Case Study
FTI Technology’s Innovative Solution for Tracing Unhosted Wallets Supports Digital Assets Recovery in Large Bankruptcy Litigation
In proceedings for a large cryptocurrency bankruptcy matter, notices and summons needed to be sent to certain cryptocurrency wallet addresses that had at some point held misappropriated digital assets that should have been part of the bankruptcy, but where the owners of those wallets could not be identified. In this ongoing matter, FTI Technology has helped the legal team develop an innovative tracing methodology and recovery framework to identify and verify unhosted wallets and support recovery efforts.
Situation
In the bankruptcy proceedings, FTI Technology’s Block-chain & Digital Assets experts traced misappropriated assets that should have been part of the bankruptcy recovery to approximately 40 unhosted cryptocurrency wallets that contained or had at some point held the missing assets.
Often in these types of disputes, when investigators trace the assets, they will find them stored in a cryptocurrency exchange. When that happens, the courts can order a seizure of the assets as part of a default judgement. However, when assets are held in a self-custodied wallet, rather than a wallet custodied by the cryptocurrency platform, there is no way for them to be seized. Additionally, because the owners of the self-custodied (i.e., unhosted) wallets were unknown, there was no way for the legal team to force them into court to have the assets forfeited for restructuring.
Our Role
Experts within the Blockchain & Digital Assets practice implemented a novel solution to help the bankruptcy team serve complaints and notices in the anonymous vaults of each of the unhosted wallets. The approach needed to ensure that the owners would see the notices when they logged into their wallets, while upholding compliance with technical, privacy and other requirements in the jurisdictions where the owners were located.
FTI Technology developed and hosted a website with a tokenized web domain, so that tokens with the notices could be served through NFTs or protocol on the wallet addresses. This way, when the owners accessed their wallets, they would see the notice and be taken to the website for more information. Though the wallet owners may not have known their assets were misappropriated, once they received the court order to surrender the assets, they would become obligated to do so. If they refused, the legal team would have grounds to potentially obtain a default judgement and legally seize the assets upon discovery of the wallet owner’s identity.
In delivering this solution, the team also provided:
- Review of documents, witness interviews, gathering of wallet addresses and digital assets to verify which assets should be in scope of the proceeding.
- Tracking and tracing of assets to unhosted wallets that could not be identified through other methods.
- Expert declaration and presentation of the findings and methodology for messaging owners to the court.
- Design of code to deliver messages containing the legal documents and a link to the web domain to each of the wallets.
- Monitoring across relevant wallet address to determine activity after being served.
- Expert declaration and presentation of findings to the court to support counsel’s move for a declaratory judgment.
Our Impact
FTI Technology’s experts delivered the largest-to-date, comprehensive NFT and smart contract solution for recovering digital assets from unhosted wallets in support of bankruptcy and related legal proceedings.
Design and execution of a reliable framework to serve legal documents to approximately 40 unhosted crypto wallets across multiple protocols.
Solution supported legal team in ongoing proceedings.