Amin Hosseini is an IPilogue Writer and an LLM Candidate at Osgoode Hall Law School.
The Singapore High Court ruled on 21 October 2022 that non-fungible tokens (NFTs) can now be considered property, Coindesk reports. NFTs are blockchain-based assets with a distinct identification number and metadata which can represent real-world objects and cannot be copied or replaced. They are minted using smart contracts. In Janesh s/o Rajkumar v Unknown Person (“CHEFPIERRE”), the NFT's owner applied for a loan on NFTfi and provided the Bored Ape NFT as collateral. Later, he failed to make loan payments and asked for an extension. The defendant initially consented to offer an extension of time to repay the loan. However, he also declared that if the loan was not fully paid by the timeframe, he would use the "foreclose" option of the NFTfi's Smart Program. The defendant then used the "foreclose" feature to move the NFT from the escrow account into his cryptocurrency wallet. The claimant reminded the defendant of their agreement but the defendant declined to negotiate further and declared he would keep the Bored Ape NFT for himself. He then advertised sale of the Bored Ape NFT.
The claimant then sued the defendant for an “equitable proprietary claim” over the Bored Ape NFT, conversion, breach of contract, and unjust enrichment. The claimant also requested a proprietary injunction banning the defendant from dealing with the Bored Ape NFT in any form.
The court had to determine whether the Bored Ape NFT, and NFTs in general, are capable of giving rise to proprietary rights which could be protected by an injunction in making its decision. In deciding the case, the court applied Lord Wilberforce’s criteria for property in National Provincial Bank Ltd v. Ainsworth (the “Ainsworth test”), which was previously used to decide if crypto assets are property.
According to the Ainsworth test, “before a right or an interest can be admitted into the category of property, or of a right affecting property, it must be (1) definable, (2) identifiable by third parties, (3) capable in its nature of assumption by third parties, and (4) have some degree of permanence or stability.”
The court maintained that the test’s first criterion means that the asset must be capable of being isolated from other assets, whether of the same type or of other types. Thus, NFTs fulfil the first requirement, since they can be distinguished using their metadata. Second, the asset must have an owner who can be recognized by third parties. For NFTs, the presumed owner would be whoever manages the wallet that is connected to the NFT. The third requirement comprises two aspects: “third parties must respect the owner's rights in that asset, and that the asset must be potentially desirable.” Here, the court believed that these prerequisites would be satisfied because the owner has the exclusive authority to transfer the NFT to a third party using blockchain technology and such NFTs are the subject of market activity. Finally, to satisfy the fourth requirement, the aforementioned NFT is as permanent and stable as money in bank accounts.
The court concluded that NFTs meet the Ainsworth criteria and therefore may be formed as property in a general sense, leaving open the question of what the specific nature of this property right is. For the reasons outlined, the court approved the claimant's request for a proprietary injunction.
This decision demonstrates that NFTs can be considered property separate from the item they represent. The judge's ruling is a turning point for NFTs and the decision may have widely applicable effects and implications.
Further reading
Read more mere about Cryptoassets and Property.
To read more about the absence of proper Regulation of NFT Platforms and the associated outcomes, please see Blurred Lines: How the Lack of Regulation of NFT Platforms Has Fueled Rampant Art Theft.
For in-depth knowledge about how smart contracts combine property and contract functions, please see Blockchain and the Future of Secured Transactions Law.