A pivotal judgment on NFTs in the UK? Osbourne v (1) Persons Unknown and (2) Ozone Networks Inc.

Ruth Whittaker highlights a recent judgment on the legal status of NFTs and discusses what it means for cryptoasset property rights in the future with lead counsel in the case, Rachael Muldoon.

In January this year, two non-fungible tokens (“the NFTs”) were taken from Lavinia Osbourne’s MetaMask crypto wallet without her knowledge or consent. In pursuing the recovery of the NFTs, Osbourne took the initial step towards establishing the first case of its kind in the world – one which formally recognises NFTs as legal property and renders them subject to enforceable rights and protections.

The case of Osbourne v (1) Persons Unknown and (2) Ozone Networks Inc trading as Opensea [2022] EWHC 1021 (Comm) established that that NFTs do have value in the eyes of the law of England and Wales. As such, regardless of opinion on the general utility of NFTs (whether one considers them code or the equivalent of a photograph of a receipt of an asset), their utility and significance may begin to enjoy new commercial and personal dimensions.

Context

The NFTs represent two digital artworks (pictured below) that Osbourne had purchased from an NFT collection promoted by the Boss Beauties Foundation, an initiative designed to engage with and support women in the professional community. The first collection of Boss Beauties NFTs debuted in 2021, and such was its popularity that it became the first NFT collection ever to be listed on the New York Stock Exchange. The NFTs hold great value for Osbourne, who launched the project with the Co-CEO of Boss Beauties and remains heavily invested in gender parity in the tech sphere generally:

“These NFTs represent a moment in time and web 3.0 history, particularly because of what they stand for – women empowerment and DEI [diversity, equity, and inclusion], and as such, they are very important to me. So, when I realised that they were stolen I had to do something about it.”

images of boss beauties NFTs 680 and 690 

After discovering the unauthorised appropriation of her NFTs, Osbourne approached Racheal Muldoon (a barrister at 36 Commercial) on a direct access basis. While Muldoon was aware of the legal hurdle to overcome, she confirmed that she did not hesitate to progress the case for Osbourne. Both women worked closely with the expert input of Rob Moore (Head of Intelligence at Mitmark) to conduct an audit of the relevant blockchain and identify the NFTs. Moore conclusively proved that Osbourne’s NFTs had landed in two wallets linked to two separate platform accounts on OpenSea, the world’s largest cryptoasset market platform.

The case itself

Two months after the unauthorised removal of Osbourne’s NFTs, an urgent application was made in the High Court for an interim injunction designed to freeze the NFTs on OpenSea. This became the case of Osbourne v (1) Persons Unknown and (2) Ozone Networks Inc.

Urgent injunctions are hardly rare, but the obstacle in this situation was that the courts had never before recognised NFTs as a kind of property that could be frozen by way of an injunction. According to Muldoon, the closest that any court of law had come to this kind of situation was in 2019, when the High Court in AA v Persons Unknown 1 held that cryptoassets in general are capable of being property that can be the subject of an injunction. (Notably, the Court here made no mention of NFTs: it only accounted for cryptocurrency, which is a distinct genus of asset from NFTs largely due to their fungible nature.) In other words: Osbourne’s case was the first to realise this potential in respect of NFTs when this application for the injunction was granted in full. Indeed – and referring again to their subjective value from Osbourne’s perspective – the modest value of the NFTs (approximated at £4,000 in this case) did not prevent the High Court from hearing the applications. In the words of the Court

“The evidence demonstrates […] that these are assets which have a particular, personal and unique value to the claimant which extends beyond their mere Fiat currency value. The Court will readily grant injunctions to protect assets in such circumstances.” 2

Muldoon’s submissions sought to convince the High Court that NFTs had all the indicia of property. As part of her approach, she devised an interesting precedent by directing the judge towards an English land and family law case from the 1960s regarding the definition of property and  successfully argued that the nature of NFTs clearly met Lord Wilberforce’s definition of property in National Provincial Bank v Ainsworth 3 in that they:

(i) are definable, with reference to the NFT’s underlying smart contract;

(ii) are identifiable on the blockchain; 

(iii) are capable in their nature of assumption by third parties who can acquire the NFT and associated underlying rights defined in the smart contract; and

(iv) have “some degree of permanence”, notwithstanding the decentralised technology that NFTs utilise. 

