By David Hoppe, Managing Partner, Gamma Law, San Francisco, United States
Recently, the UK's High Court recognized non-fungible tokens (NFTs) as “property” separate from the underlying assets or objects they represent. This decision (Lavinia Deborah Osbourne v. Persons Unknown; Ozone Networks Inc  EWHC 1021(Comm)) is likely to have far-reaching implications for disputes involving digital assets and digital art. The High Court’s ruling is likely to influence how the US views NFTs when it comes to trademark, copyright, and other intellectual property rights. NFTs have an important part to play in many industries, including sport.
In a landmark decision, the UK's High Court has ruled that NFTs are property, separate from the underlying content that they represent. The court rendered this decision in light of Lavinia Osbourne's stolen NFTs. Earlier in the year, Osbourne, founder of Women in Blockchain, claimed that two Boss Beauties NFTs were stolen from her Metamask wallet Earlier in the year, Osbourne, founder of Women in Blockchain, claimed that two Boss Beauties NFTs were lifted from her Metamask wallet. Boss Beauties is an NFT collection linked to images of 'beautifully diverse, empowered women.' Osbourne did not provide details about how criminals were able to steal the NFTs, the tokens were later listed on OpenSea, the popular NFT marketplace. It seems that these NFTs ended up in the possession of two anonymous OpenSea account holders.
Osbourne filed an injunction against OpenSea seeking to reclaim the NFTs. The court issued an injunction to freeze the assets on the accounts of Ozone Networks (the host of OpenSea) and compelled OpenSea to disclose information about the two account holders in possession of the stolen NFTs.
The outcome will bear on worldwide NFT, crypto, and blockchain law on several touchpoints.
First and most importantly, it removes the uncertainty —at least in the UK—about whether NFTs constitute property in and of themselves, distinct from the artwork, songs, tweets, or other “assets” they represent. The significance of this opinion is that the court held that an NFT represents a kind of asset that can be frozen, much like a bank or investment account. Nonetheless, this case also raises some ambiguity as the court remained silent on the relationship between an NFT and the underlying asset. As things stand, simple ownership of an NFT does not convey copyright, usage rights, moral rights, or any other rights. These rights must be explicitly granted in a written contract.
Second, the ruling clarifies that, contrary to the contention of many crypto supporters, code is not law. The term “code is law” is popular among crypto enthusiasts who believe in the proposition that written code is a legitimate form of legal enforcement even if the software contains a glitch or performs in an unintended manner. Practically speaking, it means that if someone obtains an NFT simply because they are able to access the rightful owner’s private keys via phishing or other scams, it should not be considered illegal. The code, some would argue, enabled the activity, and the perpetrator acted in a manner that is consistent with and permitted by the code, whose jurisdiction should be respected. The High Court, however, took the view that a person’s legitimate claim to a particular private key is legally significant. The fact that another party is capable of taking possession of an asset doesn’t mean that ownership is conveyed or that they should be allowed to do so.
Third, the court issued an injunction against 'unknown persons' as the holders of the wallet containing the stolen NFTs remained incognito at the time the injunction was issued. Further, the court compelled OpenSea to provide information about the two account holders, shredding the cloak of anonymity many blockchain users find desirable when conducting financial transactions.
Finally, the court ordered OpenSea to freeze the relevant accounts so that the NFT could not be moved or traded. Rightful owners of NFTs will find such action a valuable method for preserving their intellectual property rights. Freezing an asset and preventing it from being sold or moved to untraceable accounts will preserve the chain of evidence and give investigators time to unravel the events that led to the NFT’s misappropriation. Following an investigation, legal action can then be initiated.
Implications for US Policy
The High Court’s decision reinforces and coincides with the Internal Revenue Service’s (IRS’s) existing policy of viewing NFTs as property. The IRS and scholars share the view that NFTs possess all the traditional attributes of property. The owner can sell it, trade it, give it away, and prevent others from engaging with it. There is, however, some difference of opinion as to how completely separate jurisdictions can assure the security of an NFT. According to one view, the UK's official recognition of NFTs as property means that holders can be assured that their tokens will be secure and they will have legal recourse in the UK if their property were stolen. Conversely, other commentators have noted that since the US has not officially declared NFTs are property, NFT holders have no recourse if someone hacks into their wallet and steals an NFT. This has led some experts to opine that the UK is leading the way in preserving NFT ownership rights. The fact that NFTs already enjoy the status of property in the US, according to the IRS and other executive-branch agencies does little to fill the current legislative vacuum in assigning property rights to NFT holders. There is an urgent need for a federal law on digital assets, and discussions are underway.
This High Court’s decision has helped clarify the important point that an NFT should be considered property and therefore is eligible to receive all the remedies and benefits of physical possessions. It is, however, unclear as to whether US courts will follow similar reasoning even though NFTs are already considered property in certain contexts in the US as well. This ambiguity has important consequences in determining the scope of protection extended by the NFT platforms. It is particularly unclear whether courts in the US will step up to protect stolen NFTs in the same way as the UK High Court. It is best to consult an attorney specializing in NFTs for advice about the best legal strategy to keep your NFTs secure. An attorney can also draft appropriate legal documents for protecting your digital assets.
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