Court Authorizes Service of Process Through NFT Airdrop

In a landmark decision highlighting the unique aspects of blockchain technology, an S.D.N.Y. Bankruptcy Judge ruled in favor of Celsius’s motion for alternative service, whereby Celsius sought to provide legal service by airdopping non-fungible tokens (NFTs) to anonymous defendants’ digital asset wallets.

The following opinion editorial was written by Alex Forehand and Michael Handelsman for Kelman.Law.

Judge Approves Celsius’s NFT Airdrop for Legal Service

In the wake of the cryptocurrency exchange’s insolvency, its bankruptcy estate filed suit seeking to void allegedly fraudulent transfers and recover additional funds for its creditors. Due to the pseudonymous nature of the technology, however, Celsius has thus far been unable to identify the owners of the wallets connected to the relevant transfers.

As a result, the Litigation Administrator designed a novel solution for an alternative method of service. Celsius proposed to airdrop NFTs that include a hyperlink to a website containing the complaint and other relevant legal documents to the wallet addresses in question. To ensure the NFTs are properly served, Celsius will have FTI Consulting confirm the wallets receive the NFTs on-chain, and record the exact date and time the NFTs are opened. FTI will also monitor website traffic to ensure the links are opened by actual humans rather than automated bots.

Furthermore, FTI Consulting confirmed that it traced the transfers to the wallets in question, that the wallets have been active since the transfers, and that the same individuals likely remain in control of the wallets.

Alternative methods of service are generally permitted if the statutory methods of service are “impracticable.” According to New York case law, service is typically impracticable when the plaintiff is unable to locate either a business or home address for the defendant despite diligent efforts to do so. Alternative methods must also satisfy constitutional due process requirements, which requires service to be reasonably calculated, under all the circumstances, to give notice to interested parties of the nature of the action against them.

Recognizing that the anonymity of the wallet owners deemed traditional service impracticable, the Court was satisfied the defendants were likely to receive the summons and complaint via the hyperlink in the NFT since the NFT was being sent to the exact wallets used by the defendants to receive the funds at issue, and the activity could be traced on-chain.

Judge Glenn concluded the NFT airdrop was “the best possible way” to apprise the defendants of the actions against them, and praised Celsius on its “innovative” solution. In terms of service, email addresses pioneered the way for the internet. Wallet addresses just paved the way for blockchain.

This case highlights one of the many challenges of adopting new technology into society, and exemplifies how blockchain technology continues to disrupt the status quo. Luckily, the industry has taken the initiative to craft novel solutions that allow for its implementation into everyday life.

As attorneys operating exclusively in the digital asset space, we understand the importance of staying up to date on the latest developments and helping clients stay informed whenever the legal landscape shifts. Whether you are an investor, entrepreneur, or business involved in cryptocurrency, our team is here to provide the legal counsel needed to maneuver this complex landscape. If you believe we can be of assistance, schedule a consultation here.

This article originally appeared at Kelman.law.