NFT fraud: the English court recognises NFTs as ‘property’ and makes proprietary interim remedies available to protect investors

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

The Facts

In September 2021, the founder of Women in Blockchain Talks (the claimant) was gifted NFTs representing digital works of art from Boss Beauties, a women-led NFT avatar collection which funds initiatives to create mentorship and scholarship opportunities for girls and women. By January 2022, the NFTs had been removed from her wallet by fraudsters without her consent. The NFTs were then traced to two accounts controlled by persons unknown (the first defendant) on a U.S.-based peer-to-peer NFT marketplace named Ozone Networks Incorporated t/a Opensea (Opensea) (the second defendant).

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

The Decision

Recognising that the NFTs could be dissipated quickly, the judge granted each of the orders sought by the claimant and gave the claimant permission to serve both defendants out of the jurisdiction by alternative 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 pre-requisite to granting proprietary relief over an asset).
2. The NFTs were held by the persons unknown on a ‘constructive trust’ for the claimant. In summary, when property is obtained by fraud, a constructive trust is imposed on the fraudulent recipient so that they hold legal title to the assets on trust for the victim. This finding is in line with an earlier view expressed by the English court that digital assets were capable of being held on trust.²
3. As in previous cryptocurrency fraud cases (such as Ion Science Ltd v Persons Unknown, on which we reported in March 2021 (accessible here)), NFTs are to be treated as being located at the place where their owner is domiciled for the purpose of determining the applicable law of a dispute.
4. Damages would not be an adequate remedy to compensate the claimant for the loss as: (i) the financial ability of the persons unknown to meet an award of damages could obviously not be assessed; and (ii) NFTs have a “particular, personal and unique value to the claimant which extends beyond their Fiat currency [i.e. conventional cash] value”. This second rationale distinguishes NFTs from cryptocurrencies which are fungible, and increases the likelihood of an English court granting injunctive relief in respect of stolen NFTs in future cases.
5. The claimant was granted permission to serve the Bankers Trust Order on Opensea in the U.S., which is consistent with the approach taken in Ion Science to serving disclosure orders on cryptocurrency exchanges located abroad. In this case, the court was prepared to make the order in circumstances where Opensea had no presence in the English jurisdiction and the ability to compel compliance with any order against it would be questionable. It is not clear whether the outcome might be different if a point was taken at a full hearing as to the inability or impracticality of any English order being enforced in the relevant foreign jurisdiction.

Conclusions

Whilst this is an interim judgment and the defendants were not represented at the hearing to argue their case, it is an important step towards NFTs being recognised as property and will give comfort to victims of NFT fraud that effective proprietary remedies are available through the English courts to assist in recovering their NFTs. The availability of powerful remedies such as disclosure orders against crypto exchanges based outside the UK can be used to bust through the anonymity afforded to holders of crypto wallets and so facilitate enforcement against those in receipt of the stolen assets – just as happened in the case of Ion Science where an exchange was compelled to disclose the account holder of stolen Bitcoin, this ultimately resulting in enforcement against funds held in that account. This is particularly significant as the (already high) number of scams and frauds in crypto markets continues to grow. Although the vast majority of crypto cases before the English courts have so far concerned misappropriated cryptocurrencies, we expect an increase in cases concerning stolen NFTs as the market for NFTs continues to mature.

The English courts continue to lead the way in protecting cryptoasset investors by showing their willingness to apply existing legal principles to the evolving crypto markets and to act swiftly to provide remedies to victims of crypto fraud. The English courts are alive to the commercial reality of crypto frauds, in this case the judge noting that “if the [injunction] is not granted then there is a very real risk that these assets will be transferred through multiple different accounts at great speed, and in a way which will make it practically either very difficult, or possibly even impossible, for the claimant to trace and retrieve her assets”.

Dechert’s international litigation team has a breadth and depth of experience in dealing with the types of urgent remedies described in this OnPoint.

The authors are grateful to Jennifer Hutchings, Trainee Solicitor in London, for her valuable contribution to this OnPoint.

Footnotes

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