Crypto Ruling: Stolen NFTs Are ‘Property’ Held On Constructive Trust

An important ruling has provided clarity on the courts’ approach to the category of crypto assets known as non-fungible tokens (NFTs). The award-winning commercial lawyers at ParrisWhittaker are experts in the latest business technologies such as crypto assets; as well as securing freezing orders and disclosure orders over crypto assets.

Cryptocurrency, such as Bitcoin and Etherium, are already increasingly mainstream in the business world. The courts consider Bitcoin as ‘property’ for the purposes of the law, enabling claimants to pursue claims involving cryptocurrency. NFTs are a specific form of crypto asset which are held on a blockchain. An NFT essentially represents a real-life object which the buyers purchases using crypto currency (a ‘fungible’ which can be exchanged or replaced).

In one of the latest ruling¹ on crypto assets, the High Court in England has now confirmed that NFTs are also property for the purposes of the law. The judge also gave useful guidance on appropriate remedies in the case of a dispute. The ruling has persuasive authority on the courts in The Bahamas.

What was this case about?

The claimant (the founder of Women in Blockchain Talks) opened an account on a peer-to-peer NFT marketplace which was operated by a US company (second defendant). A third party company wanted to gift her several NFTs representing digital works of art. Accordingly, these were transferred into the account controlled by the claimant.

However, persons unknown later somehow removed the NFTs from the claimant’s wallet without her knowledge or consent. These assets, worth around £4,000, were later traceable to two other accounts opened by the US company – but the account owners’ identities could not be ascertained. The claimant sought:

• A freezing order against persons unknown (their location was also unknown)
• An order requiring the US company not to allow any further transfers of the assets concerned
• An order also requiring the US company to provide information enabling the claimant to trace or identify the persons unknown

This was a novel ‘crypto’ case but the court said the claimant had a good arguable case that she had been defrauded; and that the NFTs were effectively held by the persons unknown on constructive trust.

Importantly, it also acknowledged that the issue of whether NFTs constitute property for legal purposes would arise later in the case. The judge gave his preliminary view on this: there was “at least a realistically arguable case that such tokens are to be treated as property as a matter of English law”.

An important consideration was the location of the NFTs at the time of loss – this was probably where the relevant servers were maintained. The judge said trying to litigate such issues by reference to a concept so ethereal would be “difficult or impossible”; that said, it has been consistently held in several crypto currency fraud cases that crypto assets are to be treated as located at the place where their owner is domiciled. The NFTs would probably be treated in the same way, assumed they are treated as ‘property’.

Remedies

Regarding remedies, the judge took the view that damages would be insufficient in the absence of any information about the unknown persons involved or their financial position. Furthermore, the NFTs held personal and unique value to the claimant over and above their financial value.

The court granted the claimant the injunction sought because of the real risk of the NFTs being dissipated at speed, and in such a way that she would be unable to trace and retrieve them.

Jurisdiction

Importantly, even though the unknown persons’ location or jurisdiction was unknown, the claimant herself was located in England. Under English law, the NFTs were removed from her in England. England was therefore the appropriate forum and permission should be granted to serve the persons unknown out of the jurisdiction.

As for the disclosure order sought against the company itself, the court said that had the defendants been located in England and Wales, they would all face proceedings for the purposes of obtaining the information. The disclosure order was made, but whether the defendant company will engage with the English courts is another matter.

What does this mean?

Cryptocurrency and crypto assets, such as NFTs, are becoming increasingly mainstream. But given their relative infancy, their geographical reach and the ‘ethereal’ nature of these assets, the potential for costly disputes is higher. The ability of the true legal owner to enforce their legal rights may also be more challenging.