Who owns tokens and other digital assets?

Do avatars dream of electric property?

There are few certain things in life. Death, taxes, the abuse/misuse of the trolley problem in AI. But one thing is also certain, digital assets are here to stay, and they will be a growing part of our daily lives. Even if you’re a crypto and metaverse sceptic such as myself, there’s growing digitisation of goods and services, and that will mean that we are going to have to explore the question of ownership of digital assets.

There are roughly two camps when looking at the regulation of new technologies. The first camp asks for immediate regulation of everything new, while many of us tend to be more pragmatic. Not everything requires new regulation, you often can use existing legal tools to explore a variety of new subjects. When faced with digital assets, we’re starting to get new court cases and policy papers exploring the issue, and I believe that we’re on track to make rational decisions regarding digital property.

Osbourne

The first decision has been widely reported as the first one that gives property rights to tokens. In Osbourne v Persons Unknown & Anor [2022] EWHC 1021 (Comm), the claimant is Lavinia Osbourne, a blockchain entrepreneur and NFT collector, who had purchased a number of “Boss Beauties” tokens, (why are NFT names so cringeworthy? But I digress). Sometime around the 27 of February of 2022, Ms Osbourne noticed that a hacker had removed the tokens from her wallet, and were now in another wallet, and were listed on the OpenSea marketplace. The claimant asked for an injunction against the unknown hackers, but most importantly, she also asked for an injunction against OpenSea to stop them listing the stolen tokens.

In the decision Pelling QC had first to explore whether Ms Osbourne had a property right over the NFTs. He writes:

“13. There is clearly going to be an issue at some stage as to whether non-fungible tokens constitute property for the purposes of the law of England and Wales, but I am satisfied on the basis of the submissions made on behalf of the claimant that there is at least a realistically arguable case that such tokens are to be treated as property as a matter of English law.

14. The other factor which is material to this claim is where such tokens are to be treated as being located as at the time when they were lost. As is apparent from the limited description I have already given, non-fungible tokens are in effect a stream of electrons resulting in a credit item to a crypto account. As such, insofar as they have a physical manifestation at all, that is likely to be where the servers relevant to the account are maintained. However, attempting to litigate issues such as this by reference to a concept as ethereal as that would be difficult or impossible.

15. Unsurprisingly, therefore, in a series of cases relating to crypto currency fraud, it has been consistently held that crypto assets, are to be treated as located at the place where the owner of them is domiciled. There is no reason at any rate at this stage to treat non fungible tokens in any other way, assuming for present purposes as I do that they are to be treated as property as a matter of English law.”

So tokens are property. This is the most important part of the ruling for future reference, and it is likely that this case will extensively cited in the future to that effect. Pelling QC encounters more practical difficulties when it comes to how to deal with the theft in practical terms. The problem is that as the hackers can’t be easily identified, then there needs to be action against a third party which can potentially be used to pursue them. The obvious target is the NFT marketplace OpenSea, where the items are listed. Ms Osbourne is trying to have OpenSea identify the thieves, but to do so she must issue an order to a company that operates in the United States. Here the judge discusses whether English courts have jurisdiction (they do, thanks in part to early cryptocurrency case law), and then whether it is possible to serve an injunction to those parties using Bankers Trust orders. Pelling  QC is clearly reluctant to issue orders which are “futile” because OpenSea is not located in the UK, and therefore the capacity of the court to enforce a decision is limited. However, in the end the court granted permission to pursue this avenue with the understanding that OpenSea will wish to cooperate with English courts in identifying the fraudsters.

D’Aloia

Another relevant case is D’Aloia v Person Unknown & Others [2022] EWHC 1723 (Ch). In this case, Mr Fabrizio D’Aloia is a cryptocurrency trader who was deceived into transferring over $2 million worth of cryptocurrencies in the form of the stablecoins USDT and USDC to a fraudster that used a phishing website that looked like the exchange Ameritrade. Mr D’Aloia transferred funds from his Coinbase account to a wallet used in by the deceitful website, and by May 2022 it became clear that he had been the victim of a scam. Using a blockchain investigator, he was able to trace some of the funds to several exchanges, including Binance.

