English High Court suggests NFTs can be legal property, presaging battles to come

A recent High Court judgment in Osbourne v Persons Unknown & Anor strongly suggests the English courts are open to treating NFTs as property under English law. The judgment constitutes a significant legal development for NFT owners in showing the willingness of the English courts to provide enforceable rights to owners under English law.

The judgment may also serve as an indicator of the shape of things to come for NFT marketplaces and cryptoasset exchanges as developing the trend of increased legal and/or regulatory encroachment on these interfaces between established economies and (otherwise) decentralised blockchain implementations. Such market participants need to be ready to deal with claims by owners of NFTs - whose rights to their assets have now been legally recognised - in the event that those digital assets are misappropriated.

Misappropriated beauties – the case

The case concerns the alleged theft of two "Boss Beauties" NFTs from the claimant Lavinia Osbourne, valued in the judgment at around GBP 4,000. The NFTs in question are digital artwork whose ownership is recorded on the Ethereum blockchain. 

The two Boss Beauties NFTs were removed from the Claimants' wallet by persons unknown and transferred to two other accounts opened by the second defendant, the major NFT marketplace Opensea, based in the US.

Following the alleged theft, Osbourne sought a freezing injunction against the persons unknown and against Opensea, to stop the NFTs being sold on, and to seek information from Opensea as to the identities of those persons unknown as owners of the recipient accounts.

NFTs property as a matter of English law

The honourable Judge Pelling QC granted the freezing injunction sought and, in doing so, held that there was "at least a realistically arguable case that such [NFTs] are to be treated as property as a matter of English law". This judgment appears to be the first in which the English court has confirmed as much.

The judgment also confirmed that the NFTs were to be treated as located for legal purposes where their owner is domiciled. The location of assets is crucial to determining how any accompanying legal rights can be enforced, and the judge's decision to locate the otherwise totally intangible NFTs in the jurisdiction of their owner may provide significant aid to anyone trying to recover misappropriated cryptoassets in other cases.

The practical impact for NFT owners 

The fact that NFTs have been recognised as being capable of constituting legal property is important because it means owners of NFTs could gain access to important legal rights. Those rights can then also be more easily enforced in light of the decision as to their legal location.

For example, in the present case the assumed existence of these rights enabled the court to provide an order that would stop the NFTs being transferred to other accounts, and require Opensea to identify the owners of those accounts so the Claimant could bring a claim against them.

The practical impact for NFT marketplaces and exchanges

The judgment also serves as a further warning for cryptoasset marketplaces and exchanges such as Opensea and Bitfenix (a defendant in a similar case) that the English courts are willing to join them as defendants to the extent they facilitate potentially fraudulent transactions.

Authorities and regulators such as HMRC and the Financial Conduct Authority in the UK are not far behind, and the same is true for authorities and regulators in other jurisdictions (US) around (Singapore) the (Russia) world (Spain).

The battle for control between the "old world" and blockchain implementations

The Osbourne judgment is a double-edged sword for those interested and/or invested in cryptoassets.

On the one hand, the confirmation of these legal rights may provide some comfort to those with large cryptoasset holdings concerned about fraud within the sector or still reeling from recent volatility and not-so-stablecoin fallout. Indeed, companies wishing to provide a reputable interface between the "old economy" and blockchains would be well-advised to take note of the willingness of English courts to support cryptoasset owners in enforcing such rights.

On the other hand, interventions of this nature by courts or authorities and regulators strike at core principles of many blockchain implementations, which are generally designed to be anonymous and impervious to exactly this sort of interference. 

In this case Opensea was required to identify otherwise anonymous users of its platform to the claimant, and also to stop any further transfers of the NFTs, regardless of the wishes of whoever controlled the relevant accounts. By contrast, if a theft had taken place via a purely "on-chain" transaction of a cryptocurrency with no intermediation, it would likely be impossible to enforce any such order.

There is clearly a practical commercial need for marketplaces and exchanges like Opensea and Bitfenix that intermediate between users with government-denominated funds (GBP, USD, etc.) and blockchain implementations.

However, the need for these intermediaries to interface with the "real world" (and the associated increasing regulatory pressures, such as requirements to hold KYC information) means it is exactly these interfaces that now represent the biggest attack vectors for what blockchain purists might term "the encroachment" of courts, authorities and regulators upon otherwise decentralised and tamper-resistant blockchains. 

It is these interfaces between the "old world" and the blockchain where this battle for control will continue to be fought. Osbourne represents only another opening salvo.

Suggested further reading

For those interested in understanding more about the legal analysis of cryptoassets, the Legal Statement on Cryptoassets and Smart Contracts (to which, for transparency, the author and several of his colleagues contributed) represents an excellent starting point.

The analysis in the Statement on cryptoassets as legal property has been adopted by the English courts as correct in the key case of AA v Persons Unknown, to which the Osbourne case refers. See our video update at the time for more discussion on this.