Court Orders Service Through Cryptocurrency Token, Orders Attorney to Disclose Identity of Client Alleged to Steal Funds

The court in LCX AG against 1.274M US Dollar Coin et alNo. 156444/2022 (NY Sup. Ct Aug, 22, 2022) said his decision was a first impression.

Applicant LCX is a virtual asset service provider in Liechtenstein. He alleged that approximately $8 million in virtual assets, all based on the Ethereum blockchain, were wrongfully taken on January 8, 2022. The case was opened when the stolen funds, stored in Ethereum wallets 0x29875 and 0x5C41 since January 2022, was exchanged on May 9, 2022 into US Dollar Coin at the 02×29875 wallet maintained by Center Consortium LLC, an American company located in New York.

CPLR 308(5) permits alternative service of process “in such manner as the court, on petition without notice, directs, if service is impracticable”. The court ruled that it was not necessary to know a defendant’s physical location to rely on another service, noting that recent alternative service methods using social platforms and technologies are designed for a such service where the identity of the defendant is known, but their location is a mystery. . To use alternate service, due process requires that the method of service “be reasonably calculated, in all the circumstances, to give notice to the defendant of the action.”

LCX supported his claim that he knows the location of the account where his stolen funds were deposited, but has no information, and can have no such information, as to the whereabouts of defendants Doe. , which belong to this account. The court recognized that the defendants were hackers who anonymously exploited a vulnerability in the plaintiff’s computer code to steal approximately $8 million in cryptocurrency from the plaintiff and, almost immediately after the theft, used a variety techniques to disguise their tracks and conceal the trace of the transactions that followed following the theft

Since this case involves cryptocurrency, the plaintiff requested service using cryptocurrency. Specifically, the claimant would deliver a small amount of new crypto coins to the crypto wallet in question. On June 3, 2022, the court issued a temporary restraining order banning the account from the Center Consortium, which was present during the oral argument, and the court ordered:

Holland & Knight LLP, plaintiff’s attorneys, will serve a copy of this show cause order, together with a copy of the documents on which it is based, no later than June 8, 2022, on the person(s) controlling the address via a special-purpose Ethereum-based token (the service token) delivered — air-dropped — to the address. The service token will contain a hyperlink (the Service Hyperlink) to a website established by Holland & Knight LLP, where plaintiff’s attorneys will post this show cause order and all documents on which it is based. The Service Hyperlink will include a mechanism to track when a person clicks on the Service Hyperlink. Any such service shall constitute good and sufficient service for the purposes of jurisdiction under New York law over the person or persons controlling the address.

The court then reviewed the steps taken by the plaintiff to effect service to support its conclusion that it was reasonably calculated to notify the defendants of the action. Plaintiff demonstrated that Defendants Doe regularly used the blockchain address and had used it as recently as May 31, 2022. Given that the account contained nearly US$1.3 million, Plaintiff had shown that the Doe defendants were likely to return to the account where they would find the service token. The court noted that using a blockchain transaction to communicate with the Doe defendants was the only means of communication available. Additionally, the claimant demonstrated that within two weeks of the creation of the service token, a hyperlink embedded in it was clicked by 256 unique non-bot users. And, indeed, on June 15, 2022, two attorneys filed notices of appearance on behalf of the Doe defendants.

For all these reasons, the court held that service by service token satisfied CPLR 308(5).

The plaintiff also asked the law firm to identify his client or clients. The court explained that attorney-client privilege does not extend to the identity of a client. And the court said that “the presumption in favor of disclosure is stronger or weaker depending on the plaintiff’s need to unmask the defendant in order to assert his rights.” Here, the unmasking was necessary to enforce the plaintiff’s right because the plaintiff sought an injunction. Further, the identity of the defendants was critical to the court’s assessment of the defendants’ motion to dismiss for lack of jurisdiction. Accordingly, the court ordered the law firm to disclose the identity of its client to the plaintiff in writing within 48 hours of the date of the decision.

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