ThinkTWENTY20

By Eric E. Cohen, CPA

In prior blog entries, we have explored topics such as Web 3.0, non-fungible tokens (NFTs), cryptographic wallets and related key management, and anticipating the risks of blockchain by collaborating today. So, I am somewhat distressed by some recent stories that bring these issues together.

To recap some concepts here:

NFT: a non-fungible token (NFT) is a unique record on a blockchain that is different than Bitcoin, ETH, Doge or other more “traditional”, interchangeable, coins and tokens. With an NFT, in some unambiguous or ambiguous way, there is an association with some digital file, record on a database, intangible concept, or proxy to some physical entity. The NFT is generally not the piece of art, right to board an airline, or airplane in property, plant and equipment being tracked, but just a record of some control to some set of rights to that associated item. While most NFTs are meant to be transferred between blockchain addresses and users, some are meant to be held and never transferred, such as to support digital identity, record an academic achievement, or remember an important event such as a wedding vow.

Wallet: A wallet in blockchain space is generally thought of as a key management tool, used to track the cryptographic keys used to control blockchain addresses and view and manage the tokens at that address. A single address in the world of Ethereum, for example, might hold ETH and also hold other tokens, such as NFTs. Different wallets do better and worse jobs at showing the other tokens, and may or may not facilitate digging down to the details.

Airdrop: An airdrop is when a third party distributes tokens to one or more addresses, often at no cost. There are many resources that inform the public about airdrops you can volunteer to take part in; for example, the relatively well-known cryptocurrency, Stellar, gave away around $125 million USD worth of Stellar Lumens (XLM) in 2018 to drive adoption. There are no protections in place against receiving tokens to a cryptographic address, so that fact has been exploited for nefarious purposes as well. The topic of “airdrop phishing” has taken off over the last few months; users find an unexpected token accounted for by their wallet and, when seeking to get more information or trying to sell, they get scammed.

One other glossary item: Process server: In computers, it is a computer or system that communicates with other computers or systems to run or coordinate some share program or service on behalf of the client system. In the law and business environment, it is an unbiased third party whose job it is to deliver court documents to litigants/defendants involved in a court case with notice of initial legal action.

What’s New and Has Me Distressed?

So, what brings together airdrops, wallets and NFTs (and process servers)? Oddly enough, a few recent court cases related to process serving via airdropping an NFT to someone’s wallet.

I am very interested in law; my law class during my graduate studies was probably my favorite class and the principles I learned have stuck with me better than any other class. It has helped in my work with digital signatures and identity in particular, time and time again, not to mention efforts around smart contracts. I’ve been binging the YouTube channel of LegalEagle, the channel of DC-based attorney Devin Stone.

All that being said, I have somehow avoided contact with process servers so far. My only contact has been on television, seeing some litigant trying to avoid the process server and the means that server takes to get the litigant to take the documents. But, in the US and Canada, serving official documents against a name is generally the initiation of court activities, and Latin terms such as “in personam jurisdiction” and “res” come into play.

Let me now introduce two court cases:

In the UK: D’Aloia v. Binance Holdings & Others (see more at https://www.newlawjournal.co.uk/content/court-grants-service-by-blockchain)

In the US, in the State of NY: LCX AG, -v- John Does Nos. 1 – 25 (Case number 154644/2022, where on June 2, 2022, the Supreme Court of the State of New York granted an order permitting service of court proceedings via the transfer of a token on the Ethereum blockchain.

I am not a lawyer, and this is not professional advice, but these two cases have laid a foundation for a process server to deliver documents using an airdropped NFT on a blockchain to the litigants’ crypto addresses.

I have ALL manner of problems with this. As I wrote in this blog back in December, I can’t even find NFTs I actively acquired, and having found the tokens have to take multiple steps to see what the NFT is associated with. I don’t monitor all of my wallets (I have perhaps a dozen, for teaching and research far more than investing), and some don’t automatically recognize tokens unless you “import them.” To see an airdrop, I’d have to go through my wallets to each address in use and drill to an external blockchain explorer to see if there are any additional assets.

I found this article https://www.lockelord.com/newsandevents/publications/2022/06/service-of-proceedings-via-nft explained a number of my other concerns better than I could. But from an audit perspective, the deliver of litigation via airdrop may lead to a new expectation of the Enterprise and the audit procedures related to legal representations for Enterprises. In a world where a number of US states and other countries are starting to recognize decentralized autonomous organizations (DAO) as legal entities, perhaps litigation tracking by NFT has merit. But I think it is crazy right now.

What are your thoughts?