World’s First? Hong Kong Court Orders Service by NFTs and Transfer of Defrauded Digital Assets in Escrow Wallet To Combat Challenges in Crypto-Fraud Case
Introduction
In a recent case HCA 533 / 2025, Howse Williams’ Regulatory, Funds and Virtual Assets team worked with Counsel Kaiser Leung from Des Voeux Chambers to secure an innovative and potent remedy for a client in a high-stakes crypto-fraud case. It included allowing substituted service via NFTs and other blockchain tools, and more notably, securing an order for the transfer of defrauded assets into an escrow wallet pending the trial, significantly enhancing the protection for the Plaintiff.
This may very well be the first case globally in which a court has ordered the transfer of defrauded crypto assets into an escrow wallet, marking a potentially ground-breaking development in the world of crypto-related disputes.
Background
The HW legal team acted for a crypto company (the “Plaintiff”), that is a victim of fraud. It was discovered that a fraudster, or fraudsters, exploited the vulnerabilities of the smart contract maintained by the Plaintiff through a wallet and caused an unauthorised transfer of approximately US$50 million in USDC (the “Defrauded Assets”) to a first layer cryptocurrency wallet, which was then swiftly dissipated to a second layer cryptocurrency wallet (“Second Layer Wallet”).
A complication in the present case is that all of the cryptocurrency wallets involved in the abovementioned fraudulent transactions were non-custodial wallets. In contrast to custodial wallets which are held by or linked with a centralised exchange or institution, non-custodial wallets are not managed by an institution or an exchange with the relevant and usual due diligence and know-your-client protocols. Non-custodial wallets are anonymous, decentralised and non-regulated. This peculiar feature imposes significant practical hurdles for the victims to obtain effective protective orders from the Court.
To overcome these practical hurdles, as will be further explained below, the legal team applied to the Court for a number of innovative measures, both in terms of mode of service and form of order, to maximize the effectiveness and impact of the order granted.
Substituted Service by way of Blockchain Transaction, BlockScan Chat and NFT
As explained above, the peculiar features of non-custodial wallets make it almost impossible to identify the persons behind such wallets who perpetrated the relevant fraudulent transactions. This also makes it difficult to conduct effective service of the court documents on the persons involved.
To overcome this seemingly insurmountable obstacle, the legal team proposed, and the Hong Kong Court accepted, that tools available on Ethereum blockchain be deployed to bring the proceedings to the attention of the relevant wallet holders as a method of substituted service pursuant to Order 65, Rule 4 of the Rules of High Court. Specifically, the Plaintiff was granted leave to effect service on the relevant wallets of these unknown fraudsters by (1) sending a message through the blockchain transaction; (2) sending a message through BlockScan Chat; and (3) airdropping a Non-Fungible Token (“NFT”), each containing a link to the Court documents. These methods of service effectively “taint” the relevant wallets in the sense that all subsequent transactions that follow the service can be traced to the blockchain and the existence of the injunction can be seen, effectively deterring others from transacting with these wallets. Variations of substituted service on cryptocurrency platforms have also been seen in a few other cases both inside and outside of Hong Kong (see D’Aloia v Persons Unknown [2022] EWHC 1723 (Ch); Worldwide A-Plus Limited HCA 2417/2024).
Enhanced Protection for the Subject Matter Assets
Perhaps even more significantly, to combat against the peculiar features of the non-custodial nature of the wallets involved in the present case and to provide more effective protection for the Plaintiff, in addition to Mareva and proprietary injunctions, the Court granted the Plaintiff’s application for an order to compel the perpetrator and the holder of the Second Layer Wallet to immediately transfer the Defrauded Assets (including the traceable proceeds thereof) to a Plaintiff’s custodial wallet maintained by a regulated crypto-custodian to be held in escrow, pending the trial of the dispute. This is a powerful order particularly in the context of crypto-fraud cases. It removes control of the Defrauded Assets from the hands of the relevant wallet holder, enhancing the protection for the Plaintiff pending the final outcome of the case.
A similar preservation order (albeit not in the context of cryptocurrency) requiring a defendant to pay the subject matter funds into an escrow account was also recently made in Kan Sau Lan v Xu Hong [2025] HKCFI 1161. In that case, it was argued by the plaintiff, with which the Court agreed, that “if the Defendant succeeds at trial, she will suffer little prejudice as the rental income will be kept in an escrow account. However, if the Plaintiff succeeds at trial, the Plaintiff may suffer irreparable harm as there is a real risk that damages would not be an adequate remedy.” (see §30) The reasoning applies equally to a crypto-fraud case such as the present one.
Significance and Takeaways
The Court’s order compelling the defendants to transfer the Defrauded Assets to an escrow wallet, coupled with leave to effect service through blockchain, is an unprecedented and encouraging innovative step taken by the Court to combat the challenges posed by crypto-fraud cases. It provides a powerful tool for victims of crypto-fraud cases such as the Plaintiff to protect their assets against further dissipation. This is particularly significant in the modern world with rapid technological advancements.
The ability and willingness of the Hong Kong Courts to adapt and respond to the everchanging cyber environment is particularly commendable. It is believed that this decision will serve as an important foundational building block in the development of this area of law, not only in Hong Kong but also in other common law jurisdictions, to better protect victims of crypto-fraud such as the Plaintiff in the future.
The HW legal team is pleased to be part of this judicial development and innovation. This decision very likely marks a historic first in legal proceedings and will set an instrumental precedent for similar cases in the future, not only in Hong Kong but also in other jurisdictions worldwide.
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Disclaimer: The information contained in this article is intended to be a general guide only and is not intended to provide legal advice. Please contact [email protected] if you have any questions about the article.