NFT Service Brings Litigation Into the Metaverse!

Blockchain technology has been touted as inherently reliable for years. More recently, collectors of Non-Fungible Tokens (NFTs) have explored expanded uses for that novel technology. Some courts have bought in and, in doing so, recently authorized a use that perhaps no one had imagined when NFTs first entered the mainstream: service of process.

In Bandyopadhyay v. Defendant 1, No. 22-CV-22907 (S.D. Fla.), a victim of crypto-theft brought suit against the suspected perpetrators alleging that the defendants had stolen approximately $950,000 worth of cryptocurrency from his Coinbase wallet. However, the plaintiff was unable to make traditional service of the complaint on the China-based defendants, and sought leave of Court to serve the complaint via NFT. The NFT contained a link to download the complaint and could be sent to the blockchain wallet address where the plaintiff had tracked the stolen cryptocurrency. The Court found that service was proper under Fed. R. Civ. P. 4(f)(3), which allows service “by other means not prohibited by international agreement, as the court orders.” The plaintiff served the Non-Fungible Complaint, but ultimately the defendants failed to appear and a default judgment was entered.

This follows on the heels of a New York state court permitting service via NFT on an anonymous cryptocurrency thief. A discussion of the New York court’s decision to allow service by NFT can be found here, on Hunton’s Blockchain Legal Resources blog. Since then, the plaintiff has successfully served the complaint via NFT, after which the parties entered into a settlement. Taken together, the two cases illustrate the role NFTs can play in litigation.

NFTs can be a useful tool for serving process on bad actors who engage in cryptocurrency-related fraud from foreign countries, as there is often no other way to locate (let alone serve) them. Critics of the new means of service may argue, however, that the default in this case should raise concern about the effectiveness of service via NFTs, since service by other means must be “reasonably calculated to give notice.” Other courts may, therefore, be reluctant to authorize service via NFT.

Digital holdings are now measured in billions of dollars, putting holders of digital assets at substantial risk from system and user error as well as bad actors, as was the case with Bandyopadhyay. In recognition of these risks, insurers are expanding coverages afforded under legacy insurance products to specifically address risks posed to digital assets. Hunton’s Insurance Coverage team works closely with the firm’s Blockchain and Privacy teams to collaboratively address these and other emerging cyber, crypto, blockchain and metaverse issues. An example of this cross-practice effort can be seen in an article published recently in the Journal of Emerging Issues in Litigation titled “Insurance Coverage for Digital Assets: Mitigating Losses in Cryptocurrency and Non-Fungible Token Markets” discussing the evolution and current status of digital assets, the market for crypto and NFT insurance, and the legal issues surrounding these issues. As the two decisions and our recent article illustrate, NFTs and other aspects of blockchain technology may have found a place in litigation, helping to ensure service that might otherwise be difficult or altogether impossible to effect, can now be readily accomplished , thereby facilitating the resolution of disputes that might otherwise be forgone.