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Non-Fungible Tokens: A Landmark Judgment

Posted on 1 July 2022

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Digital ownership of cryptoassets has brought with it an exponential growth in engagement and monetisation. Indeed, the Non-Fungible Token (NFT) market exploded in 2021, growing to an estimated $22 billion that year and attracting the attention of investors, musicians, artists and reputed auction houses, such as Sotheby's, alike. However, the creation, trading, ownership and diverse use of these cryptoassets raises interesting legal questions, not least amongst them the matter of proprietary rights. There have been several instances in recent years of the High Court taking action to freeze stolen cryptocurrency. However, in an unprecedented judgment from HHJ Pelling QC in the case of Lavinia Deborah Osbourne v (1) Persons Unknown (2) Ozone Networks Inc Trading as Opensea [2022] EWHC 1021 (Comm), the High Court of England and Wales took an important first step of freezing two NFTs, thereby extending this developing jurisdiction to cover this additional class of cryptoassets.

The case

The case was brought by Lavinia Deborah Osbourne and arose in January 2022, when Ms Osbourne, the founder of Women in Blockchain Talks, discovered that two NFTs, representing digital works of art, had been taken from her digital wallet without her consent. The NFTs in question were from the Boss Beauties collection, an NFT-based initiative designed to create opportunities for women through a series of 10,000 digital portraits, featuring diverse women celebrated for their success in their individual careers. Investigative tracing led Ms Osbourne to two accounts opened on OpenSea, a peer-to-peer marketplace run by Ozone Networks Incorporated ("Ozone"), a company incorporated in the United States. Ms Osbourne applied to the English courts for an urgent proprietary freezing order against persons unknown and an order under the Bankers Trust jurisdiction, requiring Ozone to provide information to enable Ms Osbourne to trace or identify the persons unknown who controlled the wallets to which the NFTs had been transferred.

In considering the applications, the judge was satisfied that there was at least a realistically arguable case that NFTs are to be treated as property.  In doing so, he followed earlier cases which had reached the same conclusion in respect of other categories of cryptoassets.  Similarly, when considering where the NFTs should be treated as located, he followed earlier decisions relating to other types of cryptoassets and saw no reason to treat NFTs in any different way. Thus, he held that the NFTs should be treated as located at the place where the owner is domiciled, namely in this case, within the jurisdiction of the English courts.  

As with the majority of cryptoasset thefts, Ms Osbourne had no knowledge of where the perpetrators of the theft were located. In this regard, HHJ Pelling QC considered the issue of alternative service against the persons unknown and acknowledged the possibility that the persons were located in jurisdictions which are subject to the Hague Service Convention. Notwithstanding this, he held that it was appropriate to depart from the Convention scheme on this occasion as slower methods of bringing the injunction to the respondents' attention may defeat the purpose of the freezing order. 

HHJ Pelling QC went on to consider the application sought against Ozone. HHJ Pelling QC recognised the "rather unsatisfactory dichotomy" surrounding the ability to serve Bankers Trust but not Norwich Pharmacal orders out of the jurisdiction.  However, it was not necessary in this case to grapple with that issue given the proprietary nature of the claim and the availability of Bankers Trust relief. Happily, this distinction will soon become a moot point following confirmation that the CPR Committee has approved a new jurisdictional gateway to come into force in October this year which will cover such applications. This will be a significant development for cases involving misappropriated cryptoassets, which often involve unknown perpetrators and span multiple jurisdictions.

In granting the Bankers Trust application, the judge highlighted that the requirement for the order sought to be no wider than necessary to trace the relevant assets was a critical protection and he therefore directed that Ozone should only disclose the name, address, email address and other contact details available for those in whose name the relevant wallets were held or their ultimate beneficial owners.

Finally, in considering whether England was the appropriate forum, although the judge hesitated on this point given Ozone had no presence in this jurisdiction, he ultimately granted the order consistent with the approach adopted in earlier cases and "on the assumption that Ozone would wish to cooperate with the English Courts for the purposes of supplying information which enables the proceeds of fraud to be traced".

A landmark NFT judgment

As highlighted above, the landmark nature of this judgment is found in the precedent it sets for recognising the proprietary rights of NFT holders. Indeed, one of the most significant challenges for Ms Osbourne's application was that the courts had never before recognised NFTs as property that could be frozen by way of injunction. Importantly, this case drew no distinction between classes of cryptoassets. This judgment therefore shifts the legal landscape and removes any uncertainty that NFTs would be treated any differently than other categories of cryptoassets, at least for the purpose of granting proprietary freezing injunctions. 

News of this case also arrived alongside reports of a court ruling in Hangzhou, China, which reportedly saw NFT marketplace NFTCN, held accountable for allowing a user to fraudulently create tokens from a stolen artwork by Ma Qianli. Cases such as these will be watched closely by those involved in the cryptoasset space internationally. HHJ Pelling QC's judgment has demonstrated the willingness of the English courts to act in this space and has set a precedent which it is hoped international courts will follow in due course.

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