Amin Hosseini is an IPilogue Writer and an LLM Candidate at Osgoode Hall Law School.

The Singapore High Court ruled on 21 October 2022 that non-fungible tokens (NFTs) can now be considered property, . are blockchain-based assets with a distinct identification number and metadata which can represent real-world objects and cannot be copied or replaced. They are minted using smart contracts. In , the NFT's owner applied for a loan on and provided the as collateral. Later, he failed to make loan payments and asked for an extension. The defendant initially consented to offer an extension of time to repay the loan. However,  he also declared that if the loan was not fully paid by the timeframe, he would use the "foreclose" option of the NFTfi's Smart Program. The defendant then used the "foreclose" feature to move the NFT from the escrow account into his cryptocurrency wallet. The claimant reminded the defendant of their agreement but the defendant declined to negotiate further and declared he would keep the Bored Ape NFT for himself. He then advertised sale of the Bored Ape NFT.

The claimant then sued the defendant for an “equitable proprietary claim” over the Bored Ape NFT, conversion, breach of contract, and unjust enrichment. The claimant also requested a proprietary injunction banning the defendant from dealing with the Bored Ape NFT in any form.

The court had to determine whether the Bored Ape NFT, and NFTs in general, are capable of giving rise to proprietary rights which could be protected by an injunction in making its decision. In deciding the case, the court applied Lord Wilberforce’s criteria for property in National Provincial Bank Ltd v. Ainsworth (the “Ainsworth test”), which was previously used to decide if crypto assets are property.

According to the , “before a right or an interest can be admitted into the category of property, or of a right affecting property, it must be (1) definable, (2) identifiable by third parties, (3) capable in its nature of assumption by third parties, and (4) have some degree of permanence or stability.”

The court maintained that the test’s first criterion means that the asset must be capable of being isolated from other assets, whether of the same type or of other types. Thus, NFTs fulfil the first requirement, since they can be distinguished using their metadata. Second, the asset must have an owner who can be recognized by third parties. For NFTs, the presumed owner would be whoever manages the wallet that is connected to the NFT. The third requirement comprises two aspects: “third parties must respect the owner's rights in that asset, and that the asset must be potentially desirable.” Here, the court believed that these prerequisites would be satisfied because  the owner has the exclusive authority to transfer the NFT to a third party using blockchain technology and such NFTs are the subject of market activity. Finally, to satisfy the fourth requirement, the aforementioned NFT is as permanent and stable as money in bank accounts.

The court that NFTs meet the Ainsworth criteria and therefore may be formed as property in a general sense, leaving open the question of what the specific nature of this property right is. For the reasons outlined, the court approved the claimant's request for a proprietary injunction.

This decision demonstrates that NFTs can be considered property  separate from the item they represent. The judge's ruling is a turning point for NFTs and the decision may have widely applicable effects and implications.

Further reading

Read more mere about .

To read more about the absence of proper Regulation of NFT Platforms and the associated outcomes, please see .

For in-depth knowledge about how smart contracts combine property and contract functions, please see .

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What is NFT?

are non-fungible tokens based on Ethereum, powered by smart contracts. means it is unique and one of a kind. It can also be understood as a proof of ownership and authenticity. is an open source and decentralized software platform, and it is also the technology behind the cryptocurrency ether (ETH).

There are various platforms for NFT marketplace, such as , , and (for sports digital collectibles).

What does NFT mean for artist, collectors and the market?

Traditionally, artists would sell the physical copy of their painting, but this business model is not as suitable for digital artworks as physical artworks. Some artists were posting their artwork , or unable to sell their digital work, because there was significant difficulties in the digital work or authenticating the owner of the original copy when there is no physical copy. With NFTs and increasing amount of marketplaces for digital works, artists might be able to finally make money with their works.

This article written by Andrew R. Chow also mentioned that NFTs seemed to encourage and applaud more creative and innovative forms of artworks - “[m]any other artists working in groundbreaking and sometimes controversial styles are also receiving unprecedented interest from NFT collectors. Art with whirling 3-D renderings, street-style oversaturated color schemes, and hyper-referential (and often crass) cartoons are thriving.”

