Clifford Chance

Landmark ruling in the UK and Singapore on the treatment of NFTs as property

The English High Court's ruling in the case Lavinia Deborah Osbourne v Persons Unknown, Ozone¹, in March this year recognised NFTs as property under English law. This is significant as the recognition as property is a pre-requisite for the granting of proprietary relief over assets.

Similarly, in May 2022 Singapore's High Court also recognised NFTs as property by issuing a worldwide injunction prohibiting the sale and ownership transfer of a NFT against an online persona in a commercial dispute. These cases are important milestones as they provide clear authority on the treatment of NFTs under English and Singapore law. The recognition of NFTs as property will give NFT owners greater reassurance as they can rest in the knowledge that proprietary remedies are available to them, at least in the UK, Singapore and other common law jurisdictions, to recover their NFTs should they fall prey to NFT fraud or theft, and/or become the subject of a commercial dispute. The availability of injunctive relief and disclosure orders against NFT trading platforms and cryptocurrency exchanges located outside of the UK, and injunctive relief in Singapore against unknown persons, show that the courts are willing to step in and act speedily to provide protection to NFT investors.

China’s first infringement case related to NFTs

On the other side of the globe, the Hangzhou Internet Court² handed down China’s first ever court decision relating to NFTs in April 2022.  

The claimant brought proceedings for copyright infringement against the operator of a platform on which NFTs associated with a painting to which the claimant has an exclusive licence from the artist are traded.

The Court ruled that the platform operator is liable for copyright infringement in China and found that:

1. A buyer of an NFT does not acquire any copyright in the copyrighted work (unless the user agreement provides otherwise), and the NFT trading platform is expected to know, or should have known, of this legal principle.
2. The defendant, as a professional digital collection platform for the transaction of NFTs, can control and audit the NFTs traded on its platform, and should therefore take reasonable measures to examine the legal source from which the NFTs are minted.

A higher level of care is expected of the platform operator which receives direct economic benefits for the NFT transaction. Also relevant is the implication of the ban of cryptocurrency in China on NFT trades – in April, Chinese authorities banned the use of NFTs in connection with the issuance of financial assets such as securities and loans. Whilst this does not prevent the use and sale of NFTs as an asset, NFT trading platform should be conscious of potential financial trading activities of users, and restrict any relevant promotions related to the financial use of NFTs.

Practical issues for NFT buyers

The UK and Singapore cases provide some reassurance that an NFT is legally recognised as property that can be traded, which helps retain the investment interest and value of NFTs. No doubt investors are attracted to owning NFTs because of their reputation for being unique, especially in the case of digital arts. So, how unique are NFTs exactly? In reality, when one refers to the uniqueness of an NFT, it is the unique token ID and contract address that gives a NFT its uniqueness and not the digital asset linked to the token. Copies of the same digital asset can be the subject of different NFTs and there is no guarantee that an NFT contains the only copy of the digital asset on the market. What this means is that even though the NFT holder may own the NFT as property, it cannot prohibit any further copies of the digital asset being reproduced by the seller or creator of the NFT.  

This is where smart contracts play an important role. The smart contract for the token sets out the terms of the sale and purchase of the NFT. It should be noted that terms of sales may be supplemented by ancillary agreements or statements off-chain. In the absence of any specific licence, the NFT holder would only have possession of the digital asset, which they would probably only be able to access and display and not much else. The terms of sale of the NFT will likely contain a limited licence allowing the NFT holder sufficient rights to utilise the NFT for the purpose or purposes of the sale of the NFT. If an NFT investor buys an NFT because it is so rare, it should ensure that the smart contract and/or other terms include restrictions on the seller, creator and/or intellectual property rights owner(s) making further reproduction(s) of the digital asset.    

Although we are not aware of any case of infringement actions against NFT holders, there is a high risk that holders of – or marketplaces hosting – infringing NFTs would be required to take measures to disable access to an infringing NFT, essentially making the NFT holder lose their possession of the infringing NFT³. The China case imposes an obligation on the marketplace operator to conduct appropriate due diligence of intellectual property compliance but this does not necessarily assist an NFT holder as any rights they may have to claim damages from the marketplace operator may more likely than not be subject to disclaimers of liability under the marketplace's terms of services. Claims may be raised against the seller of the infringing NFT under any contract for the sale and purchase of the NFT and buyers of NFTs should pay proper attention to any existing contract terms in order to have a clear understanding of their rights. In the case of high value NFTs, an investor should consider conducting their own due diligence on the digital asset.

The interplay between contractual rights (whether under a smart contract or other forms of contracts) and intellectual property rights under local laws will further complicate the relationship and enforcement of rights among different stakeholders of NFTs.                    

¹ [2022] EWHC 1021 (Comm)

² Hangzhou Internet Court, established in 2017, is the first court specialised in the trial of internet-related cases in China. As indicated by the name, the Court heavily relies on internet to complete the litigation process, including case filing, evidence production, court hearing, adjudication, and delivery of decision online.

³ As is shown in the China case, the infringing NFTs would have to be removed and the holders would no longer be able to access them.