Richard Xu*
Introduction
In early 2021, almost everyone was talking about Non-Fungible Tokens (“NFTs”). What seemed like mere pictures were selling for millions and even Justin Bieber purchased one for USD1.31 million. Justin Bieber’s NFT is worth USD74 thousand dollars today.
While the promoters claimed that owning an NFT being akin to owning exclusive rights to a piece of digital artwork, one might have observed that even the legal status of an NFT itself was unclear. Now, the Singapore High Court has held in Janesh s/o Rajkumar v Persons Unknown (“CHEFPIERRE”) [2022] SGHC 264 have held that NFTs can be considered property, albeit in an ex parte interlocutory hearing.
Background
The claimant entered into an NFT-collateralised cryptocurrency loan with another user on a cryptocurrency lending platform, only known as “chefpierre.eth”.
Under the loan agreement the claimant provided an NFT known as Bored Ape Yacht Club (BAYC) No. 2162 as collateral to borrow cryptocurrencies. The claimant later asked for an extension of the deadline to pay off the loan and the parties agreed to a refinancing loan.
However, the defendant allegedly foreclosed the collateral prematurely and the NFT was transferred into his cryptocurrency wallet. The claimant then filed a suit claiming that the defendant was liable on tortious, contractual and restitutionary grounds, and now applied for a proprietary injunction to prevent the defendant from dealing with the NFT.
So what exactly is an NFT?
NFTs are created using a code on blockchain (a.k.a smart contract). In this instance, the Bored Ape NFT was created using a code called the MastersToken v2, which powers most NFTs on the Ethreum Blockchain. The code creates a new token in the crypto wallet address, which can then be transferred to another crypto wallet. The ownership of NFTs is powered by smart contracts and protected by Blockchain technology.
NFTs can then be used to represent underlying assets such as digital artwork, music, writing, and contractual assets such as event tickets as well as physical assets such as cars and yachts.
The decision
The court dealt with the broad issues of jurisdiction, the existence of proprietary rights in NFTs, and the manner of effecting service of the court documents through social media and cryptocurrency wallets.
Jurisdiction
The court held that it has jurisdiction to hear the application for the proprietary injunction despite the fact that the domicile, residence and present location of the defendant was unknown. Importantly, the court reasoned that in spite of the decentralised nature of blockchains, there must be a court with jurisdiction to hear the dispute. In this case, the appropriate court was the Singapore court since the claimant was located in and carried on his business in Singapore.
The court also satisfied that it had jurisdiction to grant a proprietary injunction against a person unknown. It was sufficiently certain for Singapore’s civil procedure rules that the defendant was identified as:
- the user behind the account “chefpierre.eth” on Twitter and Discord; and
- the person to whom the Bored Ape NFT was transferred to.
Whether NFTs give rise to proprietary rights
The court held that the Bored Ape NFT, and NFTs in general, are capable in giving rise to proprietary rights. The court reasoned that NFTs passed muster under the four criteria test set out in National Provincial Bank Ltd v Ainsworth [1965] AC 1175.
First, the property must be definable i.e., must hence be capable of being isolated from other assets whether of the same type or of other types and thereby identified. The court found that the NFT was definable because the metadata that is central to an NFT, distinguishes one NFT from another.
Second, the property must be identifiable be third parties i.e., asset must have an owner being capable of being recognised as such by third parties. This requirement was satisfied because the presumptive owner of an NFT would be whoever that controls the wallet that is linked to the NFT. Further, excludability is achieved because one cannot deal with the NFT without the owner’s private key.
Third, property is capable in its nature of assumption by third parties. This element has two aspects, that third parties must respect the owner’s right in the asset and that the asset must be potentially desirable. The first aspect was satisfied as the nature of blockchain gives the owner the exclusive ability to transfer the NFT to another party. The second aspect was also satisfied since such NFTs are clearly the subject of active trading in the markets.
Fourth, the property must have some degree of permanence or stability. This requirement has a low threshold and a ticket to a football match is regarded as property despite its very short life. This requirement too was found to be satisfied as NFTs have as much permanence and stability as money in bank accounts which, nowadays, mainly exist in the form of ledger entries.
Accordingly, the court held that NFTs were capable of giving rise to proprietary rights and granted the interim proprietary injunction.
Service
The court held that service of the proprietary injunction could be effected through Twitter, Discord and the messaging function of the defendant’s cryptocurrency wallet address. This was possible since the civil procedure rules in Singapore did not prescribe a closed lists of manners of effecting service. The court also highlighted that this was the only practical method of serving court papers on a person unknown.
Comments
This decision marks a significant development for crypto investors now that their investments in NFT are legally recognised to have proprietary rights. The court nevertheless did highlight that the hearing was ex parte and a different conclusion may be reached with fuller submissions.
In respect of legal processes, the decision affirms the that a proprietary injunction is also now available against persons unknown in the context of dispute over cryptocurrency and now NFTs as well. The ability to serve injunctions on persons unknown via communication channels also adds another tool to a litigator’s toolbox in crypto-based disputes.
* Richard is a fresh graduate of SMU, Yong Pung How School of Law and is currently preparing for his Bar examinations.
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