The Singapore High Court on Friday issued what some lawyers are describing as a “huge decision” in affirming the court’s jurisdiction over a case involving a non-fungible token (NFT), despite the borderless and decentralized nature of blockchain networks that host NFTs.
The case involves a plaintiff who used a Bored Ape Yacht Club NFT as collateral for an Ethereum-based decentralized finance (DeFi) loan of US$150,000 in March this year, according to court documents. The NFT was valued at US$500,000 at the time.
The defendant, who is known only under the online pseudonym “chefpierre,” later foreclosed the loan in a dispute over a refinancing of the debt and moved the NFT from an escrow wallet to a personal wallet, according to the court documents.
The judge in the case, Justice Lee Seiu Kin, in May placed an injunction to block any sale and transfer of the NFT in question – Bored Ape Yacht Club (BAYC) #2162 – and has now ruled Singapore has jurisdiction in the case.
“If the Singapore courts did not hear the case, there was no other appropriate forum. This was because the Bored Ape NFT existed as code stored on the Ethereum blockchain, which is essentially a decentralized network of ledgers maintained in computers around the world,” according to the latest ruling.
Shaun Leong, the lawyer for the plaintiff, said the decision has significant implications for the broader blockchain industry.
“For the very first time in a purely commercial dispute, we now have a court of law … [send] a clear signal to NFT investors all over the world that they have rights that can be protected,” Leong said in an interview with Forkast.
Centralized?
While some advocates in the NFT, blockchain and cryptocurrency industries have argued for not using centralized authorities to settle disputes, but as the blockchain and Web3 industry grow and expand, regulators and courts are grappling with how to enforce authority in industries that are digital and borderless.
Leong, a partner on the International Arbitration & Litigation team at Singapore-based Withers KhattarWong LLP, told Forkast the court decided it could take jurisdiction as the plaintiff was based in Singapore, despite the borderless nature of blockchain.
Hong Qi Yu, chief executive officer of the cryptocurrency Tokenize Xchange in Singapore that operates the NFT marketplace Elemint, told Forkast via email that this “ground-breaking” decision sets a precedent for the NFT industry that will encourage adoption.
“NFTs are here to stay and NFT owners now have full legal protection as purchasers and owners, which also serves to validate NFT creators in the creation of a genuine asset class as well,” he wrote.
Michael Bacina, a digital law specialist and partner at Australian commercial law firm Piper Alderman, said the case was significant, but still in preliminary stages.
“As an interlocutory decision, a fact noted by the Judge, it is not as strong a precedent as a case where both sides have had the opportunity to make submissions about the status of crypto-assets,” he told Forkast via email.
Like other jurisdictions, Australian courts are wrestling with multiple cases regarding disputes over crypto-assets. Bacina said the developments in the Singapore case could help inform other court’s decisions.
“If the ratio (reasoning) of this case is followed in other jurisdictions, it will give that same support in those jurisdictions to recognize crypto-assets as having value and being property,” he said.
The U.K. Law Commission released a consultation paper in July which proposed a new category of property rights to cover digital assets as courts increasingly deal with this question. The consultation closes on Nov. 4, 2022.
Blockchain summons
In another first for the Singapore court, Justice Kin ruled that the order to freeze any potential sale of the BAYC NFT could be served via the blockchain given that chefpierre’s identity is unknown.
Lawyer Leong has used messaging functions on the Ethereum blockchain, as well as Discord, and Twitter, to serve chefpierre the papers.
This follows a court in the U.K. granting permission for legal papers to be served as an NFT airdropped into a person’s wallet in July.
“We are seeing how uniquely and in very interesting ways the law is catching up with the technology,” Leong said.
The Singapore High Court also found that NFTs are not merely information or code on the blockchain, but also have the attributes of property and therefore give the owner the same rights as any other property.
“[The] nature of the blockchain technology gives the owner the exclusive ability to transfer the NFT to another party, which underscores the ‘right’ of the owner,” according to the court ruling.
“This is a great decision,” Leong said, “it shows that, notwithstanding the fact that digital assets sit in the borderless blockchain, there are courts of law that can come in in appropriate situations to bring some order, apply some legalities to the private transactions that people do on Web 3.0.”
“And I think that’s a great foundation to have,” he added.