A Banker’s Trust disclosure order, enforceable against OpenSea, was also granted with a view to securing documentation to assist in the identification of the account holders in possession of the NFTs. The High Court duly granted the disclosure order on the basis that it had jurisdiction to serve it out of the jurisdiction on the U.S.-incorporated company, given that the lex situs of the NFTs was England (where Osbourne was domiciled at all material times, and following the ratio in Ion Science v Persons Unknown4). The appropriated NFTs were consequently suspended from sale on OpenSea, and the case remains ongoing. 

At the time, the illicit assumption of Osbourne’s NFTs was but one of many instances in a decentralised arena that promised no guarantee of their return given the lack of available legal recourse. Now, following the successful acquisition of the injunction in Osbourne’s case, this landscape appears to have shifted in England and Wales.

Consequences

Freezing appropriated cryptoassets in the High Court is not a novel manoeuvre, but the distinctive aspect of the Osbourne case is that the jurisdiction of England and Wales has officially recognised NFTs as a form of cryptoasset distinguishable from cryptocurrency due to their non-fungible nature. This may strike some readers as a minor point, but the implications of this classification are stirring. Now that NFTs are classified as property in law, NFT holders can enforce ownership and other proprietary rights in this jurisdiction should NFTs be removed from their digital wallets without the holder’s consent.

Osbourne also offers some clarification on the tax status of NFTs, as it would now appear that they are taxable in England and Wales (whether for capital gains, inheritance, or otherwise). Muldoon suggests that it therefore follows that NFTs can begin to officially enjoy all manner of new treatment – they can be held on trust, used as loan collateral, or even be insured. The knock-on effects on the relevant commercial industries remain to be seen, but the potential is most certainly there.

Another unique feature of this judgment is how it has highlighted the blockchain as a singularly efficient means of tracking digital assets. Muldoon has praised it as “a gift to investigators, lawyers and the courts alike, owing to its evidential value”, explaining that Moore was able to locate the NFTs in a matter of hours – a feat which would not have been possible without the instantaneous and transparent auditing potential of the blockchain. This is comparable to conventional civil fraud cases, in which following and tracing assets can take months or years. Muldoon is emphatic on the point that NFTs are easily identifiable and therefore a natural subject of a proprietary injunction given that they are unique and non-divisible, unlike fungible cryptocurrency. As the High Court confirmed:

“[…] if the order 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.” 5

Ultimately, this judgment has added a layer of security to what was a largely unregulated field and presented this jurisdiction as something of an international trendsetter. It currently appears likely that many other jurisdictions will follow suit in recognising NFTs as property. Indeed, this author understands that many other independent practitioners in the UK are of the view that England and Wales are currently enjoying an advantageous position as the best jurisdiction when it comes to protecting the rights of cryptoasset owners.

Is this case as significant as it seems?

Debate surrounding this case has been extensive. Some U.S. specialists have disputed the precedential nature of Osbourne, with one lawyer commenting that the U.S. Internal Revenue Service already “treats all digital assets, including NFTs as property for tax purposes”.6 This point is confirmed by Professor Moringiello of Widener University Commonwealth Law School, who commented that “[a]n owner of an NFT has the right to transfer it, give it to someone else, exclude others from it. These are all of the attributes of property”.7

However, Moringiello qualified this by stating that the significance of Osbourne’s case is that the “the court held that the token is the kind of asset that can be frozen”. Moringiello’s comment appears very much in line with the law as established by Lord Wilberforce in Ainsworth,  and neatly emphasises the genuine significance of having the notion of NFTs as property formalised by law rather than in mere ‘best practice’.

