Cryptoasset claims: High Court considers enforcement of foreign proprietary judgment and the requirements for service by non-fungible token

In a recent decision, the High Court granted permission to serve out of the jurisdiction in the context of a claim to enforce a New York court declaration confirming the claimant's ownership of cryptocurrency recovered following a major hack: Tai Mo Shan Ltd v Persons Unknown [2024] EWHC 1514 (Comm).

The decision is one of the first to consider (albeit at a preliminary stage) the English courts' ability to enforce foreign judgments declaring property rights in relation to cryptocurrency, under the English common law enforcement rules (which operate where there is no applicable enforcement treaty or convention). That will be an issue of growing importance as the volume of crypto-related judgments issued worldwide increases.

The decision is of particular interest for the court's comments on the vexed question of the legal "location" of digital assets. Here, the judge was satisfied (at least to the level required at the jurisdiction stage) that:

• the New York judgment related to "subject matter which was situate in the relevant foreign state" - on the basis that the cryptocurrency was situated in New York when it was stolen because that was the location of the claimant company's central management and control (even though the claimant was Cayman-registered); and
   
• England was the most appropriate forum because (amongst other factors) the recovered cryptocurrency could be treated as now located in England - on the basis that it was held in a recovery wallet controlled by English solicitors.

In addition, the decision adds several nuances to the practice of permitting cryptoasset claims to be served via non-fungible tokens (NFTs) – including:  

• expressly qualifying the permission order to confirm that it did not authorise anything that was contrary to the law of a country where service was effected (which the court considered necessary because a defendant could be located anywhere in the world when they accessed the NFT); and
   
• permitting the served documents to be password protected (apart from those that would be available to non-parties on demand under court rules, such as the claim form and particulars).  
   

Background

The claimant was seeking to enforce in England a judgment it had obtained from a New York state court in relation to a major cryptocurrency hack. That judgment had been obtained in default of a defence by the unidentified fraudsters.

The High Court enforcement action was limited to one element of the New York judgment - a declaration confirming the claimant's ownership of cryptoassets held in a recovery wallet controlled by the claimant's English solicitors (following earlier High Court proceedings in which the assets had been seized in an "ethical hack" ordered by the court).

The claimant applied to the High Court for permission to serve the claim form and particulars of claim on the "persons unknown" defendants out of the jurisdiction and by alternative means – namely, transmitting NFTs containing a hyperlink to the claim documents and supporting materials to specified digital wallets associated with the fraud.
 

Decision

The court (His Honour Judge Pelling KC) granted permission to serve the claim out of the jurisdiction and to do so by the alternative method of NFT drop (with specified conditions).

Permission to serve out

The judge applied the standard three-limb test for permission to serve proceedings out of the jurisdiction:

1.  A good arguable case (or plausible evidential basis) that the claim falls within one of the jurisdictional gateways in Practice Direction 6B.

There was no difficulty in accepting that the claim to enforce the New York judgment met that threshold in respect of Gateway 10: "A claim … to enforce any judgment or arbitral award."  However, to the extent that the claim form also sought a number of freestanding declarations from the High Court, that relief was not covered by Gateway 10 and would need to be the subject of a separate application to serve out if it was to be pursued.
 

2.   That England is clearly the most appropriate forum for the proceedings.

The judge considered this requirement to be satisfied on the basis that the cryptoassets in the recovery wallet were presently located (or at least it was realistically arguable that they were to be treated as located) in England, because the wallet was controlled by solicitors based in England.  In any event, that made the English court clearly the most appropriate forum because of the connection with the earlier High Court proceedings and the fact that the claimant would now be seeking orders releasing the solicitors from undertakings to the court so they could transfer the cryptoassets to the claimant.
 

