NFT Fraud: English Court Recognizes NFTs as “Property” and Provides Exclusive Interim Remedies to Protect Investors | Dechert LLP

In an important judgment,1 the English High Court has recognized for the first time that there is an arguable case that non-fungible tokens (NFTs) should be treated as property under English law. This means that the powerful proprietary remedies available to victims of cryptocurrency fraud are also available to victims of NFT fraud.

Facts

In September 2021, the founder of Women in Blockchain Talks (the plaintiff) received gifted NFTs depicting digital artwork from Boss Beauties, a women-led collection of NFT avatars that funds initiatives to create opportunity mentoring and scholarships for girls and women. In January 2022, the NFTs had been removed from his wallet by fraudsters without his consent. The NFTs were then assigned to two accounts controlled by unknown individuals (the first defendant) on a US-based peer-to-peer NFT marketplace named Ozone Networks Incorporated t/a Opensea (Opensea) (the second defendant).

Plaintiff made a request without notice for: (i) an interim title injunction restricting the dissipation of the NFTs in question; and (ii) a disclosure order known as the Bankers Trust Order, requiring Opensea to provide information enabling the claimant to trace or identify those who controlled the wallets to which the NFTs had been transferred.

decision

Recognizing that the NFTs could be dispelled quickly, the judge granted each of the orders requested by the plaintiff and allowed the plaintiff to serve both defendants out of court by alternate means. In reaching this decision, the Court made the following key findings:

  1. Just like cryptocurrencies, there is an arguable case that NFTs are “property” under English law (which is a precondition for granting ownership of an asset).
  2. The NFTs were held by persons unknown in a “constructive trust” for the plaintiff. In summary, when property is obtained by fraud, a constructive trust is imposed on the fraudulent beneficiary to hold legal title to the property in trust for the victim. This conclusion is in line with an earlier view expressed by the English court that digital assets could be held in trust.2
  3. As in previous cases of cryptocurrency fraud (such as Ion Science Ltd v Unknownswhich we reported in March 2021 (accessible here)), NFTs must be considered to be located at the place where their owner is domiciled for the purposes of determining the law applicable to a dispute.
  4. Damages would not be an adequate remedy to compensate the plaintiff for loss because: (i) the financial capacity of unknown persons to honor an award of damages obviously could not be assessed; and (ii) NFTs have a “particular, personal and unique value to the claimant that extends beyond their Fiat currency [i.e. conventional cash] This second rationale distinguishes NFTs from cryptocurrencies that are fungible, and increases the likelihood that an English court will grant an injunction with respect to stolen NFTs in future cases.
  5. The plaintiff was granted leave to serve the Bankers Trust order on Opensea in the United States, which is consistent with the approach taken in Ionic Sciences serving disclosure orders on cryptocurrency exchanges located overseas. In this case, the court was prepared to make the order in circumstances where Opensea had no presence in English jurisdiction and the ability to enforce any order against it would be questionable. It is unclear whether the result could be different if a point were raised at a full hearing as to the impossibility or inability to enforce an English order in the relevant foreign jurisdiction.

conclusion

Although this is an interim judgment and the defendants were not represented at the hearing to argue their case, it is an important step towards recognizing NFTs as property and will reassure victims of NFT fraud that effective exclusive remedies are available in the English courts. to help recover their NFTs. The availability of powerful remedies such as disclosure orders against crypto exchanges based outside the UK can be used to break the anonymity granted to crypto wallet holders and thus facilitate enforcement against those who receive the stolen assets – just as it happened in the case of Ionic Sciences when an exchange was coerced into disclosing the account holder of the stolen Bitcoin, which ultimately resulted in the execution of funds held in that account. This is especially important as the (already high) number of scams and frauds in the crypto markets continues to grow. Although the vast majority of crypto cases in English courts have so far involved hijacked cryptocurrencies, we expect to see an increase in cases involving stolen NFTs as the NFT market continues to mature.

The English courts continue to lead the way in protecting crypto-asset investors by showing their willingness to apply existing legal principles to evolving crypto markets and move quickly to provide remedies for victims of cryptocurrencies. fraud. The English courts are aware of the commercial reality of crypto fraud, in this case the judge noting that “if the [injunction] is not granted, there is a very real risk that these assets will be transferred across several different accounts at high speed, and in a manner that will make it virtually either very difficult, if not impossible, for the claimant to trace and recover their assets”.

The authors would like to thank Jennifer Hutchings, Trainee Solicitor in London, for her valuable contribution to this OnPoint.

Footnotes

  1. Lavinia Deborah Osbourne vs. (1) Unknown Persons and (2) Ozone Networks Inc trading as Opensea [2022] EWHC 1021 (Comm)
  2. Wang vs. Darby [2021] EWHC 3054 (Comm)

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