Issues of Jurisdiction in the Borderless World of Crypto Disputes

I. Introduction

It has often been said that the world's borders are becoming less and less distinct, be it through transport, communication or commerce. Technology of course plays a key role in this, particularly in light of the relentless advancement of digitalisation, where digital platforms transcend geographical boundaries. One prime example would be the increasing prevalence of cryptocurrencies, non-fungible tokens ("”NFTs") and other crypto assets, demonstrating a shift towards finance and investment in the digital realm.

As with any investment vehicle, particularly in a market going through massive fluctuations, the widespread participation in crypto assets has led to a corresponding increase in crypto-related disputes and litigation. Crypto assets represent a relatively new creature before the courts, only recently starting to receive specialised legislative and judicial attention. The courts have thus found themselves having to develop new law to manage the novel aspects of crypto litigation.

One prominent issue in crypto litigation is that of jurisdiction. The courts of each nation (or drilling further down, each state or province) maintain jurisdiction over disputes within their borders. How then does this translate to crypto disputes, which occur within the borderless digital world? Furthermore, crypto transactions often involve parties in various jurisdictions, or even parties unknown to claimants beyond their digital handles.

Recent court decisions in major jurisdictions have seen a body of law begin to develop on the topic of crypto disputes and jurisdiction. The courts have had to consider issues such as how to determine which court has jurisdiction over a crypto dispute, how parties – unknown or otherwise – can be joined to proceedings, and how court orders can be enforced across jurisdictions.

While the approaches of the courts across the jurisdictions may not always be consistent, there are certain themes and principles that have arisen from which we can draw guidance. In this article, we look at some recent decisions in Singapore, the UK and the US relating to crypto disputes and jurisdiction, and seek to identify the trends in this developing area of law.

II. Jurisdictional gateways for invoking the courts' jurisdiction

Crypto assets are susceptible to hacks and scams which are often cross-border in nature, whereby the perpetrators may be located in foreign jurisdictions. Victims of such theft are likely to seek their local courts' assistance to aid in the recovery of their stolen assets. However, where the counterparty is an unknown fraudster or a crypto exchange based overseas, the victim must first demonstrate a good arguable case for invoking the court's jurisdiction over the foreign parties.

There are several jurisdictional 'gateways' which the courts have accepted as establishing jurisdiction over a dispute. In Singapore, the courts have had a few occasions to consider the issue of jurisdiction. These disputes involve stolen crypto assets, in which the claimants sought injunctions against crypto exchanges or persons unknown. In these decisions, the Singapore courts have tended to determine jurisdiction based on the claimant's or respondent's connection with Singapore:

• In CLM v CLN [2022] SGHC 46 ("CLM"), the victim of stolen crypto assets sought leave to serve court documents out of jurisdiction on crypto exchanges and payment service companies, as the stolen assets had been traced to wallets controlled by these respondents. The Singapore High Court granted the application on the grounds that the respondents carried on business in Singapore or had assets situated in Singapore. The assets in this case were shares in Singapore-incorporated subsidiaries of the relevant respondents.

• In Janesh s/o Rajkumar v Unknown Person [2022] SGHC 264 ("Janesh s/o Rajkumar"), the victim of a stolen NFT sought leave to serve court documents out of jurisdiction on an unknown wrongdoer. The Singapore High Court granted the application on the basis of the primary connecting factor that the claimant was located in Singapore, and carried on his business in Singapore as well.

In the UK, the English courts have also had the opportunity to consider jurisdiction in a number of cases involving stolen crypto assets. Until recently, the English courts have generally been willing to find jurisdiction based on the location of the stolen assets. The courts have accepted that there is a good arguable case that the location of intangible crypto assets is deemed to be its rightful owner's place of domicile. This means the question of whether the crypto assets are located within the courts' jurisdiction is determined at the time before the assets were stolen from the rightful owner and transferred out of jurisdiction.

