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Planet of the Bored Apes: NFTs recognised as property by Singapore Courts

  • Hong Kong
  • Litigation and dispute management - Other
  • Privacy, data protection and cybersecurity - ePrivacy
  • Technology, Media and Telecoms - General

15-12-2022

Non-fungible tokens (“NFTs”) have become one of the most popular type of digital asset over the past two years. Fundamentally, it exists in the form of computer codes stored on a blockchain network operated by a substantial number of computers around the world. The intangible and digital nature of NFTs has given rise to a number of legal issues, in particular as they become the subject of disputes. Recently, the Singapore Courts have grappled with these issues in Janesh s/o Rajkumar v Unknown Person (“CHEFPIERRE”) [2022] SGHC 264. The Court explored, for the first time, the legal nature of an NFT and dealt with a series of procedural issues often encountered by claimant parties in relation to crypto assets.

Background to Janesh s/o Rajkumar v Unknown Person (“CHEFPIERRE”)

At the outset, it is worth noting that while the case involves NFTs, cryptocurrencies, digital platforms and the like, the core aspects underlying the matter relate to a secured loan transaction between a borrower on the one hand and a lender on the other. In this transaction, Mr. Janesh borrowed two sums of cryptocurrencies from an individual, who has only been identified via their Twitter account handle “chefpierre.eth”, through an online marketplace known as NFTfi. The loans were secured with Mr. Janesh’s Bored Ape Yacht Club ID #2162 NFT (“Bored Ape NFT”) as collateral. Mr. Janesh sought to repossess the Bored Ape NFT from the Twitter user “chefpierre.eth” whose true identity and whereabouts were unknown as at the date of the judgment.

What happens on NFTfi?

Some background on NFTfi before diving into the case. It is essential to understand how the entire loan was arranged. NFTfi is a decentralised interface for borrowing and lending of cryptocurrencies. It allows potential borrowers to put forward NFTs they wish to pledge as collateral for any loan of a specified amount. The potential lender can view the proposed collateral and if they are of the view that a particular NFT is suitable to secure the load, they can make an offer to that borrower.

In practice, NFTfi does not play any role vis-à-vis the lender and the borrower. Once the parties agree on the loan amount, interest rate, temporal term and the NFT that is being put up as collateral, the system automatically brings these terms together with the following standard terms (“NFTfi Terms”) into the NFTfi’s Escrow Smart Contract (“Smart Contract”):

1. The NFT that is advanced as collateral will be locked so that the borrower cannot access or use it in any way until full repayment of the relevant loan has been made; and

2. The lender is allowed to transfer the NFT collateral to their digital wallet if the borrower fails to make full repayment by the agreed due date (“Foreclose Option”).

The Smart Contract is a software programme that runs on the blockchain network supported by computers around the world. It applies to every loan on NFTfi and automatically implements the immutable NFTfi Terms. The Smart Contract is autonomous in that it cannot be controlled by anyone (including NFTfi, the borrower or the lender) once it has been implemented. As a consequence, NFTfi does not itself have custody of the NFT collateral at any point.

The parties are free to agree on separate terms that extend beyond the NFTfi Terms. In this regard, it is common for them to negotiate on other social media platforms such as Twitter or Discord to outline the entirety of their terms for the loan arrangement. Irrespective, NFTfi will not be privy to these side agreements nor will these terms operate in the same manner as NFTfi Terms or the Smart Contract. NFTfi has no visibility to these terms and they are not recorded on the Smart Contract blockchain.

The involvement of a third party platform can add a further layer of complexity to the transaction. In the present circumstance, NFTfi requires users to agree to a set of terms and conditions that are governed by the laws of the British Virgin Islands. Through these terms, NFTfi disclaims all responsibility for publishing the information provided by the users. It is also clear that NFTfi is not a party to any loan agreement entered into between the parties. Further, it will not and cannot interfere with the transactions running on the Smart Contract, including any involvement in seeking to enjoin the transferring of any NFT that has been put forward as collateral.

The Case Concerning the Bored Ape NFT

Mr. Janesh approached “chefpierre.eth” on Twitter and borrowed two sums of cryptocurrencies valued at US$153,000 in January 2022 (“First Loan”) and US$150,000 in March 2022 (“Second Loan”) on NFTfi, in which he pledged his Bored Ape NFT as collateral for each loan. Mr. Janesh alleged that for both loans, the parties also entered into a set of supplemental terms (“Additional Terms”), which were as follows:

1. “chefpierre.eth” was obliged to provide Mr. Janesh with reasonable extensions of time for repayment when he became unable to make full repayment;

2. “chefpierre.eth” would not exercise the Foreclose Option to take possession of the Bored Ape NFT unless reasonable opportunities had been extended to Mr. Janesh to make full repayment; and

3. “chefpierre.eth” would never obtain ownership of the Bored Ape NFT. At best, the NFT would be held until full repayment was made.

Below is a timeline of the events that transpired over the course of the two loan transactions at issue in the proceedings before the Singapore Courts:

 

 

 

First Loan

 

 

 

6 January 2022



- “chefpierre.eth” assured Mr. Janesh that the Bored Ape NFT would not be foreclosed.

- Mr. Janesh borrowed a sum of cryptocurrency valued at US$153,000 for a period of 90 days at 33% per annum.

- It was subsequently repaid in full.