Concluding comments

The decision in Osbourne v (1) Persons Unknown and (2) Ozone Networks Inc has demonstrated the willingness of the jurisdiction of England and Wales to account for the distinctions between different kinds of cryptoassets and affords NFT owners an according level of legal protection. It seems only a matter of time until courts across the world follow suit – until which, it is this jurisdiction that appears to be providing the strongest safeguards to enterprising investors and enthusiasts in this sphere.

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Q&A with Racheal Muldoon, lead counsel on the case

I had the pleasure of discussing this case in detail with Racheal Muldoon, the art and cryptoasset lawyer who advised Osbourne and represented her in the High Court of Justice in London. That discussion has strongly influenced the above article. I also had an opportunity to put additional questions to Racheal, touching on some of the issues debated since the judgment was published.

1. Cryptoassets have been around for a long time – is this really the first time that the courts have dealt with NFTs?

To the best of my knowledge, it is. In advance of making the urgent application, I conducted extensive research and was unable to locate any reported cases domestically or in overseas jurisdictions. What is telling is that the UK Jurisdiction Taskforce’s Legal Statement on Cryptoassets and Smart Contracts (published in November 2019 and endorsed by the High Court in AA), makes no mention of NFTs. As such, it cannot be said with confidence that they were in the Court’s contemplation when judgment was handed down in AA. The first formal mention of NFTs I encountered in an official document was the solitary mention at page 11 of HM Treasury’s Cryptoasset promotions: Consultation response published in January 2022. This was but one policy document I relied upon in my submissions. 

2. What would you say to the suggestion that the significance of Osbourne is somewhat blunted on the basis that it makes no comment on the link between NFTs and the assets that they represent?

The Court in this case was faced with the question of whether it could treat the stolen NFTs as property and therefore freeze them. This was a discrete point which had to be addressed as a matter of first principle. What the High Court was not asked to consider was any question of copyright dispute or other matter going to the link between the NFT and the underlying assets; in this case, the two digital artworks from Boss Beauties. These would have been wholly irrelevant considerations in the context of the application.

However, what I will say (in the capacity of somebody who frequently advises on intellectual property and other rights associated with NFT drops!) is that this all ought to be set out in the smart contract associated with the NFT in question. My approach is to work with smart contract programmers to draft bespoke smart contracts, rather than use the ERC721 standard8 or others off-shelf. This is necessary to ensure that proper legal protections are afforded to parties in NFT transactions. 

3. I’m sure you’ve heard the drama surrounding the NFTs generally – I believe that you’ve known them to be described as a bit of an ‘emperor’s new clothes’ situation.  What’s your personal take on NFTs?

We have not yet seen NFTs used to their full potential. I often reiterate that NFTs are not cryptocurrency, nor are they digital artworks. Rather, they are standalone assets that can convey rights from a limited commercial licence, to access to VIP goods and services. They are unique tools for packaging rights, and that is why I am not surprised by the likes of Starbucks exploiting their potential. I envisage that NFTs will become as much a normal feature of our lives as shares, reward cards, and apps. 

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Notes and sources

[1] AA v Persons Unknown?[2019] EWCA 3556 (Comm)

[2] Osbourne v (1) Persons Unknown and (2) Ozone Networks Inc. [18]

[3] National Provincial Bank v Ainsworth [1965] 3 WLR 1

[4] Ion Science Ltd and Duncan Johns v Persons Unknown, Binance Holdings Limited and Payward Limited (unreported, 21 December 2020)

[5] Osbourne v (1) Persons Unknown and (2) Ozone Networks Inc. [20]

[6] https://news.artnet.com/market/uk-high-recognizes-nfts-as-property-2108605 

[7] https://news.artnet.com/market/uk-high-recognizes-nfts-as-property-2108605

[8] ERC-721 is a free and publicly accessible standard that describes how to build NFTs and other unique tokens on the Ethereum blockchain.

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Ruth Whittaker is an independent consultant specialising in matters related to the art and cultural heritage industry. This is her first contribution to SCL on account of the strong relevance of NFTs and other cryptoassets in this arena.

Published: 2022-06-22T13:00:00

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