NFTs – a Protectable Digital Asset? Part 2


Introduction

On 21 October 2022, the Singapore High Court issued its Grounds of Decision in respect of a worldwide freezing injunction granted on 13 May 2022 to prevent the sale or transfer of a non-fungible token (“NFT”) in the case of Janesh s/o Rajkumar v Unknown person (CHEFPIERRE) [2022] SGHC 264. We shall examine the reasoning for the Court’s decision in this article.

Brief facts

The facts of this case have been set out in our previous alert which can be accessed here. Briefly, the dispute revolved around the use of an NFT from the Bored Ape Yacht Club series (the “BAYC NFT”) as collateral against a loan for cryptocurrencies. The plaintiff, Janesh Rajkumar, had entered into a loan agreement on 19 March 2022 with the defendant, an NFT collector under the alias of ‘chefpierre.eth’, whose real identity and physical whereabouts remain unknown.

The loan agreement specified, among others, the following:

  • the plaintiff would never relinquish ownership of the BAYC NFT;
  • in the event of a default, the plaintiff would inform the defendant of his inability to repay in time, and the defendant was to provide reasonable extensions of time to allow for repayment; and
  • the defendant should never exercise the foreclose option to take ownership of the BAYC NFT.

When the plaintiff failed to repay his loan in time, the defendant foreclosed on the BAYC NFT and listed it for sale on OpenSea. The plaintiff then brought an action against the defendant for breach of contract, the tort of conversion, and unjust enrichment and filed an application for a proprietary interim injunction to prohibit the defendant from dealing with the BAYC NFT. The application was heard and granted by Justice Lee Seiu Kin (the “judge”).

Issues

The plaintiff’s application raised the following issues:

  1. Whether the Court had the jurisdiction to hear the application.
  2. Whether the Court has the jurisdiction to grant an injunction against an unknown person.
  3. Whether an injunction restraining the defendant should be granted.
  4. Whether the application for substituted service out of jurisdiction should be granted.

The High Court Decision

Whether the Court had the jurisdiction to hear the application

Whilst the domicile, residence and present location of the defendant was unknown, the Court was satisfied that it had jurisdiction to hear the plaintiff’s application. The primary connecting factor in the judge’s mind was the fact that the plaintiff was located in Singapore and carried on his business there. The judge was cognisant of the fact that the decentralised nature of blockchains may pose difficulties when it comes to establishing jurisdiction, but was convinced that there had to be a court which had jurisdiction to hear the dispute.

Whether the Court has jurisdiction to grant an injunction against an unknown person

Despite the fact that the Singapore Rules of Court 2021 (“ROC”) require that a defendant’s name and identification number be stated on the relevant form for an originating claim/ application, the judge was satisfied that the Court had the jurisdiction to grant an injunction against an unknown person. In coming to this conclusion, the Court adopted a purposive interpretation of the ROC, specifically ROC Order 3 rule 6 (which states that practice directions “must be used with such variations as the circumstances require”), Order 3 rule 2(4) – (5) (which, among others, allows the Court to waive non-compliance of any Rule in the ROC) and Order 3 rule 1 (which requires the ROC to be given a purposive interpretation including achieving fair access to justice).

Notwithstanding the foregoing, the judge clarified that the formality requirements cannot be dispensed of in their entirety, as to do so would make a mockery of the ROC. Hence, the Court here reiterated its decision in CLM v CLN [2022] SGHC 461, and decided that as long as the description given by the plaintiff of the defendant has described persons falling within and outside that description with sufficient certainty, that would be sufficient. Here, the defendant was described as the user behind the account ‘chefpierre.eth’ on Discord and Twitter, and was further identified as the person to whom the BAYC NFT was transferred. The judge was satisfied that this description had, with sufficient certainty, described persons falling within and outside that description.

Whether an injunction restraining the defendant should be granted

At this juncture, it is pertinent to note that in order to obtain an interim proprietary injunction that restrains the defendant, the plaintiff must establish that: (i) there is a serious question to be tried; and (ii) the balance of convenience lies in favour of granting the injunction (Bouvier, Yves Charles Edgar and another v Accent Delight International Ltd and another and another appeal [2015] 5 SLR 558). On the first element of the test, the plaintiff had to prove that he had a seriously arguable case that he had a proprietary interest in the BAYC NFT.

