By Felix Hughes
Non-Fungible Tokens (NFTs) have become an increasingly popular form of investment, despite the uncertainty in exchangeability and volatility in value. Although often considered a fad or compared to a Ponzi scheme, the popularity of these tech-based financial securities has skyrocketed over 2021 and 2022, with an extraordinary number of people trying to capitalise on this crazy trend. This includes celebrities such as Eminem, Kate Moss and Tony Hawk , further highlighting the significance of the High Court decision in popular culture.[1] But what are NFTs?
Non-Fungible Tokens are financial cryptographic assets that are stored on a blockchain (a system that publicly records transactions) with their own unique code and data that separates one NFT from another.[2] Unlike cryptocurrencies, they can neither be used as a medium for commercial transactions due to their unique nature, nor traded at a set rate . The price of an NFT is based solely on what a consumer is willing to pay for one.[3]
It is also necessary when asking whether NFTs deserve the protections of ‘legal property’ status to understand what their use is, and why people buy these tokens. NFTs are often used to represent material assets, such as real estate or artwork, on a digital platform, allowing owners to portray their assets digitally.[4] NFTs also benefit from being blockchain-based and subsequently enjoy greater visibility and speed in their transfer by removing intermediaries and simplifying transactions. As a result, they are often seen as an attractive investment because of this decentralisation.
One of the primary legal issues surrounding NFTs is the ownership and licensing of these assets. Whilst the tokens, whether they be digital art or media files, may see several owners over a brief period; it is typically the case that the asset creator will retain copyright in the NFT[5]. This is an issue if the consumer wishes to use or reproduce the asset as copyright or intellectual property has not been licensed or transferred with the underlying asset.
It is often the case that many any art based NFTs minted by creators are in fact images taken from the internet, where the creator of the digital asset has no licence to use the image or file. This poses another legal issue as the possibility of infringing intellectual property arises, and further repercussions may exist for platforms that display and sell assets that incorporate copyright and trademark.
However, it is arguable that the most important legal issue that arises regarding NFTs is whether they can be considered legal property under English and Welsh law. Subsequently, whether this grants NFTs with certain legal protections and rights as prescribed to assets with ‘legal property’ status. This is the primary focus of this article as it explores these legal protections through two cases; AA v Persons Unknown[6]and Lavinia Deborah Osbourne v (1) Persons Unknown (2) Ozone Networks Inc[7].
AA v Persons Unknown
Bryan J’s judgement in AA v Persons Unknown[8] did not set new precedent in stating that crypto-assets could be considered legal property (see Vorotyntseva v Money-4 Limited[9]). It did, however, explore the issue in detail, whilst considering whether Bitcoin could be subject to an injunction order. Bryan J also gave significant weight to the UK Jurisdiction Taskforce’s (UKJT) consideration of other intangible assets, arguing that this was a persuasive reason for Bitcoin to be accepted as legal property. Furthermore, it was considered crucial to consider that cryptocurrency meets the criteria set out in National Provincial Bank v Ainsworth[10] (having a degree of permanence, being definable, and identifiable by third parties) and could therefore be defined as property under the law.
The impact this case has on both the wider technology markets and NFTs is substantial as it further signifies a general acceptance of seemingly ‘intangible’ assets, such as cryptocurrencies, by the courts. This modern approach to technology gives rights to consumers using these blockchain-based assets and an increasing number of transactions, both large commercial ones and small everyday transactions, are becoming more commonplace.
Lavinia Deborah Osbourne v (1) Persons Unknown (2) Ozone Networks Inc
Similarly to other cases concerning these types of assets, the first claim in Osbourne was for an interim proprietary injunction to freeze the NFTs which had been transferred from the claimant, Ms Osbourne, without consent. The test for this claim is significant in considering the legitimacy of blockchain assets in the eyes of the court as it deals with whether damages can be regarded as an adequate remedy. Thereby placing NFTs on balance with other (tangible) assets/property regarding rights and protections under the principle of ‘legal property’. The second claim was to compel Ozone Networks Inc to reveal the identities of those that had ‘stolen’ the NFTs and whether such an injunction could be served out of the court’s jurisdiction. The judge found in favour of the claimant on both of these matters of relief, and makes a fascinating point about the non-fungibility of NFTs; highlighting a meaningful difference between NFTs and cryptocurrencies.