3.   A reasonable prospect of success on the claim (ie the enforcement action).

The judge regarded this as the main issue. He was satisfied that the New York judgment, to the extent it was based on equitable subrogation, contained a declaration as to the proprietary interests of the claimant and so was a judgment in rem (ie in respect of a thing, rather than as against a person). The judge therefore considered the following aspects of the common law test for enforcement of a judgment in rem: 

(i)  Local subject matter:  The foreign judgment must relate to subject matter which is situated in the relevant foreign state (referred to in the judgment as Dicey Rule 47, though it is Rule 50 in the current edition of Dicey, Morris & Collins on The Conflict of Laws).  As to that, the judge reasoned as follows:

• As the judgment was of a New York state court, it might be argued that the relevant "foreign state" was the state of New York, rather than the entire US as an international state. Even if so, the judge considered the test satisfied here, at least to the evidential and legal level required on an application to serve out. Under English law principles, it was at least arguable that New York was the situs of the cryptocurrency stolen from the claimant at the time it was stolen, because although the claimant was a Cayman registered company its central management and control was located in New York.
   
• In any event, the judge was satisfied to the relevant standard that it was appropriate to look to the US as a whole, in which case he considered "no particular problem arises" (though the judgment does not say why the cryptocurrency might be considered to be situated outside New York state but within the US at the time it was stolen).
   

(ii)  Final and conclusive:  The judge was satisfied that the judgment was sufficiently final and conclusive as to the merits to enable it to be enforced under English law. Although it was a default judgment, it was enforceable as a judgment unless and until an application was made to the New York to set it aside, which had not happened. It was also clear from the terms of the judgment itself that the New York court regarded the declaratory element (as opposed to some other elements) as immediately enforceable.
 

Service by NFT 

The judge was entirely satisfied that service by NFT drop would be in accordance with the growing body of authority permitting that as an alternative method of service in cryptocurrency fraud claims and, "by necessary incremental development", to the enforcement of foreign judgments relating to such claims.

However, the judge noted that the Civil Procedure Rules (in CPR 6.40(4)) provide that nothing in the rules permitting service out of the jurisdiction, or any court order, "authorises or requires any person to do anything that is contrary to the law of the country where the claim form or other document is to be served".  Since service via the NFT drop could theoretically take effect in any country on earth where someone could connect to the internet, the judge raised a question as to whether the order should be qualified in this regard, in the interests of comity between the English courts and foreign courts.

The claimant submitted that any such qualification was unnecessary, arguing that service by NFT is not service in any particular country, since the transfer takes place in the blockchain. However, in the judge's view, the relevant point was that a defendant would be located somewhere geographically at the time it opened the NFT (if it chose to do so, which he accepted there was no obligation to do). There was therefore a possibility that they might be located in one of the (relatively rare) jurisdictions where it is contrary to the local law to serve process by any means other than those authorised by that law.

He therefore considered it necessary that there be an express qualification on the face of the order to make clear that service of the documents will not be effective in any country where service by the alternative means authorised was contrary to the law of the country where the defendant was located at the time when service was effected or deemed to be effected.  The final order approved by the court was in the following terms: 

"Nothing in this Order authorises any person to do anything which is contrary to the law of the country where the Claim Form, Particulars of Claim, or any other document is to be served."

The uncertainty as to where service would take place also gave rise to an issue as to the time period for the defendants to respond to the claim. Under CPR 6.37(5), the applicable period is as specified for the relevant country/place in a table contained in Practice Direction 6B. The judge agreed that it was impossible to apply that directly here, where the place(s) of service were unknown. He accepted as a pragmatic solution the claimant's proposal to specify 31 days as the relevant period, on the basis that that was (a) longer than the periods specified for most of the jurisdictions in the table and (b) longer than for North Korea, for which there was some limited evidence of a connection with the defendants here.

Finally, the judge considered whether the documents to which the NFT would link should be password protected. He accepted that there was inevitably "a significant amount of full and frank disclosure contained in the material" and that service by NFT involved a risk of the documents being accessed by non-parties. He agreed with the claimant's proposal to distinguish between documents that would be available to non-parties "on demand" under the court rules - for which no password protection was necessary - and those that could only be obtained by court order - for which protection was appropriate (with directions on how the password could be accessed to be included in the order).  The approved order provided that the instructions (in one of the non-protected documents) should set out how a defendant, "upon demonstrating their identity to the claimant’s reasonable satisfaction", could obtain the password from the claimant's solicitors.