Unraveling the Metaverse: The Regulation of NFTs | Tarter Krinsky & Drogin LLP
The legal landscape surrounding non-fungible tokens (NFTs) is still in its infancy and is largely a unique area of law. Nevertheless, some have begun to test the waters in this uncharted territory around the globe, and the development of case law regarding the various issues, rights and obligations relating to NFTs, from minting to selling and buying, will inevitably follow.
While the Executive Order on Ensuring Responsible Development of Digital Assets, dated March 9, 2022 (the Executive Order), and draft legislation underway demonstrate efforts to develop and regulate these digital assets in the United States, the lack of clarity and direction for the time most attention with caution.
NFT judgments in courts abroad
The most important development this year so far was from across the pond. The landmark U.K. High Court decision in Lavinia Deborah Osbourne v. (1) Individuals Unknown (2) Ozone Networks Inc. held that NFTs are considered property. The ruling that NFTs are indeed property allowed the plaintiff to obtain relief over the asset. The relief granted by the court included (i) a temporary proprietary injunction, essentially freezing the NFTs, and (ii) a Banker’s Trust order compelling the defendant, Ozone Networks Inc., a US company that operates the NFT market , OpenSea, to provide identification of the user(s) in control of the wallets where the NFTs were tracked. A rather unique component of the order was that the court allowed Ozone to apply to vary or finalize the order within a specified period of time. The rationale for this was to provide a safeguard in case there were other factors and risks to ozone that were not fully appreciated by the court. However, it is noteworthy to mention that till date there has not been much pushback from these digital platforms and exchanges when it comes to a court-ordered information request. The Osbourne case certainly represents a milestone in the treatment of NFTs among UK courts and under English law.
It seems that others around the world are also moving towards this trend and treatment in an effort to protect digital assets. On 13 May 2022, the High Court of Singapore became the first in Asia to grant a proprietary injunction to freeze the sale and ownership of an NFT on the Ethereum blockchain on behalf of a Singaporean investor against an unknown defendant who goes by the name “chefpierre” on digital platforms. The Singapore case deviates from the traditional hacker case and concerns a loan agreement where NFTs were to be held as collateral while they waited for repayment. The loan was not paid, although an extension was to be granted, and the defendant moved the NFT to their personal Ethereum wallet to start advertising on OpenSea. The crux of the plaintiff’s case is to request repayment of the loan in exchange for the return of collateral.
Although this area is still developing, it appears that many international courts are beginning to make efforts to protect citizens’ digital assets.
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