 

 

 

 

 

 

 

 

 

 

 

 

Second Loan

 

 

19 March 2022

 

 

- Mr. Janesh borrowed another sum of cryptocurrency valued at US$150,000 from “chefpierre.eth” for a period of 30 days at 45% interest per annum.

 

17 April 2022

 

       
- Mr. Janesh told “chefpierre.eth” that he would require a short extension of time to repay the Second Loan.

- “chefpierre.eth” agreed and assured Mr. Janesh that he would return the Bored Ape NFT to him once the loan was repaid in full.

 

 

19 April 2022

 

       
- After some discussion, “chefpierre.eth” agreed to refinance the Second Loan with the Bored Ape NFT as collateral.

- Subsequently, “chefpierre.eth” went back on subsequent agreement and threatened to take possession of the Bored Ape NFT unless the Second Loan was fully repaid by 21 April 2022, 5:00 am Singapore time (“Ultimatum”).

 

21 April 2022

 

       
- Mr. Janesh was unable to satisfy the terms of the Ultimatum.

- “chefpierre.eth” activated the Foreclose Option and transferred the Bored Ape NFT to his cryptocurrency wallet.

 

 


Since 21 April 2022

 

       
- Mr. Janesh attempted to partially repay the Second Loan to “chefpierre.eth” who refused to accept it and other attempts by Mr. Janesh to make repayment.

- “chefpierre.eth” listed the Bored Ape NFT on the online NFT marketplace OpenSea for auction. 

 


 


As a result, Mr. Janesh alleged that “chefpierre.eth” had acted in breach of the Additional Terms in the Second Loan and that he was entitled to seek an equitable proprietary claim in respect of the Bored Ape NFT. In fear of “chefpierre.eth” disposing of the Bored Ape NFT, Mr. Janesh applied successfully to the Court for an interim injunction in May 2022 to enjoin “chefpierre.eth” from dealing with it in any way. The written judgment following the issuance of the court’s order was released in October 2022.

Key Takeaways

In order to reach this decision, the Singapore Court had to navigate a series of hurdles that have become increasingly familiar to parties engaged in disputes involving crypto assets.

1. Recognition of NFTs as legal property

The present case marked the first instance of judicial recognition of NFTs as legal property in Asia, closely following a recent decision from the English High Court in Lavinia Deborah Osbourne v Persons Unknown (2) Ozone Network Inc trading as OpenSea [2022] EWHC 1021 (Comm), which was in the context of an application for an asset freezing injunction against two stolen NFTs.

The Singapore Court was of the view that an NFT is distinguished from mere information although it exists in the form of a series of computer codes. The Court looked at the function of the codes and considered the purpose of the whole arrangement, which was to achieve exclusive control of the transfer of it by the owner. All of these make an NFT substantially different from mere information. The Court also adopted the approach in the English case AA v Persons Unknown who demanded bitcoin on 10th and 11th October 2019 and ors [2019] EWHC 3556 (Comm) (see our briefing on this decision here), which determined whether an NFT amounts to a legal property. A similar approach might be adopted by the Singapore Courts in relation to newer classes of crypto assets in the future.

2. Picking the right place to litigate

The NFT and the loan transactions all exist and came to fruition in a digital world that subsists outside the traditional notions of jurisdictional borders. This in of itself presents various challenges for claimant parties looking to seek redress. Accordingly, a claimant must first identify the convenient forum or jurisdiction to bring suit. However, the forum conveniens can be interpreted differently depending on the factual matrix of the circumstances. In the case of Mr. Janesh, he opted for the courts of Singapore and sought to establish that that jurisdiction had the closest connection to the matter.

He argued that as a Singapore national who conducted business from Singapore and owned property in Singapore that Singapore was the forum conveniens to resolve his dispute. He also purchased the Bored Ape NFT and entered into the loans with “chefpierre.eth” while he was physically in Singapore. Notwithstanding the digital nature of the Bored Ape NFT, Mr. Janesh argued that there had to be a court to hear the case and Singapore has the closest connection to the facts at hand. The Singapore Court accepted his arguments and observed that the primary connecting factor was the fact that the claimant was located in Singapore and carried out his business there. It is worth noting that “chefpierre.eth” did not appear in the proceedings.

3. The short arm of the law

The intangible nature of an NFT also presents practical difficulties when it comes to enforcing any order or judgment of the court. In the present case, Mr. Janesh obtained an injunction against “chefpierre.eth” granted by the Singapore Courts. However, it is unclear whether such an injunction would be enforceable in relation to OpenSea, which is situated in the U.S. and thus outside of the jurisdiction of the Singapore Courts. In such circumstances, Mr. Janesh may need assistance from the courts in the U.S.

These difficulties unfortunately do not end here. In particular, even if Mr. Janesh was able to have the injunction of the Singapore Court enforced against OpenSea, the digital nature of the NFT allows “chefpierre.eth” to simply transfer the Bored Ape NFT to another NFT trading platform for auction. By the time Mr. Janesh takes further steps to enjoin that subsequent auction from taking place, the NFT in question may already have been sold elsewhere.

*               *               *

Finally, while the case presents a new development, the decision by the Singapore Courts should be viewed in the context of an interlocutory application that was not opposed. Consequently, there was no detailed analysis of the myriad of factual and legal issues underpinning the case on the merits of the action by Mr. Janesh.




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