In recent years, the introduction and rise of use of blockchain technology, cryptocurrency and non-fungible tokens (“NFTs”) across the globe has led to booms in technology and finance.Unfortunately, this same technology has opened up fertile grounds for wrongdoers to exploit this novel digital landscape, defrauding unsuspecting individuals with relative ease and evading the legal ramifications, due to the anonymity associated with cryptocurrency coupled with minimal regulatory oversight.
As a result of the above, the Hong Kong Courts have started to grapple with the challenges and complexity of crypto-related crime, seeking to devise innovative approaches to counteract the ever-evolving challenges in this digital landscape.
One challenge that is all too common in such cryptocurrency frauds arises from the anonymous nature of cryptocurrency and blockchain technology. While this anonymity has certain benefits, it is a double-edged sword that fraudsters can wield to hide their identities and locations when perpetrating such frauds on innocent victims. This leads to a challenge faced by many, if not most, victims of cryptocurrency frauds: how can they identify the unknown fraudsters and bring the proceedings to their attention.
In a recent case we surpassed this challenge by serving legal documents by NFT following discussions and consultations with First Digital Trust Limited, who advised on the issuance and mechanics of the NFTs.
The Traditional Process of Serving Legal Documents and the Alternate Service
In Hong Kong, Order 10, rule 1, Rules of the High Court (Cap. 4A), requires individuals to be notified of the legal proceedings against them.
Traditionally, the process of initiating proceedings against defendants and service of legal documents often requires in-person delivery or registered post, which can be cumbersome. Alternatives to the traditional forms of serving legal documents range from advertisements in local newspapers to service by way of email or other electronic communications, where such identifying information is known about the defendant.
Issues have arisen due to the intrinsic anonymity of cryptocurrency cases and cybercrime, as the identity of the defendant is difficult to ascertain and often unknown. Fortunately, the law recognizes the practical difficulties of service in circumstances where there is minimal identifying information of the defendants, and the Hong Kong Courts are beginning to permit alternative service methods.
Alternate Service in Cryptocurrency Related Cases
To date, there are a handful of instances where alternative services is required in legal proceedings concerning cryptocurrency fraud in Hong Kong. A notable decision would be Wang Chichen v FeCommerce fDeal Co Limited and other [2023] (HCA 1017/2023), where the Hong Kong Court adopted a similar position in D’Aloia v (1) Persons Unknown (2) Binance Holdings Limited & Others [2022] EWHC 1723 by allowing the claimant to airdrop an NFT with a link to the court documents into the crypto wallet addresses of the unknown defendants. Such an instance indicates the Hong Kong Court’s willingness towards embracing the use of NFT as a viable means of alternative service in the context of cryptocurrency proceedings, where the only available identifying characteristic of the perpetrators is the cryptocurrency wallet address held by them and used to effect the fraud.
Our recent case
In one of our recent cases, our client was induced by unknown fraudsters to pay a large sum of stablecoins, amounting to the equivalent of thirty million Hong Kong Dollars, to a fraudulent cryptocurrency wallet address. The inducement was effected by a phishing scam, whereby our client mistakenly sent the stablecoins to a wallet address created by the perpetrators to mimic that of the intended wallet address. Such a phishing scam is commonly known as ‘address spoofing’ or ‘address poisoning’ and is carried out by creating wallet addresses with identical start and end characters to the intended wallet address. Once a fraudulent wallet address is created by way of spoofing, fraudsters initiate a small amount of cryptocurrency from this fraudulent address to the victim’s wallet, with the hopes that the victim wrongly identifies this amount is sent by the intended wallet address, and would mistakenly send funds to that address in return. As with all cryptocurrency transfers, once the transaction is sent, it cannot be recalled, and the victim’s funds are lost.
As a result of the fraudster’s wallet address spoofing, our client’s funds were erroneously transferred with no ability to ascertain identifying information of the perpetrators, other than their cryptocurrency wallet address and those wallets the funds were further dissipated to. Through our firm, our client attempted to seek legal recourse to retrieve the funds.
To ensure that our client’s assets are protected, we sought and successfully secured a proprietary injunction order to freeze our client’s assets in the defendant’s crypto wallets. In our application for the proprietary injunction order, we requested that alternative service be effected by airdropping NFTs into the fraudster’s cryptocurrency wallet addresses, noting that there were no feasible alternatives to bring the action to their attention.
Following the Court granting alternative service by way of NFT, we initiated the creation of a smart contract on Tron, a decentralized blockchain-based operating system with smart contract functionality, and used it to create eight NFTs. The NFTs containing the proprietary injunction, writ of summons, and other legal documents were then securely and instantaneously transferred to the cryptocurrency wallet addresses of the two defendants.
Our case is an illustrative example of the Hong Kong Courts’ increasing willingness to embrace innovative digital strategies and align itself with broader trends among global legal systems, to counteract these challenges by exploring alternative service methods. The affirmative court ruling on this issue further paves the way for more flexible approaches in crypto cases and ensures that justice is not hindered by traditional barriers. It is worth noting that serving legal documents by NFT does not increase the chance of successfully recovering lost funds.
With the increase of cryptocurrency fraud, more solutions are needed to combat these new areas, with service via NFTs being one of these innovative solutions within existing legal procedures to protect claimant’s interests and to ensure justice is served.
Author: Michael Titus