Will Sander, of Keystone Law, examines the implications of a recent English High Court decision which, for the first time, considers how non-fungible tokens (NFTs) should be dealt with under English law.
The English High Court, in the case of Osbourne v Persons Unknown and Ozone, was recently asked to clarify what a non-fungible tokens (NFT) really is under English law. The case is particularly significant as this is the first time the English Courts have decided the point. The case has potentially far-reaching implications and brings welcome clarity on the issue to both sellers and purchasers, in what has become a burgeoning market in recent years.
NFTs Explained
The NFT sector is currently valued at $3 billion. NFTs can go for eye watering sums. Examples include Grimes selling $6 million worth of digital artwork or Beeple selling a piece of digital art for a record breaking $69.3 million. Big brands like Nike and Louis Vuitton are getting in on the action and celebrity interest is at an all-time high.
Before venturing into investment in NFTs, it is important to understand what a NFT is and how it relates to an asset (for example a digital art or a video clip).
A NFT is an entry onto a public digital ledger, called a blockchain. A blockchain is a way of storing data and verifying ownership without the need for a middleman. Each NFT is linked to a blockchain where every block is a transaction. Every time a NFT is sold, a new block is added to the chain and a unique key is produced which will denote the new owner. This means that it is not only possible to identify the current owner, but all previous owners. Whilst the NFT is intrinsically linked to an asset, there is an important distinction between owning the NFT and owning the rights to the associated asset. In most cases the rights to the asset remain with the creator unless specified otherwise. This is an important point which passes many by. Equally, the creator of the asset can decide how many NFTs are associated with it. This is a process known as minting. As a rule of thumb, the more NFTs associated with it, the less rare it is, and the less valuable it is.
Osbourne and its Implications
Having appreciated the difference between a NFT and the underlying asset, a prudent purchaser of a NFT will ask, what am I really buying? The ground-breaking case of Osbourne addresses this. In a nutshell, Osbourne had two NFTs stolen from her digital wallet with OpenSea (a leading marketplace for the buying and selling of NFTs) by unknown defendants, in unknown locations. One of the critical questions the court was asked to decide was, what is a NFT under English law? Following on from a number of cases in which the courts were asked to decide how cryptocurrency should be treated under English law, the court held that “there is at least a realistically arguable case” that NFTs are property. The court couched its view in these terms given the particular circumstances of the case and the standard the claimant was required to meet to obtain the remedies she was seeking.
The decision in Osbourne adds further credibility to the buying and selling of NFTs. The finding that a NFT is a property right cannot be overstated. It effectively validates past and future transactions of NFTs. It also means that, as with other property (such as a house or car), the proprietor is also entitled to court redress in the event of theft or misuse. Should there have been a finding that it was not a property right, this would have meant a broad range of legal remedies would not have been available to an owner of a NFT in England. However, specialist consideration and advice should be sought to clarify the nature and terms of the purchase of a NFT, and any associated rights.
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