Data Protection Regulation and The Privacy and Electronic Communications (EC Directive) Regulations 2003 (to the extent cookies are used for tracking). It may be that the website hosting the Service Hyperlink can deal with this by directing users to an appropriate privacy policy and/or cookies policy, but this would need to be considered on a case-by-case basis. Furthermore, the fact that the blockchain is public means service via airdrop (including when linked to documents hosted on a public website) may be impractical in cases where the court documents contain confidential or private information, particularly in the case of an injunction.
  • Immutability of the blockchain: Another inherent feature of the blockchain is its immutability – i.e. information on the blockchain cannot be deleted. Furthermore, the inability to delete data is generally contrary to UK/EU privacy legislation, due to data subjects having the right to request the deletion or revision of their personal data. This (together with the privacy issues noted above) means that it may be never be practicable to host court documents on the blockchain itself – parties will always need to rely on conventional internet sites to host information and/or documents (as was the case in LCX), with the blockchain token functioning more like a digital sign-post.
  • Technical expertise and practicalities: Few law firms will have the in-house expertise, systems and IT/risk policies to enable them to create a NFT, send it via the blockchain and upload relevant documents to their website, especially at short notice in time-sensitive litigation. Firms attempting to serve documents in this way may need to rely on third parties to implement such mechanisms and it could take a number of days to make such arrangements and effect service. This will need to be considered carefully when deciding whether service via blockchain is actually viable in practice.

Could an English Court authorise or accept service by way of a service token?

Whilst the English Courts have embraced technology in recent years, such as the e-filing of Court documents and video hearings (particularly as a result of the Covid-19 pandemic), the methods of service permitted by Rule 6 of the Civil Procedural Rules (“CPR”) remain somewhat quaint (although not without good reason).

CPR 6.3 permits service of a claim form via: (a) personal service, (b) first class post; (c) leaving it at a certain address (i.e. the last known residence of an individual, the principal office of a company, or on the defendant’s solicitors if the defendant has so agreed) and (d) fax or means of other electronic communication. Service by fax or electronic means is only permitted where the party to be served or their solicitor has indicated in writing a willingness to be served by such means, so these methods are generally not viable for claims brought urgently or on a without notice basis.[9]

Where a party wishes to serve by means other than those stated above, they may apply to the Court under CPR 6.15 for an order for alternative service. The Court will only make an order for alternative service if there is a “good reason” to do so. Alternative service via various online methods has previously been authorised by the English Courts under CPR 6.15, including Instagram, Facebook and via a “contact” section of the Defendant’s website, in the context of a defamation claim.[10] The Court has not always waited until the technology or platform has become widely used – in the unreported case of Blaney v Persons Unknown (October 2009), Lewison J permitted service of an injunction via Twitter, still a relatively new social media platform at the time.

In recent cases of cryptocurrency fraud, the English Court has ordered alternative service by email.[11] This method of service is viable where the claim is against a cryptoasset exchange, or against a wallet for whom the exchange holds corresponding personal information, such as the user’s email address.[12] However, there may well be cases where a defendant’s wallet address is not hosted on an exchange and has no association with any personal data, such that the wallet address itself is the only form of identifier. The English Courts ought to consider that such circumstances constitute a good reason to allow service on a blockchain address, particularly if time is of the essence to avoid the dissipation of assets – indeed it may be the only way to serve a defendant effectively.

Finally, it is worth noting the theoretical possibility of service via the blockchain pursuant to an agreement between parties. CPR 6.11(1) provides that a claim form may be served on a defendant “by a method or at a place specified in the contract” where a claim is started “solely in respect of that contract”. This is unlikely to be of assistance in cases involving alleged theft of cryptoassets by anonymous third parties; however, in the future, clauses could be included in commercial contracts or embedded as code within smart contracts, by which the parties authorise service of proceedings on a specified wallet address. This concept is untested by the English Courts and many difficulties could arise in practice, including with respect to jurisdiction,[13] privacy[14] and the validity or enforceability of such agreements.[15] However, if (or when) parties become better versed in blockchain technology, this may be a viable approach to service in some situations.