The claimant seeks a similar redress than that of Ms Osbourne, namely to have the exchanges identify the fraudsters so that the funds can be recovered. Trower J had to consider whether Mr D’Aloia owns the cryptocurrency for the purpose of getting redress, and here he also states clearly that he’s the rightful owner of the digital assets. The discussion is similar to the above, namely as to whether the courts of England and Wales have jurisdiction over the fraud (they do), and whether to issue a Bankers Trust order against Binance, which the judge eventually grants, although he’s also concerned about issuing a futile order. In the end there’s an order made for Binance to disclose the information regarding the fraudsters.

The most interesting part of the decision, besides reinstating the ownership of digital assets, is that Trower J allowed for the order to be served to the persons unknown using an NFT. Because the persons operating the fraudulent service cannot be easily identified, the only way in which they can be reached is through an email address, but most importantly, through the wallet address used to make the cryptocurrency transaction in the first place. This is really clever. One feature of NFTs is that if you know someone’s address, you can drop an NFT into it without permission (you can drop me an NFT to technollama.eth to test this out). To my knowledge, this is the first time an NFT has been used to serve a legal order!

Law Commission

Finally, the Law Commission of England and Wales has published a detailed and extremely well informed consultation paper on the ownership of digital assets (and I don’t just say this because they cite Yours Truly extensively). I won’t attempt to summarise, running at over 500 pages it is really something that you should read. But the consultation paper is perhaps the most detailed look at how to treat digital assets, and this includes cryptocurrencies and NFTs. The difficulty here is that while the possession of a token may be easy to determine, what is exactly owned? Is a token a good? (spoiler alert: no). What about NFTs, where the token is a link to another asset, and not the asset itself?

In danger of over-simplifying a rich and complex discussion, the paper first spends a considerable amount of time describing property. There are two main categories of property: real property (land), and personal property (everything else). Tokens and crypto assets would have to fall under personal property, but of what sort? Traditionally there are two recognised categories of personal property, things in possession, namely the possession of tangible things, and things in action, namely legal rights. So you can own a car, a TV, a laptop, a phone (things), but you can also own stocks, bonds, accounts (action). Things in action have no physical form, but you can still exercise rights over them, and have the law recognise your ownership through those actions. The Law Commission proposes the recognition of a third category of personal property, as crypto assets and tokens do not fall easily into the existing two types. This third category would have three main characteristics: it should be in an electronic medium, have independent existence, and be rivalrous. I’ve chosen some paragraphs explaining each of these:

“…to fall within our proposed third category, the thing in question must be composed of data represented in an electronic medium, including in the form of computer code, electronic, digital or analogue signals. […]

The second characteristic that we think a thing must exhibit for it to be capable of falling within our proposed third category of personal property is that it must exist independently of persons and exist independently of the legal system. Broadly speaking, this means that it must exist “there in the world”. This criterion excludes from the distinct third category of personal property things which do not exist separately from any particular person (examples include personalities and unsevered body parts), and creatures of law (such as things in action as narrowly defined or statutorily-reified things).404 If its existence is dependent on either or both of these, then that thing will not satisfy the criteria of our third category of personal property. […]

The third characteristic that a thing must exhibit for it to be capable of falling within our suggested third category of personal property is that it must be rivalrous. Broadly speaking, this means that the thing in question must be something whose capacity for use is not unlimited; people must therefore compete with one another for it. More formally, a resource is rivalrous if use of the resource by one person necessarily prejudices the ability of others to make equivalent use of it at the same time.”

I find the arguments put forward compelling, and will therefore be answering the consultation endorsing the proposed third category of personal property for crypto assets. I should also take the time to congratulate the paper’s drafters on their excellent use of popular culture and gaming references. Is this the first paper to use Pokémon as legal examples?

Concluding

We are living in an exciting legal time, digital assets will undoubtedly continue to be the subject of litigation, and I believe that we’re starting to get a good grip on the many issues involved. It is interesting how tokens have managed to bridge the divide between property law and intellectual property law, and I find myself reading more about the intricacies of property, while property lawyers have to get up to speed with issues of IP law.

(Big thanks to @gonbe for the heads up!)

Edit: There’s another decision in Singapore declaring NFTs as property.