As the digital bites settle on a turbulent 2022, Roman Kubiak discusses what he sees as the top five legal cases in the crypto and digital asset space of 2022.
High Court recognises NFTs as property which can be subject to freezing injunction
The claimant in this case, Lavinia Osbourne, a Blockchain, Fintech and Welltech specialist consultant, brought a without notice application seeking:
- an injunction preventing the so-called “persons unknown” from dealing with or dissipating two NFTs given to Lavinia Osbourne reportedly from a collection by the Boss Beauties Foundation and directing the second defendant, Ozone (trading as Opensea), not to permit any further transfers;
- a “Bankers Trust Disclosure Order” requiring the second defendant to release information it might hold regarding the identity of the persons unknown. This is a type of order which authorises and requires a financial institution, most often a bank, but, in the case of crypto assets usually a crypto exchange or peer-to-peer digital asset marketplace, to disclose information about customers in circumstances where it is believed a fraud has been committed to enable a person to trace those assets. It derives its name from the 1980 case of Bankers Trust v. Shapira [1980] 1 WLR 1274 (CA). While similar to a “Norwich Pharmacal Order” it differs in that the latter is an order for disclosure by a third party about information which may allow a claimant to plead their case. A Norwich Pharmacal Order has historically been the more prevalent type of order sought in cases of suspected fraud but, as the cases of 2022 confirm, Bankers Trust Orders have been, at least until recently, the order of the day in cases involving stolen crypto assets; and
- permission to serve these orders outside of the jurisdiction and by alternative means.
In considering the application, HHJ Pelling KC had to consider, first, whether there was a serious issue to be tried as between Lavinia Osbourne and the persons unknown. He clearly felt that the theft of two NFTs which, though perhaps not having a significant market value (c.£4,000) had a particular “personal and unique value to [Lavinia] which extends beyond their mere Fiat currency value”, was a serious issue to be tried.
He then looked at whether England and Wales was the appropriate jurisdiction in which to hear the applications. Describing NFTs as “a stream of electrons”, and following previous authority, he concluded that crypto assets are to be treated for legal purposes as being located in the place that the owner is domiciled.
Turning to the injunctive relief sought, having found that there was a serious issue to be tried, HHJ Pelling KC had to consider whether damages would be an appropriate remedy. Again, given the lack of information about the persons unknown and the value to Lavinia of the NFTs in question, he felt it was right and proper to grant an injunction seeking to protect the NFTs.
On the question of whether to make a Bankers Trust Order against Ozone, again, HHJ Pelling KC had to consider whether there was a serious issue to be determined as between Ms Osbourne and Ozone, which he was satisfied there was.
He then had to satisfy himself that granting the order sought i.e. disclosure from Ozone, would lead to the location and preservation of the NFTs. Again, he was confident it would.
Finally, the judge had to be satisfied that it was proportionate to make the order. He did so by limiting the disclosure required to the “name, address, email addresses, and any other contact details available to Ozone concerning those in whose name the relevant wallets are maintained”.
On the point of service, as Ozone are based in the USA, the court had to consider whether one of the “gateways” set out in Practice Direction 6B of the Civil Procedure Rules could be applied. The judge found that the third so-called gateway at paragraph 3.1(3) could be used, namely that “there is between the claimant and the defendant a real issue which is reasonable for the Court to try; and b) the claimant wishes to serve the claim form on another person who is a necessary or proper party to that claim”.
What was notable about this case was that it was the first case of its kind certainly in England and Wales where NFTs had been made the subject of a freezing injunction.
HHJ Pelling KC, also noting the clear dichotomy that was apparent between the courts’ treatment of Bankers Trusts Orders on the one hand and Norwich Pharmacal Orders on the other, also commented that:
“At some stage it will be necessary for a Court to grapple with the question of whether or not it is a matter of principle either both Bankers Trust and Norwich Pharmacal-type claims should be permitted to be served out of the jurisdiction, usually adopting the necessary or proper party gateway; or whether neither should be permitted.”
The courts did, in fact, grapple with that issue in the more recent decision of LMN v. Bitflyer Holdings Inc. and others [2022] EWHC 2954 (Comm), discussed below.
But that is far from the end of this tale as the case came before the High Court again in September 2022 in the reported decision of Osbourne v. Persons Unknown and Others [2023] EWHC 39 (KB) which was handed down on 13 January 2023.
That gives a useful update on the case and confirms that:
- Opensea provided the disclosure sought and, thereafter, the claim against it was dismissed;
- Ms Osbourne issued her claim against “Persons Unknown” and a Thembani Dube, believed from an email address disclosed to be the holder of a wallet into which one of the NFTs was transferred; and
- the other NFT remained in a wallet.
In this latest application Ms Osbourne sought permission to:
- amend her claim to add the person or persons whom she believed were in possession or control of the NFTs and include an additional claim to seek a proprietary equitable claim against that person or persons;
- extend the injunctions granted by HHJ Pelling KC against the defendants preventing them from dealing with the NFTs;
- serve the claim outside of the jurisdiction; and
- to permit service by alternative means.
Mr Justice Lavender hearing that application granted it subject to a few revisions.
In relation to the third head, Mr Justice Lavender considered a number of possible gateways, eventually finding that the appropriate gateway which would enable the court to authorise service outside of the jurisdiction was 15(c), which is where:
“[a] claim is made against the defendant as constructive trustee, or as trustee of a resulting trust, where the claim is governed by the law of England and Wales.”
In short, he was agreeing that the alleged hackers were effectively holding the NFTs on “constructive trust” for Ms Osbourne.
The final head is the one which has caught most people’s attention as, while citing another key 2022 decision of D’Aloia v. Persons Unknown [2022] EWHC 1723 (also discussed below), this case is reportedly the first in which service by NFT was approved as the sole method of service.
As the top cases of 2022 confirm, the courts are happily embracing blockchain technology as providing a means for service by way of airdropping NFTs.
The second case I will talk about is D’Aloia v. Persons Unknown [2022] EWHC 1723 and this was the first reported instance of courts permitting service of proceedings by NFT.
