Court orders service via cryptocurrency token and directs the lawyer to reveal the identity of the client who is alleged to have stolen funds

The court inside LCX AG v 1,274M US Dollar Coin et aln. 156444/2022 (NY Sup. Ct Aug, 22, 2022) said his decision was a first impression.

The LCX actor is a virtual asset service provider in Liechtenstein. He claimed that approximately $ 8 million of virtual assets, all based on the Ethereum blockchain, were misappropriated on January 8, 2022. The case was initiated when the stolen funds, stored in Ethereum Wallets 0x29875 and 0x5C41 from January 2022, were were traded on May 9, 2022 in US Dollar Coin at the 02 × 29875 wallet managed by Center Consortium LLC, a US company based in New York.

CPLR 308 (5) allows alternative notification of the trial “so that the court, on request without notice, will decide, if notification is impracticable”. The court ruled that it was not necessary to know the physical location of a defendant to rely on an alternative service, noting that recent alternative service methods using social platforms and technologies are designed for that service where the identity of the defendant is known, but their whereabouts are a mystery. To use the alternative service, due process requires that the service method “be reasonably calculated, in all circumstances, to inform the defendant of the action”.

LCX supported its claim that it knew the location of the account where the stolen funds were deposited, but had no information and cannot have such information, as to where the Doe Defendants are located, which belong to that account. The court acknowledged 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 of techniques to disguise your own tracks and hide the traces of the transactions that followed in the aftermath of the theft

Since this case involves cryptocurrency, the plaintiff requested the service using the cryptocurrency. In particular, the plaintiff would deliver a small amount of new crypto coins into the crypto wallet in question. On June 3, 2022 the court issued a provisional restraining order warning the bill at the Consortium Center, which was present at the dispute, and the court ordered:

Holland & Knight LLP, the plaintiff’s attorneys, will have to notify a copy of this Order to prove the cause, along with a copy of the documents on which it is based, by June 8, 2022, to the person or persons controlling the Address via a special Ethereum-based token (the service token) delivered – airdrop – in the address. The service token will contain a hyperlink (the service hyperlink) to a website created by Holland & Knight LLP, where the plaintiff’s attorneys will publish this Order to prove the cause and all documents on which it is based. The service hyperlink will include a mechanism to track when a person clicks the service hyperlink. Such service will be a good and sufficient service for the purposes of jurisdiction under the New York law on the person or persons controlling the Address.

The court then examined the measures taken by the plaintiff to effect the notification in order to support his conclusion that it was reasonably calculated to inform the defendants of the action. The plaintiff demonstrated that the Doe Defendants regularly use the blockchain address and had used it until May 31, 2022. Since the account contained nearly $ 1.3 million US dollars, the plaintiff had shown that it was likely that the Defendants Doe return to the account they had in would find the service token. The court noted that using a blockchain transaction to communicate with the Doe Defendants was the only mode of communication available. Additionally, the actor proved that, within two weeks of the service token being minted, a hyperlink embedded in it had been clicked by 256 unique non-bot users. And, in fact, on June 15, 2022, two attorneys filed subpoenas on behalf of the Doe Defendants.

For all these reasons, the court found that the Service Token service met CPLR 308 (5).

The actor also asked the law firm to identify his clients. The court explained that the attorney-client privilege does not extend to a client’s identity. And the court stated that “the presumption in favor of disclosure is more or less strong depending on the actor’s need to unmask the accused in order to assert his rights”. Here, the unmasking was necessary to enforce the plaintiff’s right because the plaintiff requested an injunction. Furthermore, the identity of the defendants was critical to the court’s assessment of the motion dismissing the defendants for lack of jurisdiction. As a result, the court ordered the law firm to reveal its client’s identity to the plaintiff in writing within 48 hours of the date of the decision.

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