Other uses of blockchain technology in litigation

The service of court documents is just one potential application for blockchain technology in litigation.

The Law Society of England and Wales recently published the Second Edition of “Blockchain: Legal and Regulatory Guidance”.[16] The guidance clearly demonstrates that the judiciary is aware of the technology and willing to embrace it in principle, if not (yet) in practice. The guidance raises the prospect of distributed ledger technology (“DLT”) such as blockchain being used in dispute resolution for disclosure,[17] digital signatures[18] and even a species of arbitration conducted in accordance with procedures set out in a smart contract.[19] It has also been suggested by commentators that self-executing judgments on the blockchain may one day become reality:[20] such technology would be revolutionary in cases of urgent or interim relief, particularly where cryptoassets are the subject of the dispute, but may be a number of years away, particularly where the English Court itself is not running on blockchain.

For now, it remains to be seen to what extent the English judiciary will embrace the potential of blockchain technology in practice. Permitting alternative service via such means could be an easy and effective first step to take if the Court is given the opportunity to do so in the near future, particularly in cases of cryptoasset fraud or theft (which are becoming increasingly common).

[1] Web 3.0 is a term commonly used to refer to the internet based on blockchain technology. Web 2.0 refers to the internet built on and around user-generated content on social media platforms and Web 1.0 referring to the era of read-only web pages created solely by website publishers during the early days of the internet.

[2] Wallets not held via exchanges are generally difficult, if not impossible, to associate with the person(s) controlling them.

[3] For more information, click here

[4] For example, holders of so-called “Bored Ape Yacht Club” NFTs were airdropped a proprietary “ApeCoin” token in March 2022.

[5] Such as Etherscan, in the case of wallets on the Ethereum network, which lists the full contents of all blockchain addresses and provides a log of all transactions conducted by every wallet addresses on the network.

[6] Such as OpenSea, Coinbase NFT or LooksRare.

[7] Ape-themed airdrop phishing scams are on the rise, experts warn

[8] The same may be said for service by email (i.e. a prudent email user would be well advised not to click on hyperlinks of an email they are not expecting to receive), which is consistent with the restrictive approach taken by the English Courts and civil procedure rules which only permit service by email where the recipient has expressly agreed to be served by such means, as discussed further below.

[9] The Supreme Court in the United Kingdom has taken a firm stance on refusing to permit service by email in circumstances where the defendant has not clearly indicated a willingness to be served by such means, even though parties and the solicitors will conduct virtually all of their correspondence via email: Barton v Wright Hassall LLP [2018] UKSC 12

[10] Pirtek (UK) Ltd v Jackson [2017] EWHC 2834 (QB)

[11] Danisz v Persons Unknown and Huobi Global Ltd (T/A Huobi) [2022]

[12] Most exchanges should hold this information on their users under KYC/AML laws, but this may depend on (i) the jurisdiction in which the exchange or user is based and (ii) the extent to which the exchange is compliant with applicable KYC/AML laws.

[13] If the defendant is located out of the jurisdiction (or the defendant’s location is unknown, which may be the case if they are only identifiable by reference to a wallet address), service out of the jurisdiction will likely require the permission of the Court.

[14] As stated above, all information on the blockchain is capable of being viewed by the world at large.

[15] Few (if any) consumers or their lawyers have the ability to read smart contracts, which comprise lines of code rather than clear, prosaic language. A party served via the blockchain pursuant to an alleged agreement for blockchain service may be able to argue that they never agreed to such a provision and/or that such a clause should be void on grounds of unfairness.

[16] Blockchain: legal and regulatory guidance (second edition)

[17] DLT may allow for a secure, encrypted platform on which parties can host documents in a way that removes the risk of tampering or removal.

[18] For example, private key signatures being used as an alternative to wet-ink or modern digital signatures of documents used in litigation, to reduce arguments of fraud or false signatures.

[19] Kleros is an example of a decentralised dispute resolution protocol for use on smart contract platforms: click here

[20] Zhen Er Low, Commentary, Execution of Judgements on the Blockchain- A Practical Legal Commentary, Harv. J.L. & Tech. Dig. (2021): click here