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Freshfields Risk & Compliance

| 3 minutes read

A flexible approach to Non-Fungible Tokens in the English Courts

Two recent cases have illustrated the continued willingness of the English Courts to adapt existing rules to deal with claims before them concerning digital assets – in these cases, in the context of non-fungible tokens (NFTs).

NFTs as legal property

For some time now, the English Courts have been willing to consider that cryptoassets should be treated as property for the purposes of granting proprietary injunctions.  However, the same had yet to be confirmed for NFTs, until the recent case of Osbourne v Persons Unknown and another [2022] EWHC 1021 (Comm).

The NFTs in question were two digital artworks purchased by the Claimant, which were stolen from her digital wallet in January 2022. The Claimant was able to trace the NFTs to two separate digital wallets held by Persons Unknown and so applied for an injunction restraining the dissipation of the stolen NFTs until the end of the proceedings. While the Court noted that “[t]here is clearly going to be an issue at some stage as to whether non-fungible tokens constitute property for the purposes of the law of England and Wales”, it found that there was “at least a realistically arguable case” that NFTs are property as a matter of English law and proceeded to grant injunctive relief.

Two points of particular interest arise out of the case. First, the Court considered that the best cause of action available to the Claimant was that the NFTs were held by the Persons Unknown on constructive trust for her, meaning the claim could fall within gateway 15 of Practice Direction 6B for service out of the jurisdiction (subject to the lex situs of the NFT being in England). Second, despite the modest value of the NFTs (c. £4,000), the Court considered that they had “personal and unique” value, such that damages were not an appropriate remedy. While nothing turned on this on the facts, this reasoning may justify the use of proprietary injunctions over NFTs in cases against known defendants given their non-fungible nature, in circumstances where the Courts have been less willing to grant such injunctions in respect of fungible cryptoassets (see, for example, Toma and another v Murray [2020] EWHC 2295 (Ch)).

Service of proceedings by NFT airdrop

In what is believed to be a first for the English Courts, in D’Aloia v. Binance Holdings & Others [2022] EWHC 1723 (Ch), permission was granted to serve proceedings on Persons Unknown by NFT airdrop into two wallets to which misappropriated cryptoassets had been sent.

While this decision represents the latest example of the English Courts embracing modern forms of alternative service where there is good reason to do so (having previously permitted service via Instagram, Facebook and Twitter), in D’Aloia, the Court also required service to be effected by way of email to an email address which the Persons Unknown had used to correspond with the Claimant, and it is unclear whether the Courts would be willing to go as far as permitting service only by NFT airdrop.

This decision is believed to be only the second of its kind worldwide, following the June 2022 decision by the Supreme Court of the State of New York in LCX AG v John Does Nos. 1-25 which granted an order permitting service of court proceedings by an NFT airdrop into a wallet controlled by the anonymous defendant.

Key takeaways

While these decisions illustrate the English Courts’ continued willingness to apply existing legal principles to tackle claims concerning digital assets, it should be borne in mind that these decisions (and the majority of earlier decisions concerning digital assets) are interim hearings on an ex parte basis meaning the treatment of digital assets under English law has yet to be subject to any significant judicial scrutiny in contested hearings. For more information on the treatment of NFTs, which are considered by the UK Law Commission in its recent consultation on digital assets, please read our blog post here. In summary, the Law Commission: (i) proposes that a third category of property, “digital objects”, should be recognised under English law; and (ii) considers that NFTs are crypto-tokens that are capable of attracting personal property rights in themselves, but that they can also be capable of conferring rights external to the NFT itself (such as intellectual property rights).