Lin Jiujiu invited Shihui Law Firm to interpret the property attributes of NFT

NFT (Non-Fungible Token) is a digital asset that can be bought and sold online, usually using cryptocurrency, similar to a specific item with a certain value in the real world. As a unit of data stored on the blockchain, NFT can be used to represent a complete and indivisible entity, proving that the digital asset, such as digital files such as photos, audio, and video, is unique and irreplaceable.

Since NFT is a series of codes and data information reflected on the Internet, and it also has the unique properties of being unique, irreplaceable, and transferable, does it have the attributes of property and can it be identified as "property"? This issue has been widely discussed in the industry.

Case Background

On October 21, 2022, the Singapore High Court heard the case in which the plaintiff Janesh s/o Rajkumar sued the defendant "a user under the pseudonym "chefpierre" on NFTfi". The judge made corresponding arguments on the property attributes of NFT and determined the property attributes of NFT from a judicial perspective.

In this case, the plaintiff believed that he had an "equitable claim to ownership" of the Boring Ape NFT he owned, and applied to the court for a proprietary injunction prohibiting the defendant from dealing with the Boring Ape NFT in any way (including but not limited to sale, disposal, and mortgage). So, whether the court should issue an injunction to restrict the defendant from dealing with the Boring Ape NFT, the court must discuss whether "the Boring Ape NFT or NFT in general can generate ownership rights that can be protected by an injunction."

Core view of the judgment

The judge in the case held that: when purchasing NFTs, people can obtain the code information of the NFTs. However, in terms of crypto assets (i.e. NTFs, cryptocurrencies and tokens), it may not be entirely appropriate to characterize it as information:

(1) The entire purpose behind crypto assets is to create an item of tradable value, rather than simply recording or secretly transmitting knowledge or information.

(2) Generally speaking, although crypto assets are composed of code information, just like contracts are composed of text, contracts composed of text can stipulate clear rights and obligations. For example, in a creditor-debtor relationship determined by a contract, the creditor's claims under the contract are valuable and can be transferred, and the claims stipulated in the contract are his "property". Similarly, crypto assets also clarify a relationship on the block based on code information (such as ownership relationship, and the ownership of a certain NFT or crypto asset is recorded through code. Therefore, crypto assets are not just information.

(3) In other cases, judges have held that: "Generally speaking, information is not property. It is usually open to all those who have eyes to read and ears to hear." This suggests that information can be copied infinitely and is not considered property. However, this does not apply to crypto assets because the data that constitutes a crypto asset is unique. It is also protected by the relevant key and cannot be transferred without consent.

In addition to the above views, the judge in this case applied the standard mentioned in the judgment of National Provincial Bank Ltd v Ainsworth (hereinafter referred to as the "Ainsworth standard") to determine whether cryptocurrency/NFT is property. The Ainsworth standard contains four conditions, all of which can be regarded as "property":

(1) the right is “definable” in the sense that the asset must be capable of being isolated from other assets whether of the same type or of other types and thereby identified;

(2) have an owner being capable of being recognised as such by third parties;

(3) the right is capable of assumption by third parties;

(4) The rights and corresponding assets have some degree of permanence or stability.

The judge in the case held that NFT passed the Ainsworth test, as follows:

(1) Rights can be defined: Metadata is the core of NFT, and it is this metadata that distinguishes different NFTs;

(2) Asset owners can be recognized by third parties - in the case of NFTs, the owner of the NFT is anyone who controls the wallet connected to the NFT. Similar to cryptocurrencies, NFTs cannot be processed without the owner's key, thus achieving exclusivity;

(3) The right must be transferable by a third party - this involves two aspects: the third party must respect the rights of the asset owner, and the asset must be potentially desirable. NFTs meet these two requirements: first, the nature of blockchain technology gives the owner the exclusive ability to transfer the NFT to another party, which highlights the owner's "rights". Second, such NFTs are the subject of active market transactions (if they are not desirable, NFTs will not be actively traded in the market);

(4) The rights and the corresponding assets have “a certain degree of permanence or stability” – this threshold is easily met (the case uses tickets as an analogy. Although the lifespan (i.e., the period of use) of a game ticket is short, it is property like money).

