English High Court treats Non-Fungible Tokens as legal property in fraud case

Injunction against Persons Unknown

NFTs to be treated as property:

The High Court was satisfied that LO had demonstrated a good arguable case that she had been defrauded of the NFTs. In handing down his judgment, HHJ Pelling QC stated “[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, but I am satisfied… that there is a least a realistically arguable case that such tokens are to be treated as property as a matter of English law”.

This brought the case in line with the Court’s approach to dealing with cryptoassets in AA v Persons Unknown, Re Bitcoin [2019] EWHC 3556 (commented on here). AA followed the UK Jurisdiction Task Force in its ‘Legal Statement on Cryptoassets and Smart Contracts’ and established that, "for the purpose of granting an interim injunction, cryptocurrency such as Bitcoin is a form of property capable of being the subject of a proprietary injunction". Please also see here for our previous LawNow on injunctions and cryptocurrencies.

Jurisdiction to hear the claim:

The High Court held that there was no reason to treat NFTs as different to other cryptoassets when determining the Court’s jurisdiction to hear the claim.

In particular, HHJ Pelling QC followed the reasons outlined by Butcher J in the case of ION Science Ltd v Persons Unknown (unreported, 21 December 2020), who held that, "[t]he lex situs of a crypto asset is determined by the place where the person who owns it is domiciled". Please click here for our analysis of the decision in ION Science.

Accordingly, LO was treated as having had the NFTs in her possession in England by operation of that principle.

Serious issue to be tried:

In considering LO’s claim for the granting of an injunction, the Court held that it was entirely satisfied that there was a serious issue to be tried.

Further, the High Court held that the balance of convenience clearly favoured the granting of interim relief given that if the order was not granted then there would be “a very real risk that these assets will be transferred through multiple different accounts at great spread, 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”.

Service outside of jurisdiction:

Since there was a likelihood that the persons unknown were located outside England and Wales, the Court had to consider whether or not the claim could be served outside the jurisdiction under one of the gateways set out in Practice Direction 6B of the Civil Procedure Rules (“PD6B”).

In this case, HHJ Pelling QC held that the relevant gateways in PD6B 3.1 were met. In particular, it was held that the NFTs were held by persons unknown on a constructive trust from the moment they were removed from LO’s wallet and that gateway 15 was therefore engaged.

The Court also gave permission for alternative service as the injunction may have been “defeated if the more leisurely methods of service… were to be adopted”.

Bankers Trust Disclosure Order against OpenSea:

A real issue to be determined:

In relation to LO’s application for a Bankers Trust Disclosure Order to be made against OpenSea, the Court held that there was a real issue to be determined. In particular, HHJ Pelling QC found that:

1. There were good grounds for concluding that assets belonging to LO had been removed from her wallet.
2. There was a real prospect that the information sought would lead to the location or preservation of the NFTs, particularly as the wallets to which the NFTs were transferred were controlled or administered by OpenSea.
3. The Bankers Trust Disclosure Order was no wider than necessary to trace the current holders of the NFTs. This was of particular importance to the Court, which held that the only information to be provided by OpenSea would be information concerning the name, address, email address and any other contact details available to OpenSea regarding persons unknown.
4. The Court had appropriately balanced the rights of LO as against the potential infringement of rights to privacy and confidentiality of others. To achieve this balance, the Court gave OpenSea an express right to apply to vary or discharge the order within a fixed future period and delayed the obligation to comply with the terms of the order until after expiry of the time by which that application had to be made.
5. It was necessary for LO to provide undertakings to OpenSea so that its interests could be protected, including:

a. meeting the expenses incurred by OpenSea in complying with the order;

b. compensating OpenSea in damages that it becomes liable to pay as a result of complying with the order; and

c. using any information supplied only for the purposes of attempting to trace the NFTs.

Service outside of jurisdiction:

As OpenSea was located in the United States of America, service of the claim would again have to be brought outside of the jurisdiction under one of the gateways set out in PD6B. As set out previously, the Court were content that the claim could be served on persons unknown under gateway 15 and that there was a real issue that was reasonable for the Court to try.

Accordingly, the only remaining issue concerned whether or not OpenSea were a necessary party to the claim. In considering the general threshold test as to whether OpenSea would be sued if they were located in England and Wales, HHJ Pelling QC held that he was “entirely satisfied that if Ozone were in the English jurisdiction, then they would be joined in at the proceedings commenced against the persons unknown for the purposes of obtaining the information which is sought”.

Is England and Wales the appropriate venue for the claim against OpenSea to be resolved:

The Court demonstrated significant reluctance when considering whether England and Wales was the appropriate venue for the claim against OpenSea to be resolved, particularly as it noted any order:

1. would likely be punitively expensive for LO to police;
2. would likely generate significant litigation if OpenSea took issue with it; and
3. may not be engaged with at all by OpenSea.

However, ultimately the Court chose to remain consistent with the approach adopted in earlier cryptoasset fraud cases and grant the Bankers Trust Disclosure Order, on the assumption that OpenSea would wish to cooperate with the English Courts for the purposes of combatting fraud.

Comment:

This judgment is yet another step forward for victims of fraud and highlights another leap forward in the Court’s attempts to keep up with technological advancements and the novel legal problems that cryptoassets, NFT and blockchain technology pose.

Further, the Court’s recognition that there was at least a realistically arguable case that NFTs are to be treated as legal property in the same way that cryptoassets have been, is likely to continue to receive much judicial attention over the coming months.

It is also encouraging that the English Court continues to be willing to act with urgency to combat fraud committed in this sphere. In particular, the English Court’s preparedness to make a Bankers Trust Disclosure Order against exchanges based outside of the jurisdiction in appropriate cases (despite the fact that such orders might be difficult to enforce) is welcome even if optimistic.