The Commercial Court in Osbourne v Persons Unknown and another [1] has held for the first time that NFTs can, at least in principle, be treated as property, following the jurisprudence in respect of cryptocurrencies [2] and in the UKJT's Statement on Cryptoassets [3].
In this case the NFTs represented digital works of art and the decision is another illustration of English courts' expansive approach to grant injunctive relief to victims of cryptoasset fraud, which is welcome news to NFT owners. If an NFT is stolen, the English courts are able to grant an interim proprietary injunction to freeze the NFT, prevent it from dissipation and require the NFT platform (in whose account the stolen NFTs are held) to disclose information regarding the identity of the wrongdoer.
Key takeaways
1. NFTs are to be treated as property for the purposes of granting injunctive relief (as has been the case with cryptocurrencies), and can therefore be frozen to prevent dissipation.
2. A Bankers Trust Order can be granted against an NFT marketplace outside of the jurisdiction, in a similar vein to the court's approach against cryptocurrency exchanges [4]. This is despite the initial obiter hesitation of Bryan J in AA v Persons Unknown [5]. The position as to Norwich Pharmacal relief remains uncertain (see more on this here).
3. It appears to be becoming the standard approach for victims of cryptoasset fraud to apply for this two-stage relief. The orders complement each other; as the disclosure obtained from the marketplace/exchange will be required to recover the misappropriated NFTs from the wrongdoer, whilst the injunction prevents the cryptoassets from dissipation in the interim.
Facts
The Claimant, Ms Osbourne (the founder of a platform called 'Women in Blockchain Talks'), owned 2 NFTs representing digital works of art. These were stored in her account with the Second Defendant (Ozone Networks Incorporated t/a Opensea) ("Opensea"), a US-based peer-to-peer NFT marketplace. These platforms are essentially like Amazon or eBay for NFTs; the NFTs can be stored, displayed, traded and in some cases minted (created) on the platform.
Unknown hackers managed to remove the Claimant's NFTs from her account without her knowledge or consent. Following enquiries, the stolen NFTs could be traced to two accounts on Opensea. The Claimant sought from the court:
1. an interim proprietary injunction to freeze the NFTs and so prevent them from dissipation; and
2. a Bankers Trust Order compelling Opensea to disclose information to identify the individuals that controlled the wallets in which the stolen NFTs were.
1. Proprietary Injunction against Persons Unknown
By treating the NFTs as property (in principle) this allowed them to be the subject of a proprietary injunction against the unknown hackers.
"Particular, personal and unique value"
One of the interesting points to emerge from the judgment was the recognition that the stolen NFTs, despite only being worth around £4,000 each, had a "particular, personal and unique value" to the Claimant. This (combined with the fact that the identity and therefore financial means of the hackers was unknown) persuaded the court that damages would not be an adequate remedy for the Claimant.
This demonstrates the fundamental difference between NFTs and cryptocurrencies – Bitcoin, for example, is fungible; every bitcoin has the same value and is not unique relative to any other bitcoin. Whereas NFTs each represent a unique asset (such as a piece of art) and the court has recognised that they will therefore have varying degrees of subjective value.
Service Outside of the Jurisdiction
The court was satisfied that the Claimant could serve outside the jurisdiction upon persons unknown by reference to CPR Practice Direction 6B, Gateway 15.
This was on the basis that (1) the Claimant's strongest cause of action was that the stolen NFTs were held by persons unknown on a constructive trust from the moment that they were removed from the Claimant's wallet [6]; and (2) the lex situs of the NFTs is in England as this is where the owner is domiciled, following the approach in previous cryptocurrency cases such as Ion Science v Persons Unknown[7].
It is worth noting though that, since Osbourne, the High Court in Tulip Trading Limited v Bitcoin Association & others[8] has indicated in obiter comments that the lex situs of the cryptoasset is likely to be where the owner is resident, rather than where they are domiciled. In this case, the Claimant company was incorporated, and therefore domiciled, in the Seychelles. However the company undertook no active business in the Seychelles; rather its sole function was to hold cryptoassets and was controlled and run by its CEO from their office in Surrey, England. This casts some uncertainty over which approach is correct, but may simply depend upon the specific facts of each case.
The court also granted permission for service by alternative means, following the approach in AA v Persons Unknown.
2. Bankers Trust Order Against Opensea
The Claimant also sought, and was granted, a Bankers Trust Order against Opensea, requiring the US-based NFT marketplace to disclose information that could help trace the identity of fraudster(s).
The court felt that Opensea was likely to hold Know Your Customer (KYC) information about the fraudster(s) and this would lead to the location or preservation of the NFTs.
The Claimant was ordered to provide undertakings to Opensea to pay all expenses and any damages that it becomes liable for as a result of complying with the Bankers Trust Order. Cryptocurrency exchanges and NFT marketplaces being made subject to disclosure orders is a relatively new concept. Therefore there is limited knowledge or precedent to indicate (a) the level of detail and information that they are prepared to provide to comply with the disclosure order and (b) the costs that they say are incurred in doing so. This might expose the Claimant to significant costs indemnifying Opensea and potentially costs of enforcing the order in the US, if that becomes necessary.
Service Outside of the Jurisdiction
The court granted permission to serve the Bankers Trust Order outside of the jurisdiction on Opensea in the US by reference to Practice Direction 6B Gateway 3, as it considered Persons Unknown (relying on Gateway 15) as the 'anchor defendant'.
The difficulty for the court on this issue was whether or not England was the appropriate place for the claim to be resolved, as Opensea has no presence in England which limits the ability of the court to enforce any order it makes against it. However, consistent with the approach adopted in previous cases and on the assumption that Opensea would cooperate and supply the information requested, the judge was minded to grant the order sought.
Final thoughts
It remains to be seen how cooperative Defendants based foreign jurisdictions such as Opensea will be in relation to complying with English disclosure orders. This could expose the Claimant to further costs, which was an express concern of the judge in Osbourne[9]. However the priority in this case was evidently recovering the NFTs given their personal and unique value to the Claimant.
For more on the nature of NFTs and the potential risks of fraud, see our previous article.
[1] [2022] EWHC 1021 (Comm)
[2] AA v Persons Unknown [2019] EWHC 3556 (Comm)
[3] Legal Statement on Cryptoassets and Smart Contracts published by the UK Jurisdiction Taskforce in November 2019
[4] Ion Science v Persons Unknown (unreported) (21 December 2020); Fetch.AI Ltd v Persons Unknown [2021] EWHC 2254 (Comm); Mr Dollar Bill Limited v Persons Unknown [2021] EWHC 2718
[5] [2019] EWHC 3556 (Comm)
[6] Following Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669
[7] (unreported) (21 December 2020)
[8] [2022] EWHC 667 (Ch)
[9] Osbourne v Persons Unknown and another [2022] EWHC 1021 (Comm), para. 54
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