Worldwide: Property Rights In NFTs Are In The Spotlight

Interest in non-fungible tokens (NFTs) — unique digital assets created and sold on blockchains — have exploded in the past year. Buyers have paid many millions for these digital goods, and online marketplaces have developed in tandem to allow consumers to shop for and purchase a wide variety of NFTs. But the full scope of property rights that comes with buying an NFT is far from settled — though recent decisions from courts in the UK and Singapore may bring more clarity to the issue.

Notably, Singapore's High Court recently recognized that Non-Fungible Tokens (NFTs) were protectable digital assets and a form of legal property. The decision marks one of the first cases globally to grapple with the issues surrounding property rights in NFTs and could have important ramifications for future disputes.

Background

NFTs are unique units of data that are created or "minted" on a blockchain. At their core, NFTs are non-fungible — i.e., they are irreplaceable, unique, and non-interchangeable. Blockchain technology provides a highly reliable method for proving ownership — and tracing the transfer of ownership — because it keeps NFTs from being edited or deleted, and it allows interested buyers to verify both ownership and uniqueness of the asset. And because most blockchains used for NFTs are public, this allows interested buyers and third parties to assess and verify NFT ownership and accurately trace transactions.

Some recent uses for NFTs include NFT characters being used for major television shows, using NFTs as deeds to purchase digital property, and video game players purchasing in-game NFTs such as unique items. Others register their NFTs as collateral for securing loans. Law firms have even leveraged NFTs to effect service. In any event, the use cases for NFTs continue to evolve in real time.

NFT Property Rights in Singapore

A recent decision by Singapore's High Court was the first major high court in the world to explicitly recognize NFTs as a protectable digital asset and a form of legal property in a purely commercial dispute. The claimant was a Singaporean NFT owner who sued an unknown NFT collector to block the sale of an NFT that the claimant claimed he rightfully owned. The claimant and defendant had entered into a loan agreement secured by an NFT, BAYC No. 2162, as collateral for the loan. BAYC No. 2162 is a unique token and part of the Bored Ape Yacht Club (BAYC) series. Each token in the BAYC shows a cartoon ape with distinct traits such as unique attire, expressions, and backgrounds. And BAYC NFTs are highly coveted, often selling for well over $200,000.

In the event the plaintiff failed to timely repay the loan, the terms of the agreement prohibited the defendant from taking ownership of the BAYC NFT and required the defendant to grant plaintiff a reasonable extension to make repayment. After prematurely foreclosing on the loan, the defendant asserted ownership over the rare NFT. The plaintiff then claimed to be the rightful owner of the NFT and sought an order to compel the defendant to accept repayment of the loan and to return BAYC No. 2162.

The court granted the plaintiff relief and ordered the defendant to return the NFT. In doing so, the court recognized NFTs as protectable digital assets and a form of legal property. Singapore is a common law jurisdiction, like the United States and the United Kingdom, and is increasingly seen as a global legal hub, so the holding is likely to be persuasive for future decisions.

Comparison To Other Common Law Jurisdictions

The Singapore decision comes on the heels of two recent holdings by the United Kingdom's High Court that found blockchain-based assets constitute "legal property" subject to asset freezing orders. In AA v. Persons Unknown, the High Court held that Bitcoin and other cryptocurrencies can be considered property under English Law subject to an injunction. Most recently, in Lavinia Deborah Osbourne v. (1) Persons Unknown and (2) Ozone Networks Inc. trading as OpenSea, the court extended this reasoning to NFTs, finding that NFTs could qualify as property under English law and upholding an injunction to freeze two NFTs stolen from a woman's digital wallet and later found in other digital wallets.

In the United States, recognition of NFTs as distinct digital assets is still an unsettled issue, though courts have separately addressed how other blockchain-based tokens may be treated. To start, state and federal statutory regimes widely treat bitcoin as property. Recently, in Shin v. ICON Foundation, tokens hosted on a blockchain were recognized as "capable of being possessed." The court applied a three-prong test from the Ninth Circuit to determine a property right in blockchain assets: "First, there must be an interest capable of precise definition; second, it must be capable of exclusive possession or control; and third, the putative owner must have established a legitimate claim to exclusivity." The Shin decision applies common law property principles to blockchain technology, acknowledging an owner's possessory interest in tokens recorded on the blockchain.

Another lawsuit filed in February 2022 could shed more light on how courts apply these principles in the context of NFTs. In McKimmy v. OpenSea (Civil Action No. 4:22-CV-00545), filed in the Southern District of Texas, a man who unknowingly sold his BAYC NFT for what he alleges is well below market value is suing a large NFT online marketplace (OpenSea) for the return of the NFT and/or damages of over $1 million. If this case does not settle, it could add important context on how courts analyze these types of issues.

Looking Ahead

Characterizing NFTs as a distinct form of legal property and digital asset is a significant development for several reasons.

To start, the Singapore decision establishes NFTs as valuable property, distinct from a mere record on a blockchain — they are digital assets with accompanying rights that owners can assert in court and that courts recognize as collateral. However, as the Singapore decision highlights, contracts involving these assets should be carefully reviewed and special attention should be paid to any terms related to the scope of property rights being transferred.

Further, the Singapore decision emphasizes the need for NFT owners to take precautions when allowing use of their tokens. Purchasing an NFT grants ownership over the token itself, including the record of the token's ownership and the right to exclude others from claiming ownership over the token. However, NFT owners must be vigilant about the intellectual property rights and control they relinquish to third parties.

Indeed, in the United States, several cases are pending in lower courts regarding NFT ownership and intellectual property rights. NFT ownership does not necessarily entail ownership beyond the token itself and NFT ownership often excludes ownership of the intellectual property rights of the underlying asset. For example, the NFT minter can maintain copyright ownership over the token while granting the purchaser a limited display right. Still, contracts and purchase agreements may transfer intellectual property rights. For example, the terms and conditions of the BAYC NFTs that were the subject of the Singapore decision provide that the right to exploit intellectual property rights in the NFT's image follows the NFT. Actor Seth Green, who was developing a show around a BAYC NFT, recently had to halt production on the show when he lost the NFT and the associated intellectual property rights to an online scammer. In July 2022, the United States Patent and Trademark Office and United States Copyright Office announced the launch of a joint study into the issues surrounding intellectual property rights in NFTs.

At bottom, courts will continue to be faced with new questions regarding ownership, possessory interests, and intellectual property protections for digital assets like NFTs.

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