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New Civil Practice Rules...
New Civil Practice Rules Facilitate Process Service by Non-Fungible Token (NFT), E-mail, and Other, ‘Alternative Means’
An online cryptocurrency exchange claims on an earnings statement that a customer’s investment portfolio has shown significant growth in the value of its Bitcoin and Ethereum holdings. The customer, based in London, wants to cash out, and take her gains in cryptocurrency futures in pounds sterling. But in reality, the earnings statement was completely false. Not only was the exchange lying – it no longer returns calls from the client, or her solicitors.
What is more, nobody knows where the cryptocurrency exchange is physically located, but the best guess is that it is overseas, somewhere, and is not governed by the Financial Conduct Authority (FCA) of the U.K.
But how do the lawyers claw back the investment funds from the fraudulent cyber-financiers?
“In relation to proprietary claims, generally it is argued that English law imposes a constructive trust on a fraudulent recipient of property obtained by fraud,” said His Honor Judge Mark Pelling, judge-in-charge of the London Circuit Commercial Court, in a recent speech. “Courts have generally held this principle to apply in respect of crypto assets obtained by fraud.”
To help enforce the remedy of a constructive trust, litigators can now use the new Gateway 23 into Civil Practice Rules, Practice Direction 6B, as probably the best place to start for the solicitors as they seek to identify who the fraudsters are and where they and their money are located.
“The new Gateway will permit the service out of the jurisdiction of a Part 8 claim (for litigation on simple fact situations) for disclosure of information regarding the true identity of a potential
defendant or what has become of the property of a claimant in aid of proceedings which it is intended to commence, without the need to commence Part 7 (money claims) proceedings against persons unknown,” said Judge Pelling. “This will substantially reduce the cost of at least the information gathering stage of the process.”
Financial losses from crypto investments reported during the period from October 2021 to September 2022 rose by 32 per cent year-on-year to £226 million, according to Action Fraud, the UK's national reporting centre for fraud and cybercrime.
“Very often only be possible to serve proceedings either directly using the messaging or email addresses used by the fraudsters when carrying the fraudulent scheme into effect or indirectly by passing pleadings evidence and orders to the entities that provided the wallets used by them to carry the fraudulent scheme into effect,” said Judge Pelling. “This requires an order permitting service by an alternative means.”
Service by NFT
In one recent proceeding, prosecuted by the law firm Holland & Knight, LLP, with a presence both in the financial centers of London and New York, the judge in New York allowed service of process on a cryptocurrency dealer by the very medium of cryptocurrency itself – a non-fungible token – in a multi-milliondollar fraud case.
In an interim relief hearing on 24 June, 2022, High Court Judge William Trower ruled that the plaintiff could serve the summons and complaints to the digital wallets controlled by the defendant who allegedly defrauded him by NFT.
Judge Trower said that this alternative method to effect service was appropriate because “the difficulties that would otherwise arise and the complexities in relation to service on the first defendant mean that good reason has been shown.”
The “service token” may be a key mechanism for serving evasive, anonymous defendants in the blockchain space –where malevolent actors have been able to shield their unjust enrichment by utilising the blockchain’s veil of anonymity. As Judge Pelling noted, this kind of “alternative service” is possible now because of amendments to the Civil Procedure Rules 1998 (CPR), in force from 1 October 2022. The new rules make it easier to seek information orders against non-parties to litigation located outside England and Wales. Other alternative service regularly allowed by courts is by e-mail.
Another recent alternative service case of note is Tax Returned Ltd, R (On the Application Of) v Commissioners for His Majesty's Revenue and Customs [2022] EWHC 2515 (Admin). The judge there authorised retrospective alternative service by e-mail, after initially deciding that e-mail service did not comply with procedural guidelines.
The changes that allow alternative service are found in paragraph 3.1(25) of Practice Direction 6B (PD 6B), which creates a new jurisdictional gateway for service out of the jurisdiction in circumstances where:
"A claim or application is made for disclosure in order to obtain information
(a) regarding:
(i) the true identity of a defendant or a potential defendant; and/ or
(ii) what has become of the property of a claimant or applicant; and
(b) the claim or application is made for the purpose of proceedings already commenced or which, subject to the information received, are intended to be commenced either by service in England and Wales or pursuant to CPR rule 6.32, 6.33 or 6.36” (the New Gateway).
The New Gateway is part of a large number of changes to PD 6B as published in the 149th Practice Direction Update, but this amendment is of particular note for those involved in fraud proceedings with cross-border elements.
The kinds of information orders against non-parties to which the New Gateway may apply include Norwich Pharmacal Orders (NPOs) and Bankers Trust Orders (BTOs).
Judge Pelling also suggested in his speech that new international agreements may, in the long-term, need to be created that put these kinds of cross-border claims for cryptocurrency fraud into arbitration. But there is always the potential issue of the fraudulent party not honoring the arbitration award.
