LCX AG, a cryptocurrency exchange based in Liechtenstein, recently made history and demonstrated how NFTs can add real value in the crypto world. Entering the legal realm of New York LCX was able to demonstrate to a New York court that a strong case could be made that an unknown individual was the likely thief of a significant portion of a January wallet theft (you can read more about the case here). This is most likely only the first of what is likely to become a standard practice in the future digital world.
LCX had recently lost nearly $8 million in digital assets from a cyberattack. The perpetrator’s identity was unknown. Through the public ledger, LCX found the blockchain address that received the stolen assets, and quickly filed a complaint in New York to freeze certain of those assets. Without any other way to contact the perpetrator, the court permitted LCX to serve the wallet address with an NFT containing a hyperlink to the required legal notice documents. This may be the first example of service-by-NFT.
Every jurisdiction has its own rules regarding service of process. Providing legal notice is sometimes done without issue by serving a defendant personally, or even via certified mail or email. However, evasive defendants can make service difficult. Process servers are often hired when parties are resistant or evasive, resulting in some creative services. But even the most imaginative process servers can’t help when the defendant itself is unknown, as is often the case in crypto-fraud.
This innovative use of NFTs by LCX, if it succeeds, could be useful to parties struggling to provide legal notice, particularly victims of cyberattacks and crypto phishing scams, which have cost $1 billion in lost assets for 45,000+ wallet owners, according to the Federal Trade Commission. Other courts may be catching on: a few weeks after LCX successfully petitioned the New York court to send legal notice through an NFT, a London court held that service-by-NFT was valid in a case where the plaintiff was defrauded over $2 million USD in digital assets by a Hong Kong registered trading platform.
Serving a crypto-thief by NFT over the blockchain has benefits. Though the personal identity of a thief may be unknown, the wallet address—a unique string of numbers and letters used to verify transactions on the blockchain—used for the improper transfer of assets is publicly available to everyone on the blockchain. The hyperlink embedded in an NFT ensures that the sender knows precisely when the NFT is opened, indicating that the receiver viewed the court documents. This allows for a quick and easy way to alert an otherwise unreachable party. Because NFTs are digital and non-duplicable, there is no risk of the legal notice being “lost in the mail” or otherwise tampered with during delivery.
Looking forward, it is conceivable that other digital means may be used to try to effect service in the near future. For example, a party might attempt to use the metaverse to serve legal notice on defendants via their avatars in a shared virtual space. Or, perhaps a process server will try to visit a virtual residence or other virtual real estate location to serve court documents to a defendant.
On the other hand, service-by-NFT does have shortfalls. The receiver can simply ignore the NFT and never open the link to the court documents. And though the sender can see when the NFT is opened, there is no way to know who opened it, which may give courts cause for concern.
This is an area to watch but, for the time being, courts will likely view service-by-NFT as a last resort. Parties should continue to follow existing procedures in the relevant jurisdiction, including federal, state, and other local legal notice rules; as yet, there is no guarantee that a particular court will consider service-by-NFT sufficient. Based on precedent, we expect courts will at least mandate a showing that a defendant cannot be reached by other means prior to approving this alternate method of service.
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