Cryptoasset fraud poses novel questions on jurisdiction and service of proceedings

The recent judgment in Osbourne v Persons Unknown and another adds to the growing body of English case law on cryptoasset fraud and the willingness of the courts to tackle novel questions posed by such cases. Osbourne sets a precedent as the first judgment to authorise service solely by non-fungible token (NFT). It is also notable for its confirmation that NFTs are property. At the same time, it highlights that cases which almost invariably will span (often multiple) jurisdictions raise issues over the location of such assets and whether or not English court jurisdiction is established.

Background

The case concerns two NFTs which were transferred without the claimant’s knowledge or consent out of her MetaMask cryptoasset wallet and into separate wallets owned variously by unknown persons. The NFTs are two unique digital artworks which make up part of the “Boss Beauties” set of NFTs, depicting inspirational women and conferring upon the holder the ability to attend exclusive virtual events, amongst other benefits. A modest financial value was attributed to the NFTs in the claim itself but the NFTs’ particular, personal and unique value to the claimant was recognised by the court as extending beyond their simple currency value.

The claimant issued proceedings against the persons unknown who had unlawfully gained access to the NFTs. The claimant instructed digital assets tracing company M to M (Mitmark) Ltd to investigate and they traced the NFTs to accounts on online trading marketplace OpenSea and a separate wallet owned by an individual located in South Africa. The claimant sought permission to amend, adding claims against this individual and persons unknown, who were in possession or control of the NFTs, and to serve the claim form on persons unknown and the subsequent transferee outside of the jurisdiction and by way of transfer of NFTs containing embedded hyperlinks directing to the documents being served.

NFTs as property

Mr Justice Lavender noted that recent caselaw had reached the conclusion that cryptoassets such as Bitcoin were capable of being treated as property as a matter of English law. He saw no reason to depart from HHJ Pelling KC’s conclusion (when granting an interim injunction against the first defendants in March 2022) that there was at least a realistically arguable case that NFTs were similarly to be treated as property.

However, the next question for the court was more problematic: did the NFTs constitute property or assets within the jurisdiction? This was important in order to determine whether certain gateways were engaged to permit service of the claim out of the jurisdiction.

In line with earlier cases on the lex situs of a cryptoasset, as well as the views of HHJ Pelling KC in his judgment of 10 March 2022, Lavender J accepted that there was a good arguable case that the two NFTs were located in England and Wales when they were in the claimant’s MetaMask wallet – that is, the lex situs of a cryptoasset is the place where the person who owns it is domiciled.

The judge went on to consider commentary in Dicey, Morris & Collins on The Conflict of Laws, 16th edition, paragraph 23.50 that: “the ‘owner’ should generally be understood to refer to the party in possession of the private encryption key giving access to the cryptocurrency at the time of the relevant transaction. If an encryption key is duplicated, the ‘owner’ should generally be understood as the party who in fact exercises control over the cryptocurrency, for example, through effecting a sale to a third party.”

Using the analogy of a valuable motor car being obtained by fraud and then transported out of the jurisdiction, Lavender J was doubtful that England and Wales remained the situs of the two NFTs. This therefore brought under scrutiny when the property or asset has to be located in the jurisdiction – when the cause of action arises or when the application is made for permission to serve the claim form out of the jurisdiction. He observed that there was caselaw pointing towards the latter but that, in any event, the two NFTs may have left the jurisdiction before any cause of action accrued against the third or fourth defendants (who were the focus of the present application for permission to serve out).

In the event, the judge considered that there was a strongly arguable case that the constructive trust alleged to have been created upon misappropriation from the claimant’s MetaMask wallet was governed by the law of England and Wales and that gateway 15(c) in Practice Direction 6B of the Civil Procedure Rules was therefore engaged to grant permission for service out of the jurisdiction.

Service by NFT

The judgment in Osbourne is notable as well for being the first occasion the court has permitted service solely by NFT. The evidence was that, with the exception of service by email on the fourth defendant, the claimant had no other method of service available other than by NFT sent to the relevant wallets. That was a good reason, in Lavender J’s judgment, for authorising service of the documents by NFT.

One feature of service by NFT in the present case was that, since the NFT was to be “on the blockchain”, the NFTs would be open to the public and the hyperlinks contained in them could be used by anyone to view the documents served. As a result, the court was asked to sanction redaction of the documents to prevent access to personal data. Lavender J was prepared to do this but only on the condition that the defendants would be offered access to unredacted versions of the documents and the only redactions would be those approved by the court.

Comment

Coming at a time when senior judicial figures such as Sir Geoffrey Vos have commented on how the adoption of English law by the crypto sector will be good news for the economy, and the Law Commission considers legislation around digital assets, the judgment is a timely measure of the state of English law for legal practitioners, cryptoasset owners and investors alike.

Close on the heels of D’Aloia v Person Unknown and others, where service via NFT and email was authorised, the decision in Osbourne breaks new ground in permitting NFT as the sole method of service, albeit demonstrating that careful consideration must be given around what information may be publicly accessible and the extent to which this may require protection.

Beyond this point of procedural interest, the judgment makes two important additions to the growing body of jurisprudence on the status of cryptoassets. First, it confirms that NFTs – like cryptocurrency – can constitute property and therefore may benefit from protection through injunctive relief. Secondly, it highlights (but does not resolve) issues that can arise around the ownership of such assets and consequently their location for the purpose of determining jurisdiction. As Lavender J acknowledged, this will require another case to decide.

This article first appeared on the Practical Law website on 13 March 2023 and is reproduced with the kind permission of the publishers.