New York Bankruptcy Court Authorizes Service via Non-Fungible Tokens on Cryptocurrency Wallet Owners


Oct 25, 2024
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By Moish E. Peltz, Esq., Kyle M. Lawrence, Esq., Richard E. Weltman, Esq., Michael L. Moskowitz, Esq., and Michele K. Jaspan, Esq.

A recent decision by the United States Bankruptcy Court for the Southern District of New York may have significant implications for digital asset holders and users. The decision, issued on October 24, 2024, granted a motion for alternative service of process by airdropping non-fungible tokens (NFTs) to the cryptocurrency wallet addresses of defendants whose identities and locations are unknown. The decision is one of the first of its kind to squarely address the challenges posed by digital blockchain technology in civil litigation and to authorize the use of NFTs as a means of service.  

Background of the Case

The decision arose from three adversary proceedings related to the bankruptcy case of Celsius Network LLC, a cryptocurrency lending platform that filed for Chapter 11 protection in 2022. The plaintiff in the adversary proceedings is the litigation administrator for the post-effective date debtors, who seeks to avoid fraudulent transfers and recover estate property allegedly misappropriated from Celsius by a former employee and a related entity. The defendants in the adversary proceedings are the owners of cryptocurrency wallets to which the plaintiff traced asset transfers from the former employee and the related entity. The plaintiff settled its case against the former employee and the related entity, but could not identify or locate the defendants who received the transfers. The only information the plaintiff had about the defendants was their wallet addresses on the Ethereum and Bitcoin blockchains. 

Motion for Alternative Service

The plaintiff filed a motion for alternative service, seeking authorization to serve the defendants with copies of the summons and complaints by airdropping NFTs to their wallet addresses. The plaintiff argued that this method of service was permissible under both New York law and federal law, depending on whether the defendants were within or outside of the United States. The plaintiff supported its motion with two declarations by an expert from a consulting firm that specializes in blockchain and digital assets. The expert explained how NFTs could be created and airdropped to the wallet addresses, and how the NFTs would contain a link to a website with the legal documents. The expert also attested that it was highly unlikely that the ownership of the wallets had changed since the alleged fraudulent transfers, and that the plaintiff could monitor the wallets and the website to verify whether the defendants received and accessed the NFTs. The motion was unopposed and a hearing was held on October 8, 2024. During the October 8 hearing, non-parties to the subject adversary proceeding raised concerns about the method of service, but none of the subject defendants appeared to oppose the motion.  

Court's Decision

The court granted the motion for alternative service, finding that service via NFT was authorized by both New York law and federal law, regardless of the defendants’ geographic location. The court reasoned that service via NFT was akin to service via email or social media, which have been approved by other courts as alternative means of service when the defendants are difficult to find or reach. The court relied on the expert’s declarations to conclude that service via NFT was reasonably calculated to apprise the defendants of the actions against them and give them an opportunity to present their objections, as required by due process. The court also noted that service via NFT was not prohibited by any international agreement, and cited several cases from other jurisdictions that have permitted service via NFT on foreign defendants. The court also acknowledged that the plaintiff may face further challenges in prevailing and collecting any judgments. 

Key Takeaways for Clients

The decision by the New York Bankruptcy Court is a notable development in the intersection of digital assets and civil litigation, and may have several implications for our clients who hold or use digital assets, such as: 

  • The decision demonstrates that courts are willing to adapt to the evolving nature of digital technology and to recognize NFTs as a valid and effective means of service of process on blockchain addresses. This may open the door for more plaintiffs to use NFTs to serve defendants who are anonymous or elusive, and who can only be reached through their digital wallets, including in bankruptcy proceedings (or even in other Celsius adversary proceedings). Conversely, this may also expose more digital asset holders and users to potential litigation, especially if they are involved in transactions that may be subject to avoidance or recovery actions by bankruptcy trustees or other parties. 
  • The decision also highlights the importance of maintaining control and security over one’s digital wallet and private key, as well as being aware of the contents and activities of one’s wallet. The court noted, the ownership of a wallet is presumed to remain the same unless the private key is transferred. Therefore, the owner of a wallet may apparently be held liable for any transfers or transactions that occur through the wallet, even if they are unaware of or did not authorize them. Moreover, the owner of a wallet may be deemed to have received service of process if an NFT is airdropped to the wallet, even if they do not open or click on the NFT.  
  • This decision appears to create precedent that digital asset holders and users should monitor their wallets regularly and take precautions to protect their assets and privacy. However, requiring individuals to monitor for the receipt of NFTs as a form of legal service is impractical and potentially absurd, given the decentralized and often anonymous nature of blockchain transactions. 
  • The decision also underscores the challenges and uncertainties that digital asset holders and users may face in cross-border litigation, as different jurisdictions may have different rules and standards for service of process and recognition and enforcement of judgments. As the court acknowledged, the plaintiff may encounter difficulties in proving its claims and collecting any judgments against the defendants, especially if they are located in foreign countries that do not cooperate or comply with U.S. law. Therefore, digital asset holders and users should be mindful of the potential legal risks and consequences of engaging in transactions or activities that involve parties or assets in different countries. 

We are closely following the developments in this case and other cases involving digital assets and bankruptcy, and we are ready to assist our clients with any questions or concerns they may have. Our Digital Assets Practice Group and Bankruptcy Practice Group have extensive experience and expertise in advising and representing clients in matters related to digital assets, blockchain, cryptocurrency, NFTs, and bankruptcy, including defending numerous Celsius adversary proceeding defendants. Please do not hesitate to contact us if you need any guidance or assistance in this area. 

Click here to view the opinion from Pacer.

 

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