According to the above description, NFT meets the characteristics of property in many aspects, including its unique and non-replicable data characteristics, its characteristics that can be recorded on the blockchain and controlled by a single customer, and its characteristics that can be transferred through the blockchain and have long-term stable market demand. Therefore, the judge in this case believes that NFT is a property.

Domestic judgment extension

Similarly, in domestic trial practice, the attributes of such crypto assets (i.e., NFTs, cryptocurrencies, and tokens) often become one of the controversial points in cases involving crypto assets, and various courts have also conducted preliminary research and judgment on their characterization.

Most courts believe that crypto assets have property attributes. For example:

(1) In the first case of crypto asset dispute in Hangzhou Internet Court, the second instance case of Yan Xiangdong et al. vs. Li Shengyan et al. property damage compensation dispute, and other cases, the court held that the acquisition of crypto assets requires the investment of material capital and consumes time costs. This process condenses the abstract labor of human beings and can be transferred for monetary consideration. It has value, scarcity, and disposability, and meets the constituent elements of virtual property. Although crypto assets do not have currency status in China, their property attributes are not denied by laws and regulations. Therefore, they have property attributes and should be protected by law.

(2) In the case where Cheng applied for execution of Shi’s other ownership dispute, the People’s Court of Baoshan District, Shanghai also determined that crypto assets have the characteristics of value, scarcity, and disposability, and have the attributes of virtual property, and inquired about the crypto assets available for execution under the name of the person subject to execution. In the absence of crypto assets available for execution, the two parties negotiated a discount for compensation.

However, a small number of courts hold different views. For example, the Jiyuan Intermediate People's Court of Henan Province proposed in the second-instance criminal case of Feng Guoshi's illegal acquisition of computer information system data and illegal control of computer information systems that virtual currency, as a kind of virtual property, has the legal attribute of computer system data. Therefore, there is currently no clear legislative basis for the ownership of NFTs in China, and judicial practice has yet to reach a consensus.

Viewpoint Exploration

Combining the mainstream views at home and abroad, we believe that, first of all, crypto assets (i.e. NFTs, cryptocurrencies and tokens) are unique. They are the only data recorded on the blockchain that belongs to a certain person/address and can be distinguished from other data. Secondly, crypto assets have exclusive attributes, that is, the data is protected by relevant keys and will not be transferred without the consent of the owner. Thirdly, crypto assets have value attributes, which are also brought about by their uniqueness and exclusivity. Simply put, no third party can claim ownership of the cryptocurrency at will. Even if the "metadata" of the cryptocurrency is copied, it is meaningless as long as it is not recorded on the block. Because of the "scarcity" and "uniqueness" of cryptocurrency, its uniqueness and exclusivity will bring it corresponding value. Finally, cryptocurrency is transferable and can be transferred by the owner or disposed of in other ways.

In addition, from practice, we can see from the above-mentioned domestic cases that the current laws and regulations have not clearly defined the nature of virtual currency, so there are different voices. However, we understand that my country's judicial precedents are gradually tending towards the mainstream judicial point of view, mainly starting from the definition and characteristics of "property", and believe that the process of obtaining virtual currency and its transferable characteristics are comparable to property. Therefore, like the aforementioned Singapore court judge, it is believed that virtual currency has the elements of property.

Finally, the legal nature of NFT, that is, whether NFT has property attributes and whether it can be recognized as private property, will directly affect what rights NFT owners can obtain legally, which is of great significance. This will strengthen the protection of the property of the owner, stabilize the market of NFT and the entire crypto asset, and lay a good foundation for the prosperity of the crypto asset market.