Freezing orders brought onto the blockchain and service of proceedings via NFTs

The challenge of enforcing court orders in respect of cryptocurrencies may become easier, following the settlement announced last week between the Bitcoin Association for BSV and Tulip Trading Ltd (TTL). This follows the significant case brought by Dr Craig Wright against a number of blockchains and their developers in 2021: Tulip Trading Limited v Bitcoin Association for BSV [2022] EWHC 667 (Ch) (discussed in our previous blog post).

While courts have previously demonstrated a willingness to issue freezing orders in respect of digital assets that have been misappropriated in hacking incidents (see, for example, Ion Sciences v Persons Unknown (unreported) 21 December 2020 (Commercial Court), considered here), the ability to give practical effect to these orders on a blockchain has been generally limited to enforcement via exchanges.

As part of the settlement with TTL, Bitcoin Association has agreed to release software which will make it possible for a Notary Service Provider to verify court orders asserting the rightful ownership of coins misappropriated in hacking incidents, and broadcast them to mining networks in machine readable language to allow miners to freeze these coins.

In a separate development in the US court, service of documents has been permitted via non-fungible token, raising the question of when the English court will be asked to permit service to be effected in a similarly innovative manner to a pseudonymous counterparty.

The new software

In its public statement regarding the settlement, Blockchain Association noted that the software was aligned with Blockchain Association's existing goal: "To equip the digital currency and blockchain industry with the technical mechanisms and industry best practices to provide remedies, upon valid proof of ownership and with judicial due process, to restore control of lost or stolen coins to their rightful owner – just as there are remedies available for any asset or property (physical, digital, intangible or otherwise)."

The promised software, which was already in development prior to the settlement, builds on a release Bitcoin Association made in October 2021. As well as developing the software, the group will endeavour to procure a Notary Service Provider to execute the notary aspects of the process as an independent entity within a 30-day period. The functions of the Notary Service Provider will include:

• validating a court order;
• translating it into machine-readable language; and
• broadcasting it to miners.

Once notarised, Miners who have installed the software will decide if they trust the information received from the Notary Service Provider, and (if appropriate) take action to freeze the coins in question. Bitcoin Association will have no role in installing, implementing or enforcing the software, though Miners who decide not to do so will be in breach of the network rules, and may face action for contempt of court and the risk of their blocks being orphaned from the network.

What does this mean for the industry?

Once implemented, this software may be considered by other blockchains and by users as setting a precedent for what can be done to address cases of fraud – though the possibility exists that some will reject this solution as contrary to cryptocurrency's original ethos. While cryptocurrencies are still considered to carry inherent and external risks (look no further than the current market volatility), if implemented, this software would go some way to mitigating the threat of hacks and other attacks that have affected the cryptocurrency industry over the past years. By increasing the alignment between the way that ownership rights can be enforced in respect of digital and traditional assets, this software could increase public trust in cryptocurrency, and lay further groundwork for its mainstream adoption.

Serves them right – cryptohackers served using a novel NFT

The Supreme Court of the State of New York has also broken new ground in allowing Holland & Knight, the legal representatives of LCX, to serve a temporary restraining order to a pseudonymous defendant via non-fungible token (NFT). Called a "service token" or "service NFT", the novel NFT can be publicly found on the Ethereum blockchain, and links to a copy of the order on the law firm's website.

LCX is a regulated fintech company that focuses on digital asset trading, compliant token offerings and tokenization. In January 2022, it was the subject of a US$8m hack – about 60% of the funds have now been frozen, including:

• 500 ETH frozen under a Liechtenstein court order served in Ireland on Coinbase Europe; and
• 3 Million USDC frozen in Centre Consortium under a US court order from the Supreme Court of New York, blacklisting the hacker wallet.

With this development in the US, it seems a matter of time before a similar approach is proposed in the UK. The English court has already been sympathetic to the challenges of effecting service on pseudonymous defendants in cases of cryptocurrency hacking and fraud, permitting email service where no defendant identity or address could be obtained (see, for example, AA v Persons Unknown [2019] EWHC 3556 (Comm)).  The English court has also permitted service of court documents through various social media platforms (Facebook Messenger, WhatsApp, LinkedIn) and through virtual data rooms.  It seems plausible that the English court will be asked to extend the methods of permitted service to NFTs in the not too distant future.

Note: Since publishing this blog post, there has been an English court decision (reportedly the first outside the US) permitting service of court proceedings via NFTs: D’Aloia v Persons unknown and others [2022] EWHC 1723 (Ch).