D'Aloia v Persons Unknown & Others: A step forward for victims of crypto-asset fraud?

The claimant, Mr Fabrizio D'Aloia, brought proceedings against persons unknown, a number of cryptocurrency exchanges and others arising out of what he alleges to be the fraudulent misappropriation of crypto-assets in the form of 2.1 million USD Tether and 230,000 USD Coin, so-called "stablecoins" which seek to "peg" their value to the US Dollar. For more information about stablecoins, please visit our legal briefing "what next for stablecoins?".

Mr D'Aloia alleged that he had been the victim of a scam to induce him to transfer the crypto-assets held in his accounts at Coinbase and Crypto.com to accounts controlled by persons unknown who were operating behind a website with the name "www.tda-finan.com" (the "TDA Accounts").  It having subsequently become apparent to Mr D'Aloia that he had been a victim of fraud, he hired an intelligence investigator, Mitmark, who concluded that it was highly likely that those behind the website had been using it as a way of imitating a well-known brokerage – TD Ameritrade – in order to "con" unsuspecting investors, such as the claimant, out of crypto-assets.

Mr D'Aloia advanced claims in fraudulent misrepresentation and deceit, unlawful means conspiracy and unjust enrichment against the operators of the "tda-finan" website, who were persons unknown; and proprietary claims against six other companies as constructive trustees, who he alleged were the controllers or operators of the crypto exchanges into which (according to the report produced by Mitmark) it was possible to trace the relevant crypto-assets.

The claimant applied to the High Court for an interim freezing injunction to prevent the defendants from disposing of his crypto-assets, as well as a Banker’s Trust disclosure order against the exchanges to compel them to provide him with documents that would help him trace the crypto-assets.  There was clear evidence that all of the exchange defendants, with the exception of the third defendant, were located outside the jurisdiction. The location of the fraudsters was unknown, but there was some evidence to suggest that they may be domiciled in Hong Kong. Mr D'Aloia therefore applied for permission to serve out of the jurisdiction on all of the defendants (with the exception of the third defendant), and by an alternative means.

Mr Justice Trower granted Mr D'Aloia's application for an interim freezing injunction, finding as follows:

1. There was a serious issue to be tried as against the persons unknown based on the evidence put forward by Mitmark. Further, there was a good arguable case that the English courts would be the appropriate forum based on the fact that: (i) the misrepresentations were made in England; (ii) the asset was located in England (because the lex situs of a crypto-asset is the place of domicile of the (rightful) owner); and (iii) the claim would also likely be governed by English law because the damage occurred in England when the asset was misappropriated from the claimant.
   
   
2. There was a good arguable case that Mr D'Aloia had a claim against all other defendants (with the exception of the third defendant, in respect of which there was insufficient evidence) as constructive trustees on the basis that they controlled and operated the exchanges into which the relevant crypto-assets could be traced.
   
   
3. Damages would plainly not be an adequate remedy because they would not prevent further dissipation of the Mr D'Aloia's crypto-assets and the balance of convenience came down firmly in favour of granting the injunction (with Mr D'Aloia providing a cross-undertaking in damages).

Mr Justice Trower also granted Mr D'Aloia's application for a Banker's Trust disclosure order against the exchanges, concluding, amongst others, that: (i) there was a real prospect that the information sought would lead to preservation of the assets because it would help Mr D'Aloia identify the persons unknown; (ii) the balance of convenience came down in favour of granting disclosure in circumstances where the Mr D'Aloia was willing to pay the reasonable costs incurred by the exchanges in providing the information; and (iii) the potential benefits of disclosure outweighed the duties of confidentiality that may be owed by the exchanges to third parties in respect of the information sought. Whilst there is currently some uncertainty as to whether Banker's Trust, as well as Norwich Pharmacal, orders are capable of being served outside the jurisdiction, this issue will be put beyond doubt by the introduction of a new gateway 25 (information orders against non-parties) in Practice Direction 6B on 1 October 2022.

Mr D'Aloia adduced evidence that all of the defendants, with the exception of the third defendant (in respect of which Mr Justice Trower had already concluded that there was insufficient evidence to demonstrate that there was a serious issue to be tried), were located outside the jurisdiction.  It was therefore necessary for the court to consider whether it was appropriate to grant permission to serve out in respect of the substantive relief sought.

Having already concluded that there was a serious issue to be tried against all of the defendants (with the exception of the third defendant), and that there was a good arguable case that the English courts would be the most appropriate forum, Mr Justice Trower focussed his analysis on the application of the jurisdictional gateways. As regards the persons unknown, Mr Justice Trower concluded that gateway 9 (claims in tort) applied because there was a good arguable case that the damage was sustained in England.  There was also a good arguable case that gateways 15 (the constructive trust gateway) and 11 (where the claim relates wholly or principally to property within the jurisdiction) applied in respect of the persons unknown. As regards the remaining defendants, gateway 15 applied on the basis that the transfer of the crypto-assets occurred within the jurisdiction and this was the critical event that underpinned the constructive trust coming into existence. Permission to serve out was therefore granted.  

Mr D'Aloia also brought an application for service on the persons unknown by alternative means, namely, email and an NFT, which the Judge described as a "form of airdrop" into the TDA Accounts into which Mr D'Aloia first made his transfers to those behind the "tda-finan" website.  Mr D'Aloia's solicitor contended that this was a novel form of service, with the advantage being that the claimant would be "embracing the Blockchain technology" because the effect of service via NFT would be to embed the service in a blockchain.

Mr Justice Trower found that there could be no objection to it; rather, it was likely to lead to a greater prospect of those who were behind the "tda-finan" website being put on notice of the making of the order and the commencement of the proceedings.  He was therefore satisfied that, in this particular case, it was appropriate for service to be effected via an NFT in addition to service via email.   The difficulties that would otherwise arise and the complexities in relation to service on the persons unknown meant that good reason had been shown.

Although the English courts have previously granted permission to serve proceedings by alternative electronic methods (including Instagram and Facebook), this is the first time that permission has been granted for service by way of distributed ledger technology, such as blockchain.  This represents a huge step forward for victims of crypto-asset fraud where more traditional methods of service are generally not viable because claims are usually brought urgently, on a without notice basis, against persons unknown whose conventional contact details (such as a physical address) are unable to be identified. It also arguably opens the door for the use of NFTs or other such technology in legal proceedings more generally (i.e. not just crypto-asset fraud) where the whereabouts or contact details of one of the parties is unknown.  That said, it is unlikely that the English courts will accept this as a standard method of service (particularly given that permission is still required for service via email), and so parties will still need to seek the permission of the court to use this method of service, to be determined on a case-by-case basis.

This ruling also demonstrates that the English courts are open to entertaining constructive trust claims concerning crypto-assets, not only against the fraudsters themselves, but also against third-party exchanges. The possibility of such a claim has been lent further support by the Law Commission's analysis in their Consultation Paper on Digital Assets, published on 28 July 2022 (see paragraph 19.51). This would give victims of crypto-asset fraud a means of direct action against exchanges for breach of trust should they fail to comply with their duties as constructive trustees, having been notified that they are in the possession of fraudulently misappropriated crypto-assets. Exchanges should therefore take robust steps to ringfence identifiable crypto-assets that are the subject of a potential dispute.

The full judgment is available here: D'Aloia v Person Unknown & Ors [2022] EWHC 1723 (Ch) (24 June 2022) (bailii.org)