NFT AS PROPERTY: LEGAL LANDSCAPE

Current laws are yet to adapt to the fast-changing technology, and they do not provide direct answer to this important question

NFT or non-fungible token is an entry in a blockchain ledger that is created to transfer ownership of either a digital media or a physical asset. Once it is created, it can be traded, sold or otherwise transferred in accordance with the smart contract embedded in the block chain. As a thing of value, it is prone to theft, fraud and other forms of misappropriation.

Does NFT qualify as property in legal sense?

This is an important question.Current laws are yet to adapt to the fast-changing technology, and they do not provide direct answer to this important question.

Recognition of NFT as property in legal sense will allowapplication of existing law governing property rights and make available whole suite of rights and remedies under them to its owner. This has important consequences in cases of fraud, theft, or breach of trust where proprietary right is necessary for maintaining legal action.The courts in common law jurisdictions have been ahead of the law makers. They have adopted pragmatic and creative approach in recognising this new asset class as property.

The Legal Statement

Legal statement on cryptoassets and smart contracts by the UK Jurisdiction Task Force¹ (Legal Statement) laid the foundation for the evolving jurisprudence on digital assets as a property class.

The Legal Statements notes that cryptoasset is typically represented by a pair of data parameters, one public which is available and visible to all the participants in the system, and the other private which is known only to the person who holds the cryptoasset. The public parameter contains information about the asset such as its ownership, value and transaction history. The private parameter or the private key permits transfer or other dealings in the crypto asset to be cryptographically authenticated by digital signature. Knowledge of the private key confers practical control over the asset; it is therefore exclusively known to the holder.

Based on the analysis of technology, and common law principlesgoverning concept of property,the Legal Statement has concluded that in general cryptoassets possess all indice of property, and their intangibility does not disqualify them from being property. They are also not disqualified from being property as pure information. The Legal Statement thus posited that in general the crypto assets are to be treated in principle as per property. It however added a caveat that whether English law would treat a particular cryptoasset as property ultimately depends on the nature of the asset and the rules of the system in which it exists.

The Legal Statement uses the term cryptoassets in generic sense including non-fungible tokens. The principles stated in its will, therefore, apply to NFTs as well.

Decisions of UK Courts

Trend of case law from UK Courts has been to treat cryptoassets as property.

In AA vs Persons Unknown² the court was dealing with a case for grant of proprietary and freezing injunctions in respect of bitcoins paid by the claimant as ransom to hackers who had hacked its computer system, and installed ransomware. The court noted that for grant of proprietary injunction, it must determine whether the bitcoins are property. It reviewed the evolution of concept of intangible property in English law and concluded that because a crypto asset might not be a “thing in action” does not in itself mean that it cannot be treated as property.

The Court referred to Lord Wilberforce’s classic definition of property in National Provincial Bank v Ainsworth³, and the four criteria laid down by him(Ainsworth criteria). To quote: before “a right or an interest can be admitted into the category of property or a right affecting property, it must be definable, identifiable by third parties, capable in its nature of assumption by third parties, and have some degree of permanence or stability”. In other words, for a right or interest to qualify as property, it mustbe unique, exclusive, capable of being transferred, and permanent or at least stable. These criteria are often cited as a classic test for a right to be characterised as property.

The Court applied these criteria to cryptoassets, followed the same reasoning as in the Legal Statementto conclude that they are a form of property.

Amir Soleymani vs Nifty Gateway LLC⁴, was a case involving NFT for a digital artwork “Abundance” by the artist Beeple. The NFT could be traded and could be bought and sold via auctions. The claimant made a bid at the auction and his bid was accepted. He sought resile and sought a declaration that particular term of the contract under which he made the bid was unfair and therefore not binding upon him. Though the court did not specifically decide the issue as to the nature of NFTs as assets, it did find that NFTs exist as unique string of code stored on a block chain Ledger.

