Where are your digital assets, and where is the court?

Determining jurisdiction

The English courts have broadly taken the view that they will hear claims from parties based in England relating to digital assets, at least insofar as they can be said to have suffered loss in this jurisdiction.

However, many digital assets have no tangible form. You cannot simply seize them, or anything that will give you control of them. So even if an English court orders that an asset must be transferred into the name of the claimant, the controlling entity may have no connection with England and may ignore an English court order. At which point a judgment from a local court, with jurisdiction over that entity, may be necessary.

This will be easier to obtain in some jurisdictions than others. Some courts may take the view that the original claim should have been brought locally. Others may object for reasons of public policy, or may treat digital assets in a different way from the English courts.

These issues underline the importance of taking some pre-emptive steps to shape any disputes that may arise. Smart contracts are an increasingly common way of building in some certainty: when the contract itself can regulate and manage a dispute, there is less potential for such problems.

There is also an increasing tendency to design smart contracts with jurisdiction clauses in them – not least to mitigate any uncertainties about the place of a smart contract’s formation, which might otherwise be germane when determining jurisdiction – and in designating the law applicable to their contractual relationship.

Arbitration

Uncertainties about jurisdiction and enforcement have also led many businesses dealing with digital assets to adopt arbitration as their preferred form of dispute resolution. Arbitration allows the creation of a bespoke procedure that suits what may be innovative and complex assets or a novel transaction.

It can also – thanks to the New York Convention – result in awards that are more widely enforceable than those from national courts. However, this may not always be the case. Courts in some jurisdictions have declined to enforce arbitral awards relating to cryptocurrencies on public policy grounds.

Where – and who – is the defendant?

The pseudonymous or anonymous nature of many online transactions – particularly those involving distributed ledger technology – means that you can enter into a contract without knowing the identity of your counterparty. Naturally, this can cause problems in the event of a dispute. Similar issues often arise in online frauds, where it can often be hard to identify or find the fraudster.

In practice, the courts are applying similar remedies to those in their armoury in more traditional cases, but they deploy them in slightly different ways, to reflect the nature of digital assets and the question of how best to preserve their value.

Making orders – The English courts have shown themselves increasingly prepared to make orders not only against parties in other jurisdictions but also against ‘persons unknown’.  But obtaining such an order is only the first step. The order has to be served – which can be challenging when an elusive or unknown defendant is involved.

Serving orders – Again, the courts have moved with the times. They have allowed service by email, and even by NFT airdrop – that is, serving proceedings on persons unknown by placing an NFT containing the relevant information in the digital wallet into which misappropriated assets were transferred. The courts have also been prepared to order crypto exchanges – including exchanges in other jurisdictions – to provide information about customer accounts where these have allegedly been involved in the misappropriation of digital assets.

Granting injunctions – And they have shown themselves ready to grant injunctions to freeze assets even where persons unknown are involved. This is an important consideration, given the ease with which digital assets can be transferred between entities and jurisdictions.