• In ai Ltd v Persons Unknown [2021] EWHC 2254, the claimant was an English registered company whose cryptocurrencies had been stolen, and sought leave to serve court documents out of jurisdiction on the fraudsters and Binance. The English High Court granted the application based on several jurisdictional gateways grounded on the finding that it was at least realistically arguable that the claimant's stolen cryptocurrency was located in England. The Court held that the test for whether assets are within the jurisdiction must focus on where the assets were located before the justiciable act occurred.

• In D'Aloia v Persons Unknown [2022] EWHC 1723, the claimant was an English-domiciled individual who had been scammed of cryptocurrencies, and sought leave to serve court documents out of jurisdiction on the fraudsters and Binance. Similarly, the English High Court granted the application based on several jurisdictional gateways grounded on the finding that there was a good arguable case that the location of the assets was England because the claimant was at all material times domiciled in England, and the cryptocurrencies were thus located in England.

However, in the more recent decision of Osbourne v Persons Unknown [2023] EWHC 39 ("Osbourne"), the purported victim of a hacked wallet sought leave from the English High Court to serve the claim documents abroad on a person in South Africa to whose wallet the 'stolen' NFT had been traced. Although the victim was domiciled in England, the High Court was not inclined to grant leave under the jurisdictional gateway of the NFT being located within the court's jurisdiction. The Court questioned whether the victim was still the NFT owner at the time of the application, as the NFT had at that point already been transferred to the wallet of the person in South Africa and the victim was no longer able to exercise control over the NFT. In any event, the Court granted leave pursuant to other grounds.

This decision in Osbourne represents a departure from the other decisions made by the English courts, presenting victims with an additional obstacle to secure their stolen assets, which will typically be dissipated to wallets or exchanges based abroad in seconds. It thus remains to be seen whether future decisions of the English or Singapore courts will apply the reasoning in Osbourne.

III. Service of documents on foreign or unknown respondents

In litigation, courts generally require claimants to serve court documents on respondents to notify them of the claim and give them a chance to respond. In particular, the claim documents that initiate the litigation must usually be served on respondents personally. Where personal service of documents is not possible or practicable, the courts may permit alternative forms of service, such as through post, advertisement in newspapers, email, or direct messaging through social media or messaging apps.

However, in cases involving 'stolen' crypto assets, the nature of the 'theft' and the obscurity of the blockchain mean the wrongdoers are typically unknown. Such parties are also likely to evade service. It can thus be difficult (or impossible) to serve the relevant court documents on the wrongdoers.

To address this problem, courts across some major jurisdictions have adopted an innovative solution to address this problem – service of court documents via NFT airdrop:

• In LCX AG v John Doe Nos. 1-25 (Docket No. 154644/2022), the New York Supreme Court allowed a crypto exchange hack victim to serve claim documents and injunction orders on unknown hackers by airdropping a NFT to the wallets that the stolen assets were traced to.

• In D'Aloia v Persons Unknown [2022] EWHC 1723, the English High Court allowed the victim of a scam to serve claim documents and injunction orders on unknown fraudsters by airdropping a NFT to the wallets that the victim had been induced to transfer his cryptocurrency to.

• In Jones v Persons Unknown [2022] EWHC 2543, the English High Court allowed the victim of a cyber fraud to serve a summary judgment order on unknown fraudsters and a crypto exchange by airdropping a NFT to the wallets that the victim had been induced to transfer his cryptocurrency to.

• In Benjamin Arthur Bowen v Xingzhao Li (Case No. 23-cv-20399), the Florida District Court allowed the victim of a cryptocurrency fraud to serve claim documents on a known fraudster by airdropping a NFT to the wallets that the assets had been traced to.

In these decisions, the courts noted that the scams or hacks had been perpetrated using blockchain ledger technology, and that the use of NFTs was thus the most appropriate method of service, and the method most likely to giving notice to the respondents of the relevant proceedings or orders.

In Singapore, the courts have also had occasion to grant substituted service in cases of crypto disputes.

• In Janesh s/o Rajkumar, the Singapore High Court allowed for substituted service out of jurisdiction against the respondents via the methods sought by the claimant: (i) on the respondent's Twitter account; (ii) on the respondent's Discord account; and (iii) on the messaging function of the respondent's cryptocurrency wallet address. The Court noted that this was the only practical manner of effecting service.

