How to Protect Your NFTs – Singapore Court Grants Landmark Injunction over NFTs

by James · November 14, 2022

Introduction

The age of the crypto economy has brought about a marked shift in what the market attributes to value. One of the more prominent examples of this is the non-fungible token (“NFT“). Once a niche investment, NFTs are now an increasingly ubiquitous digital asset. But as with any change in technology, questions arise as to whether the existing laws are able to accommodate its unique characteristics – particularly whether the law provides effective protection over ownership of NFTs.

IN Janesh s/o Rajkumar v Unknown Person [2022] SGHC 264, the Singapore High Court issued a landmark decision granting an injunction against a Bored Ape NFT. In its decision, the court considered a number of key questions – Do NFTs give rise to property rights? Can an injunction be granted against a person known only by a pseudonym, and how should a summons be served on such persons? When does the court have jurisdiction in the case?

The Court recognized that NFTs are capable of giving rise to property rights that can be protected by an injunction. The court chose to grant the requested injunction, finding that the NFT was sufficiently unique that damages would not be sufficient compensation for the loss.

The court approved the application despite the fact that the claimant only knew the defendant by his web handle, “chefpierre.eth”. The court further demonstrated the adaptability of its processes by allowing the subpoena to be served via the defendant’s Twitter, Discord and cryptocurrency wallet address.

This decision follows the decision of the Singapore High Court in CLM v. CLN and ors [2022] SGHC 46, where the Singapore court granted the first reported injunction against “unknown persons” in Singapore for $9.6 million in cryptocurrency assets. The plaintiff in that case was successfully represented by our fraud, recovery and investigation team, led by Danny Ong and Jansen Chow of Rajah & Tann Singapore LLP. For more information, see our previous legal update on the decision here.

Short facts

The plaintiff was the owner of an NFT from the popular Bored Ape Yacht Club collection of NFTs (“Bored Monkey NFT“). He was a regular user on NFTfi, which is a community platform that serves as an NFT-collateralized marketplace for cryptocurrency lending. He began dealing with the defendant, whom he only knew by the pseudonym “chefpierre.eth”.

Plaintiff pledged Bored Ape NFT as collateral for a loan from Defendant, who later agreed to refinance, but later changed his mind and stated that he would exercise the “foreclosure” option of NFTfi’s smart program if the loan was not fully repaid.

The plaintiff was unable to find sufficient funds. Defendant then exercised the “foreclose” option and the Bored Ape NFT was transferred to his cryptocurrency wallet. The plaintiff attempted to make a partial payment, but the defendant refused to discuss the matter further. Since then, the claimant discovered that “chefpierre.eth” had listed the Bored Ape NFT for sale on OpenSea.

The plaintiff sued the defendant for tort of conversion, breach of contract and unjust enrichment, alleging that they had agreed to certain terms regarding the exclusion and sale of Bored Ape NFT. Given the real risk of dissemination and disposal of Bored Ape NFT, the Claimant made an urgent application to the Court for a proprietary injunction prohibiting the Defendant from dealing with Bored Ape NFT.

The plaintiff also applied for permission to serve the claim and subpoena for injunction on the defendant as follows: (i) on the defendant’s Twitter account; (ii) on Defendant’s Discord account; and (iii) on the messaging function of Defendant’s cryptocurrency wallet address.

Holding of the Supreme Court

The court approved the claimant’s application, and granted the injunction against Bored Ape NFT and leave for substituted service. In its decision, the court considered the following questions:

Whether the court had competence to process the application;
Whether the court could grant the injunction against an unknown person;
Whether NFTs may be subject to an injunction;
Whether the injunction should be granted in this case; and
Whether substituted service is to be allowed.

Jurisdiction of the Court

The court considered that it had the competence to process this application.

While the court acknowledged that the decentralized nature of blockchains can create difficulties in establishing jurisdiction, it emphasized that there must be a court that had the jurisdiction to hear the dispute. In this case, based on the facts available, that court was the Singapore court. The primary connecting factor was the fact that the claimant was located in Singapore and carried on business there.

Ban against unknown person

The court held that it had the competence to grant the preliminary orders against the defendant despite the fact that he was an unknown person, known only to the plaintiff as “chefpierre.eth”.

The court recognized that it is possible to have entered into a contract with someone online, where both parties have concealed their true identity by using pseudonyms, and that a claimant should not be prevented from seeking interim relief or bringing a claim, even if he only is able to use the defendant’s pseudonym.

Here, the court was convinced that the plaintiff’s description of the defendant was sufficient according to the legal rules. However, even if the description did not comply with the Court’s rules, the Court was willing to waive this instance of non-compliance.

Mandate on NFTs

The Court held that NFTs are capable of giving rise to property rights that can be protected by an injunction.

The court used the test in National Provincial Bank Ltd v Ainsworth [1965] AC 1175 (“Ainsworth“), which has been used in previous decisions to determine whether crypto-assets are property. However, the court emphasized that it accepted the application for Ainsworth in connection with requests, and that a different conclusion could be reached with fuller submissions.

The court found that NFTs satisfy the criteria in Ainsworth for recognition as property.

The right must be definable – Metadata, which is central to an NFT, distinguishes one NFT from another.
The asset must have an owner – For the requirement of an owner that can be recognized by third parties, the presumed owner of an NFT will be the person who controls the wallet associated with the NFT. Ownership is exclusive because one cannot handle NFTs without the owner’s private key.
The right must be able to be taken over by third parties – This requires that third parties must respect the rights of the owner, and that the asset must be potentially desirable. Here, the nature of blockchain technology gives the owner the exclusive ability to transfer the NFT to another party, and such NFTs are clearly subject to active trading in the markets.
The right must have a certain degree of permanence or stability – NFT has as much duration and stability as money in bank accounts.

Whether the injunction should be granted

The court decided to grant the injunction against Bored Ape NFT as the balance of convenience was in favor of granting the injunction.

The court found that the claimant would not be adequately compensated by compensation if the defendant sold Bored Ape NFT. The court noted that the uniqueness of the NFT was not the digital artwork itself, which could be copied and shared online. Rather, what was unique and irreplaceable was the code string that represented the Bored Ape NFT on the blockchain. If this was transferred to third parties, the claim may never be able to recover it. Any proprietary remedy ordered by the court in relation to Bored Ape NFT will thus be a purely paper remedy.

Replaced service

The Court held that leave should be granted for substituted service outside the jurisdiction, consistent with the means sought by the plaintiff (via Twitter, Discord and cryptocurrency wallet address). To find otherwise would be to deprive the claimant of the only practical means of effecting service on the defendant.

Final words

The Court’s decision demonstrates its recognition of the value of an NFT as an asset. Like physical assets or financial assets, an NFT has a number of rights that can be protected by interim orders. Parties seeking the Court’s assistance to protect such rights, or to trace such assets, should be reassured by the Court’s approach.

The decision also demonstrates the robust approach the court has taken to procedural issues when NFTs or other digital assets are involved, such as the cryptocurrencies in CLM v. CLN and ors [2022] SGHC 46. In such cases, it is common for the counterparty to be known only by its handle or username, and that it can only be contacted via online means. The Court recognized these challenges and recognized that they should not stand in the way of advancing a valid claim.