For collectors and the digital art market, NFT is a proof that the person is the owner of the original copy. Collectors might be paying more for “” or appreciation of digital arts than just for the money in this .

Concerns about NFTs?

Ioanna Lapatoura has discussed copyright ownership with respect to NFTs in her recent article on . NFT ownership is different from copyright ownership or a proprietary right over an actual asset. NFT is the “proof of owning an unique digital version of an asset, rather than the asset itself”. There is also new type of alleged infringement – copied artwork . Since NFTs are still new and developing, there is likely to be difficulties in enforcing intellectual property rights.

What’s in the Future of NFTs?

Some people view NFTs as cards and were bidding on the virtual future. Some people were skeptical and worrying that the NFT bubble might burst. Nonetheless, NFTs are providing creators of digital works a way to monetize their work product and receive real returns for their virtual work. Since NFTs are based on the Ethereum blockchain, maybe the other question that we ought to ask is – what is Ethereum and ETH’s long term growth potential?

Written by Ya-En Cheng, JD Candidate 2022, enrolled in Professor D'Agostino's Directed Reading: IP Innovation Clinic course at Osgoode Hall Law School. As part of the course requirements, students were asked to write a blog on a topic of their choice. 

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Now let’s imagine a world without vending machines. I see your candy bar and I offer you one dollar in exchange for it. You accept my offer, then I hand over my dollar and you hand over your candy bar. Transaction complete: everybody is happy and maybe I made a new friend – why would we ever need smart contracts? Well, not everybody is so friendly, and misunderstandings happen all the time. That is where we need contract law and the courts. Or, in the words of philosopher , “Covenants, without the sword, are but words…” Luckily, the sword we all have is the legal system; unfortunately, there’s a very long line to use this sword and it is expensive to swing it.

This is where smart contracts might have an advantage. Let’s imagine that I hand over my dollar, but instead of handing over your candy bar, you run away with my money. Now I have to go to court and ask for because you breached our contract. At the end of the day, I still might not get the chocolate bar. I am better off dealing with the vending machine.

Contracts can be thought of as a , but smart contracts are different from the typical contract in law (see for an excellent analysis on this topic). One peculiar divergence with smart contracts is that a breach is, in principle, impossible. At this point, the vending machine example can be confusing – vending machines break and often fail to dispense the candy bar because of some mechanical issue. Let’s now think a bit more abstractly about computer programs and code. A basic conditional statement for my morning alarm might look like this: “IF the time is 7 AM, THEN play the alarm, ELSE do nothing.” Now imagine that I promise to give you $1 if you give me a wakeup call tomorrow at 7 AM, or else, if you fail, I keep my $1. I can make this into a smart contract by locking away $1 (perhaps using ) and programming something like this: “IF you call at 7 AM tomorrow, THEN transfer to you $1, ELSE transfer to me $1.” Notice how neither of us can go back on our deal; it’s out of our hands, it’s impossible to change (see for further discussions on the legality of smart contracts).

The interesting upshot is that by making breach impossible, it eliminates the possibility of breaking the promise. Legal scholars debate the relationship between contracts and promissory morality. that contract law should be understood in economic terms, while others argue that contract law should or consistent with a   However, in making breach impossible, smart contracts seem to sterilize the relational aspects of trust and shared projects, which to the institution of contracts in general.

I remember reading in my 1L contracts class for mitigation. In short, it’s about an employee in a dispute with their employer over a layoff and – despite the bad blood between employee and employer – the court concluded that the employee should have taken the employer’s subsequent offer of re-employment to mitigate damages. The Court seems to expect us to put our emotions aside. But people are not rational maximizers or cold automatons. Smart contracts seem like a step in this direction. While smart contracts are certainly more efficient and perhaps more reliable, their inflexibility may limit litigants to restitutionary remedies and pose further doctrinal challenges for and fairness.

Written by Dan Choi, a second year JD Candidate at Osgoode Hall Law School and an IPilogue Contributing Editor.

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