This difference is exemplified in the consideration of damages as a remedy for Ms Osbourne’s loss. Whilst the NFTs themselves were considered to be worth a mere £4000, the judge indicated that the assets have a ‘personal and unique value to the claimant which extends beyond their mere Fiat currency value’[11]. This is an unconventional approach in regards to the awarding of damages for crypto-assets, yet is one that makes sense when considering the unique nature of the token, as the context behind the NFTs highlighted that they were not merely collectibles, but representative of Ms Osbourne’s principles, its purpose being "digital portraits to capture the empowered women they want to see and be in the world"[12]. It was this decision, and the belief that should the injunction not be granted the assets would become impossible to track, that the court satisfied the injunction claim.
This point is a significant development in the court’s analysis of NFTs and is perhaps one of the reasons why the claim was heard in the Commercial Court, setting a precedent for other victims of NFT misappropriation.
As jurisdiction is often a primary focus of cases concerning NFTs and cryptocurrencies, the court debated whether a Bankers Trust order (orders to ascertain the identity of perpetrators of fraud involving the misappropriation of cryptocurrency) could be served on Ozone Networks. Another significant point here as it is the first case where a platform such as OpenSea (Ozone Networks) has attempted to challenge an information request order. This is significant not only in the development of the powers of the courts, in being the first case to do so, but it indicates a willingness of the courts to protect claimants and ensure that companies are held to a reasonable standard.
Significance of decisions on wider technology/law
Whilst the decision is significant for NFTs by establishing them as legal property, it also has further implications for other matters concerning technology and the law. With concerns about blockchain-based assets being used in money laundering and other fraudulent financial activity, the court’s ruling is yet again important in providing a definitive answer to whether these possessions are classified as property, allowing authorities to then combat perpetrators of financial misconduct, as it has set a precedent that will ultimately protect claimants’ interests in matters such as these.
Although it could be argued that because of the theoretical nature of this case, discussing whether the claimant’s case was, in fact, arguable in court, it may appear that the significance of this case is overstated. This may be a valid argument, yet the case is nonetheless important when looking at the courts’ propensity to rule in favour of those bringing claims regarding cryptocurrencies.
Conclusion
The Osbourne case is undoubtedly significant as it declares, for the first time in English and Welsh law, that non-fungible tokens are legal property.
Whether the courts have made a step in the right direction in this regard is perhaps unclear, as NFTs are a new and mostly unregulated security. This liberal approach to new blockchain-based assets, however, may be beneficial in the long run as the courts are renowned for their sluggish approach to ruling on new technologies; and as an international phenomenon, NFTs remain an important part of new technology issues.
[1] (N. Salmi, November 27, 2022) 13 Celebrities Who Have Joined the Crypto Art Craze https://www.lofficielusa.com/pop-culture/celebrities-on-the-crypto-art-craze [2] (H. Chang, March 25, 2020) Understanding the Value of Non-Fungible Tokens https://medium.com/@changhugo/understanding-the-value-of-non-fungible-tokens-nft-49d2713bdfc4 [3] (H. Chang, March 25, 2020) Understanding the Value of Non-Fungible Tokens https://medium.com/@changhugo/understanding-the-value-of-non-fungible-tokens-nft-49d2713bdfc4 [4] (Spatial.io, November 10, 2022) Examples of NFTs you can Collect and Invest in https://www.spatial.io/blog/10-examples-of-nfts-you-can-collect-and-invest-in [5] (Mr. Gautam KM, July 14 2022) https://www.legal500.com/developments/thought-leadership/nfts-and-copyrights/#:~:text=NFTs%20are%20unlikely%20to%20enjoy,created%20may%20enjoy%20copyright%20protection. [6] [2019] EWHC 3556 (Comm) [7] [2022] EWHC 1021 (Comm) [8] [2019] EWHC 3556 (Comm) [9] [2018] EWHC 2596 (CH) [10] [1965] 1 AC 1175 [11] [2022] EWHC 1021 (Comm) point 18.
[12] (C. Whitehouse, D. Wyatt, G. Fahey, 10 June 2022) Injunction granted over stolen NFTs held on constructive trust https://www.rpc.co.uk/perspectives/commercial-disputes/injunction-granted-over-stolen-nfts-held-on-constructive-trust/