In Osbourne Vs Persons Unknown⁵, the Claimant complained of theft of NFTs from his account with a peer-to-peer NFT marketplace and sought an order for restraining the dissipation of stolen assets. Though the court did not engage in any detailed analysis on the issue of NFTs as property, it proceeded on the basis that “there is at least realistically arguable case that such tokens are to be treated as property as a matter of English law.”

New Zealand: Ruscoe Vs Cryptopia⁶

This is one of the early decisions on the issue. The decision is well reasoned and based on a thorough analysis of the technology and the preceding legal authorities.

The case involved liquidation proceedings of a cryptocurrency trading exchange, and the court was called upon to determine who owns the cryptocurrency under the control of the company in liquidation. The creditors of the company contended that the cryptocurrencies belong to the company in liquidation and, therefore, they form part of the liquidation asset. On the other hand, the account holders asserted their proprietary rights over the cryptocurrency.

The court relied on the Legal Statement for the definition of crypto assets and their character as property. It applied the Ainsworth criteria to crypto currencies and by a detailed reasoning, concluded that cryptocurrency meet the standard criteria outlined by Lord Wilberforce to be considered as a species of property. They are a type of intangible property because of the combination of their three independent features: first, they obtain their definition as a result of public key; and the control and stability are provided by the other two features- the private key attached to the corresponding public key, and generation of fresh private key upon a transfer of the relevant coin.

Though this case was concerned with cryptocurrency, a fungible token, its conclusions and the ratio will also apply, in fact more so, in case of non-fungible token. Non fungibility of NFT reinforces its character as uniquely defined and easily identifiable digital asset. It also reinforces its characteristic of exclusivity. All these factors in fact contribute to NFT’s qualification as property.

Singapore: Bored Ape Case

Bored Ape Yacht Club (BAYC) is a collection of digital artworks, each depicting an ape with unique attributes. All the artworks are tokenized (Bored Ape NFT) on the Ethereum blockchain, and each piece has a unique hash number and token ID. The claimant owned one such token. The Bored Ape NFT could be traded at OpenSea or any other NFT marketplace or offered as collateral for a loan in cryptocurrency, as the Claimant did in this case.

The Claimant obtained a crypto currency loan and used the NFT as collateral. The terms for the collateral stipulated that the lender will not obtain the ownership and the right to sell or dispose of the Bored Ape NFT, he will only be entitled to hold it until repayment of the loan. There was a delay in the repayment of the loan. In violation of the agreed terms, the Defendant exercised the option to foreclose and transferred the Bored Ape NFT to his wallet. He then listed the Bored Ape NFT for sale at OpenSea.

In these facts, the Claimant filed a suit for the return of the Bored Ape NFT inter alia on the ground of breach of contract. Fearing further sale, the Claimant also sought proprietary injunction against the Defendant from dealing with the Bored Ape NFT.

In this case as well, the court applied Ainsworth criteria.

It reasoned that the identification code of an NFT and its metadata makes it unique, and it is, therefore, definable. The person who controls the wallet (containing the NFT) is the presumptive owner to the exclusion of the others, and he can transfer it by transferring the private key. It is as permanent as money in a bank account. For these reasons, the Court concluded that NFT in the case fulfilled the Ainsworth criteria and the rights in it deserve to be protected by grant of proprietary injunction.

Emerging consensus

Thus, there appears to be a consensus across jurisdictions that in general crypto assets qualify as property and they can be justifiably made subject to the same legal rules. In particular cases however, as the Legal Statement notes, the answer will depend on the contractual framework which govern the crypto asset and the rules of the system in which it exists.

This is consistent with the findings in research a paper published in the Florida Law Review,⁷.The authors reviewed the terms of service of eight NFT platforms and concluded that NFTs do not, in all cases, embody the property rights of the asset they represent.

Therefore, the answer to the question whether a particular crypto asset (or an NFT) will constitute property will depend on the contractual framework under which it is created (or “minted”) and the rules of the system in which it exists. In general, however, it has all the indice of a property.

Disclaimer – The views expressed in this article are the personal views of the authors and are purely informative in nature.