Are NFTs a type of property under English law?
By Matt Dixon-Ward, Trainee
An English court has reportedly recognised a non-fungible token (NFT) as a type of property in an as yet unreported High Court decision (Lavinia Deborah Osbourne v (1) Persons Unknown (2) Ozone Networks Inc Trading as Opensea) (the OpenSea case).
At the date of writing, the published judgment is not available, but if a victim of an NFT theft is now able to establish that an NFT is a type of property under English law it would mean that the victim might be able to obtain an interim freezing injunction (or other judicial remedies) to protect the NFT against those whose digital wallets contain stolen NFTs, as well as – potentially - against the platform upon which such NFTs are being offered for sale.
Such an outcome would follow a growing consensus in the English courts that cryptocurrencies (which, like NFTs, are typically hosted on distributed ledger technology) are also property.
NFTs shift towards the mainstream
NFT sales volume reached US$24.9 billion in 2021, compared to US$94.9 million the year before.1 The market is no longer confined to individuals as issuers, with large businesses queuing up to mint NFTs, including well-known household names. Some countries are also participating in the growing market. For example:
- Slovenia announced that it would be issuing NFTs at EXPO DUBAI 2020 for the purpose of promoting tourism.2
- Similarly, in March 2022, after receiving donations of almost US$50m worth of various cryptocurrencies, Ukraine announced that it would also be issuing NFTs in order to support its armed forces.3
- In April 2022 the UK’s Chancellor of the Exchequer announced that the Royal Mint would be issuing an NFT as part of the Treasury’s drive to make the UK a “global cryptoasset hub”.
Such activity points to a nascent technology that may quickly becoming mainstream. There is a range of use cases and many legal issues to consider in relation to NFTs (see our articles, The Anatomy of an NFT and NFTs and Intellectual Property Rights, and our webinar, What is an NFT and why are people paying so much for them, for more information).
Cryptoassets as property
It may be surprising that, given the growth popularity of NFTs and the cost purchasing some of the more expensive tokens, there has been uncertainty about the rights granted to owners of NFTs. Such uncertainty becomes particularly problematic when NFTs are stolen.
The cryptoasset community has historically been resistant to regulation, and there are still those who believe in the so-called “code is law” approach to irreversible coding outcomes of NFTs and distributed ledger technology, even when such outcomes may not have been predicted or desired. So the thinking goes, it is up to individuals to protect their own cryptoassets, and regardless of how cryptoassets might be acquired, it is up the technology itself (distributed ledger technology, such as blockchain) to determine ownership.
Such an approach, for businesses, is clearly problematic. Recent downward adjustments in cryptocurrency valuations, impacting upon individual investors adversely, have increased calls for regulation in the area. In the meantime, the courts have been addressing discrete legal questions about cryptocurrencies where the legislature has been silent.
In 2019 the English case of AA v Persons Unknown:
- Recognised that Bitcoin was property for the purpose of granting proprietary injunctions following a cyberattack.
- Bryan J acknowledged, however, that “prima facie there is a difficulty in treating Bitcoin and other cryptocurrencies as a form of property" due to its resistance to being categorised as either a “thing in action” or a “thing in possession” (see our article, “What sort of property is a cryptoasset?” for further discussion on this point). The UK Jurisdiction Taskforce (UKJT) had earlier published a Legal Statement on Cryptoassets and Smart Contracts, analysing the treatment of novel kinds of intangible assets (including patents and EU carbon emissions allowances) and taking the view that that some intangible assets should be property. Bryan J found that the UKJT’s analysis was a compelling reason to apply a broad definition of the term “property”, enabling it to apply to Bitcoin.
Similar outcomes were reached by the English courts in two further cases in 2019, Vorotyntseva v Money-4 and Robertson v Persons Unknown. These decisions align with decisions elsewhere in the common law world (see our articles, The Legal Nature of Cryptoassets and Smart Contracts and Cryptocurrencies are property capable of being held on trust, New Zealand High Court holds).
The OpenSea case
Despite a number of English court judgments recognising cryptocurrencies as property, the OpenSea case is the first English case of which we are aware that addresses the same issue in relation to NFTs.
As reported:
- The litigation was commenced by Lavinia D. Osbourne (founder of Women in Blockchain Talks) after two of her NFTs from the Boss Beauties collection were transferred out of her digital wallet without her consent.
- Osbourne was able to trace the NFTs to two specified wallets on the OpenSea NFT marketplace, but was not able to identify the individuals who owned the wallets in question.
- Osbourne applied for an interim injunction to freeze the assets until the end of proceedings - an order that can only be made against assets defined as property.
- The High Court ruled in Osbourne’s favour, in the process recognising NFTs as property.
- The interim freezing injunction was issued against the unidentified individuals who own the named wallets, as well as OpenSea (the platform hosting the wallets).
It already appears that the OpenSea case has been influential in informing the approach taken by courts in other jurisdictions. On 18 May 2022 it was reported that the Singapore High Court has granted a proprietary injunction on behalf of an NFT investor to freeze the sale and ownership transfer of a Bored Ape Yacht Club NFT.4 In doing so, the Singapore High Court recognised NFTs as an asset capable of being the subject of an injunction, following the same approach taken by the English courts in the OpenSea case.
Consequences of the OpenSea case
The recognition of NFTs as property could have very significant implications for the NFT market. When recommending that cryptocurrencies be defined as “property”, the UKJT summarised the importance of the issue, stating:
Why does it matter if a cryptocurrency asset is capable of being property. It matters because in principle proprietary rights are recognised against the whole world, whereas other – personal – rights are recognised only against someone who has assumed a relevant legal duty. Proprietary rights are of particular importance in an insolvency, where they generally have priority over claims by creditors, and when someone seeks to recover something that has been lost, stolen, or unlawfully taken. They are also relevant to the questions of whether there can be a security interest in a crypto asset and whether a crypto asset can be held on trust.
The most immediate of these issues that the OpenSea case dealt with was increased protection for victims of NFT thefts. The court in OpenSea was reported to have recognised the ability to enforce freezing orders and proprietary injunctions against individuals suspected of stealing NFTs and platforms hosting wallets containing stolen NFTs. The case does, however, give rise to a number of issues:
- While the outcome is legally very significant, questions about the practicality of enforcing these court orders arise, particularly where individuals cannot be identified.
- The status of “property” may mean that NFTs are capable of being held on trust.
- The case also has implications for insolvency law in relation to NFTs and in relation to the question of whether NFTs can be the subject of a security interest.
These are all important issues, which the courts (and perhaps the legislature too) will need to deal with in the future.