This publication is part of the series Lex Digitalis: At the Crossroads of Dispute Resolution and Digital Innovation by Economou & Co LLC

D’Aloia v Persons Unknown attracted attention as one of the first judgments issued after a full trial addressing cryptocurrency fraud. The claimant, Mr. D’Aloia, alleged that he had been defrauded of approximately £2.5 million in cryptocurrency, including a significant portion in Tether (USDT). He claimed these funds were transferred through various blockchain wallets before being converted into fiat currency.

In his legal action, Mr. D’Aloia sought to trace the movement of the misappropriated funds across cryptocurrency exchange platforms using expert analysis of wallet transactions. He brought claims against several parties: the unknown individuals to whom the cryptocurrency was transferred, the unknown individuals who withdrew the funds as fiat currency, and the exchanges themselves.

Ultimately, only the claim against one of the defendants, Bitkub, proceeded to trial. This claim centred on the misappropriated USDT alleged to have reached a wallet controlled by Bitkub. However, the court held that Mr. D’Aloia had failed to establish that his USDT had been received by Bitkub. As a result, his claims were dismissed.

Despite this outcome, the case is significant for its examination of emerging legal issues in cryptocurrency fraud, including the recognition of cryptocurrency as property, tracing through mixed funds, and the potential for constructive trusts in digital asset disputes.

Key Legal Highlights

1. Service of Proceedings via NFT Drop

The court took the unprecedented step of permitting service of legal proceedings via a non-fungible token (NFT). This marked the first time:

• Legal documents were served through an NFT drop on a blockchain wallet associated with the defendants.
• The court acknowledged the need for innovative methods to tackle the challenges posed by decentralised digital assets and anonymous transactions.

This decision reflects the legal system’s adaptability to the complexities of blockchain environments and sets a benchmark for future cases.

2. Cryptocurrency as Property

The court addressed whether USDT could be treated as property under English law:

• It reaffirmed that cryptocurrencies, including USDT, can attract proprietary rights.
• The court clarified that individuals can hold a proprietary interest in USDT rather than merely a contractual claim.
• Importantly, the finding was limited to USDT and did not extend to cryptocurrency in general.

This provides clarity on the proprietary treatment of digital assets in legal claims.

3. Following and Tracing Cryptocurrency

The court examined the principles of following and tracing cryptocurrency:

• Following applies when the property remains unchanged but moves between parties.
• Tracing, on the other hand, identifies substituted assets or proceeds when the original property is sold or exchanged.

In this case:

• The court held that tracing at common law through a mixed fund was not possible.
• However, equitable tracing could apply if sufficient evidence established the flow of funds.
• The expert evidence failed to link the claimant’s USDT to the wallet held by Bitkub, leading to the rejection of the tracing claim.

This highlights the importance of precise and reliable evidence in cryptocurrency tracing and raises questions about adapting existing legal principles to digital assets.

4. Constructive Trust and Cryptocurrency

The court also considered whether a constructive trust could be imposed on Bitkub:

• It recognised that the original fraudster held the claimant’s USDT on constructive trust due to the fraud.
• However, it concluded that no constructive trust could be imposed on Bitkub, as the claimant could not prove that his USDT was received by Bitkub.

This outcome emphasises the necessity of establishing a direct link between the trust property and the party alleged to hold it as a constructive trustee.

Conclusion

D’Aloia v Persons Unknown is a landmark case that provides essential guidance on critical issues in cryptocurrency law. While Mr. D’Aloia did not succeed, the court’s detailed analysis of proprietary rights, tracing principles, and constructive trusts lays important groundwork for future cases. It highlights the need for robust evidence and innovative approaches to address the unique challenges posed by digital assets in legal disputes.

For individuals or entities navigating fraud, asset tracing, or cryptocurrency disputes, our team offers extensive expertise and tailored legal assistance.