• In CLM, the Singapore High Court also allowed for substituted service out of jurisdiction against the respondents by email, noting that it was impractical to require service in person as the respondents' whereabouts were unknown, and they had used virtual private networks (VPN) to obscure their locations.

These developments demonstrate the courts' flexibility and innovation to meet the unique aspects of crypto disputes by equipping litigants with faster and more effective means of serving documents. This is particularly important as crypto assets can be dissipated with great speed.

IV. Enforcement of orders

Once jurisdiction has been established and the dispute is determined by the courts, a successful claimant may receive an award or order in its favour. However, while a monetary order may generally be enforced via the traditional methods over the wrongdoer's assets within the jurisdiction, how should enforcement be effected against the wrongdoer's crypto assets in an account with an offshore cryptocurrency exchange?

This was the issue faced by the English High Court in the recent case of Joseph Keen Shing Law v Persons Unknown and Huobi Global Limited (Case No. LM-2022-000049, 26 January 2023). The claimant had been the victim of fraud, and had succeeded in a proprietary claim against persons unknown. Part of the proceeds of the fraud were traced to cryptocurrency in an account controlled by the defendants and maintained by a cryptocurrency exchange based outside England. The Court had to determine how best to manage the cryptocurrency in the defendants' account so as to facilitate the enforcement of the claimant's award.

The Court ultimately ordered that either (a) the cryptocurrency exchange convert the cryptocurrency held in the relevant account to fiat currency and transfer the funds onshore to England and Wales (to the claimant's solicitors) for payment to the Court Funds Office; or (b) the cryptocurrency exchange deliver up the cryptocurrency held in the relevant account to the claimant's solicitors, who were to convert the cryptocurrency to fiat currency and pay the funds to the Court Funds Office. The Court noted that these were exceptional circumstances, and that while the cryptocurrency exchange was cooperating with the claimant, an order for transfer to England and Wales (within the Court's control) was warranted as the situation could change at any time to the claimant's detriment.

A successful determination is of no benefit to a claimant if it cannot be effectively enforced. The courts' ability to structure appropriate orders for enforcement against crypto assets, particularly those held in foreign jurisdictions, is thus particularly important in the litigation process.

V. Concluding words

The world is constantly evolving, and this is certainly true of the digitalisation of finance and investment, and with it, the proliferation of cyber crime and crypto disputes. Courts around the world have found themselves having to grapple with new issues, both practical and legal, revolving around the unique nature of crypto disputes.

The developments highlighted above demonstrate the speed at which courts are adapting to such novel scenarios, as well as how quickly the law on such issues may begin to diverge. Lawyers and litigants alike should be aware of the evolving law in this regard and seek to keep abreast of the latest developments.

AUTHOR INFORMATION:

Jansen Chow is Partner and Co-Head of Fraud, Asset Recovery & Investigations Practice at Rajah & Tann Singapore LLP.
Email: jansen.chow@rajahtann.com

Foo Xian Fong is Senior Associate in the Commercial Litigation Practice at Rajah & Tann Singapore LLP.
Email: xian.fong.foo@rajahtann.com

Rajesh Sreenivasan is Partner and Head of Technology, Media & Telecommunications Practice at Rajah & Tann Singapore LLP.
Email: rajesh@rajahtann.com

Steve Tan is Deputy Head of Technology, Media & Telecommunications Practice at Rajah & Tann Singapore LLP.
Email: steve.tan@rajahtann.com

Benjamin Cheong is Partner and Deputy Head of Technology, Media & Telecommunications Practice at Rajah & Tann Singapore LLP.
Email: benjamin.cheong@rajahtann.com

Lionel Tan is a Partner in the Technology, Media & Telecommunications Practice at Rajah & Tann Singapore LLP.
Email: lionel.tan@rajahtann.com

Tanya Tang is a Partner and Chief Economic and Policy Advisor at Technology, Media & Telecommunications Practice at at Rajah & Tann Singapore LLP.
Email: tanya.tang@rajahtann.com