Hence, the crux of the issue was whether the BAYC NFT, or NFTs in general, can give rise to proprietary rights which can be protected by a proprietary injunction.

On this, the judge raised several interesting points in deciding whether NFTs are capable of giving rise to proprietary rights, including the fact that in most cases, and certainly in the present case, all an NFT contains is a link to the server where the actual image itself can be found – it is essentially a string of code which includes the code for the image. Ultimately, the judge applied the test laid down in the English case, National Provincial Bank Ltd v Ainsworth [1965] AC 1175 (the “Ainsworth test”), which sets out four requirements to be fulfilled for cryptoassets such as NFTs to be considered a property right:

  1. the right must be definable, i.e., the asset must be capable of being isolated from other assets whether of the same type or of other types and thereby identified;
  2. the asset must have an owner capable of being recognised as such by third parties;
  3. the right must be capable of assumption by third parties, which in turn involves two aspects: that third parties respect the rights of the owner in that asset, and that the asset must be potentially desirable; and
  4. the right and in turn, the asset, must have some degree of permanence or stability.

In his analysis of the four requirements, the judge found that NFTs easily fulfilled the first requirement, as the metadata on NFTs distinguishes one NFT from another. As for the second requirement, the judge found that the individual that controls the wallet linked to the NFT would be the owner of said NFT, and that excludability is achieved because one cannot deal with the NFT without the owner’s private key. For the third requirement, the judge recognised that blockchain technology gives the owner the exclusive ability to transfer the NFT to another party, which underscores the right of the owner, and also that NFTs were the subject of active trading in the market, thus fulfilling the desirability factor. On the fourth requirement, the judge was satisfied that NFTs have as much permanence and stability as money in bank accounts which, nowadays, exist mainly in the form of ledger entries.

The judge also held that the balance of convenience lay in favour of granting the injunction, and was satisfied that an interim proprietary injunction should be granted in this instance. In deciding so, the judge clarified that what made the BAYC NFT (and NFTs in general) truly unique and irreplaceable was not the artwork itself (that, in the judge’s opinion, exists as an image file which could be copied many times over), but the string of code that represents the BAYC NFT on the blockchain. Once that code is transferred to third parties, the plaintiff might never be able to recover it.

Whether the application for substituted service out of jurisdiction should be granted

Due to the unique circumstances of this case, the plaintiff sought leave for substituted service out of jurisdiction to serve the court documents onto the defendant via the defendant’s Twitter and Discord accounts, and via the messaging function of the defendant’s cryptocurrency wallet address.

Though it appeared at first blush that the Court had no power to make such an order, the judge was nevertheless satisfied that the Court had power to grant leave for substituted service out of jurisdiction upon a purposive reading of the ROC, as the ROC did not appear to prescribe a closed list as to how service of the originating process or other court documents could be effected out of Singapore. The judge also pointed out that such power is one of considerable vintage, and that the drafters of the ROC would have utilised express and specific language if they intended to curtail the Court’s power in this respect.

Comments

While it may seem only logical that owning an NFT would give rise to proprietary rights in said NFT, the present case is a welcomed development in the string of cryptoasset-related cases as it gives recognition to the fact that, at least in Singapore, NFTs are a form of property that can be protected by a proprietary injunction. Though the Malaysian High Court has previously granted an injunction against unknown persons using a similar test2, the present case remains significant as it is, reportedly, the first ever instance in Asia where a judiciary has explicitly recognised NFTs as legal property with rights attached to them. It will now become increasingly difficult for wrongdoers to avoid liability by hiding behind the cloak of anonymity and pseudonymity for dealings made through the Internet. Whilst the judge did not conclude the discussion on whether there is a possible third class of rights beyond the traditional English law view on rights vested in property, it would be interesting to see how this would pan out if such argument is raised by counsel when a similar issue arises in the future.



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