By Lawfox | Algemeen | 12 September 2022 | 15 min. reading time
In February, we reported on the first that a Dutch court has allowed an attachment to issue on an NFT for the first time. After the attachment, the NFT concerned is held in judicial custody by the bailiff until the court decides to whom it must be issued. The lawsuit has resulted in the ownership of the Cryptobatz-NFT being transferred to our client. In this article we explain how we have brought this case to a successful conclusion for our client.
What is an NFT?
Before we get to that, a short explanation. This case concerns an NFT. An NFT is in fact nothing more or less than a piece of code that is registered on the blockchain. The blockchain is a digital ledger in which transactions in blocks are stored cryptographically and which blocks are cryptographically linked to each other. Transactions on the blockchain can only be performed by the person who has the cryptographic public and private key for this. The result of this is that the transactions are registered in a fully public, verifiable and untouchable manner. This makes digital information unique, uncopyable and scarce. Unique in the digital revolution.
There is a large number of blockchains and protocols, each of which has its own characteristics. In this case, it concerns the Ethereum blockchain and the ERC-720 protocol. This protocol makes it possible to run “smart contracts”. Pieces of code that are automatically executed (“if input X then output Y”). This also makes it possible to register bits of information on the blockchain, such as images, video and audio. This gives this information its own identifier, making the information unique, non-copyable and valuable: NFTs. These NFTs are also tradable on the blockchain, usually against the cryptocurrency Ether (“ETH”). When an NFT is traded, the association of cryptographic keys changes from the old to the new owner. As a result, the old owner can no longer use the NFT, the new one can.
In this case, it is an NFT of the “Cryptobatz” project. The NFT in question refers to an image of a bat. During the escalation of the conflict, the estimated value of the NFT was approximately EUR 20,000.
Trade in NFTs
parties entered into discussions about trading cryptocurrencies. The opposing party, we call him “Ozzy” here, thinks he knows a lot about this. Our client, “Sharon”, did not have that knowledge. She has therefore regularly asked Ozzy for advice, and also asked to purchase NFTs for him. Sharon trusted Ozzy completely. For example, she has made large sums of money available to Ozzy to buy NFTs for him. The deal was that Ozzy would buy the NFTs for Sharon. Ozzy did this selflessly, while the profit would go to Sharon.
Agreement to Purchase the Cryptobatz NFT
On January 20, 2022 at 4:25 PM, Ozzy Sharon pointed out the Cryptobatz project. That night, at 0:30 AM, the public sale of this new project started (also known as the moment of “minting”). Ozzy has made Sharon enthusiastic about the purchase of a Crypobatz. The public sale would likely sell out right away, the value of the NFT would likely go up quickly, and if you receive a special NFT, you’d be “really in,” Ozzy says.
As with previous transactions, Sharon informs Ozzy that he does want to buy a Cryptobatz from Ozzy. However, Ozzy didn’t have enough resources for that. Sharon therefore proposes to deposit money so that Ozzy can buy cryptocurrency and mint an NFT for him. Ozzy responds that he hopes he can mint one for Sharon. The Agreement is thus concluded.
Sharon executes the Agreement and deposits EUR 3,750 to Ozzy, transferring him 0.4 ETH. This happens about twenty minutes before “minting”.
Minting then takes place at 0:30 AM and the project – as expected – soon sells out. Ozzy then proposes to either wait until after the reveal or get one more. Sharon requests to try it now. This means that the parties have agreed that Ozzy will buy a Cryptobatz for Sharon before the reveal.
Ozzy obeys. That same night, between 01:00 and 01:21 – and only after the project has sold out – Ozzy makes sure that he finally has Sharon’s resources ready for the purchase of a Cryptobatz for Sharon.
On January 21, 2022 at 03:21 AM, Ozzy buys Cryptobatz with Token ID XXX1. Ozzy confirms that this transaction was successful.
Before the reveal, the parties are still discussing the sale of this NFT if its value starts to rise.
It follows from the foregoing that the Agreement provided for Ozzy to purchase Cryptobatz #XXX1 for Sharon. This has been implemented.
What that NFT entails became clear on January 22 at 0:00 AM, with the ‘reveal’. It became apparent that it is a rare Cryptobatz, with unique characteristics. It turned out to be a “Top 100” Cryptobatz (out of 9999 pieces).
After the reveal, on January 22 at 00:10, Sharon requests the delivery of the Crytpobatz.
Only 8 hours after the purchase of the Cryptobatz (January 21, 2022 at 11:37 AM) Ozzy indicates that he plans to “sell” (sell) some more so that some more can be “sniped” (buy). Only then does he decide to also buy a Cryptobatz – for himself. This is also consistent with the actions Ozzy then performs on the blockchain: on January 22 at 1:08 AM, Ozzy will receive 1.54 ETH from (probably his own account with) crypto exchange service Coinbase. With a limited additional balance that was still present in his wallet, he then buys Crytpobatz #XXX2.
Sharon sees that Ozzy has bought this NFT and correspondence shows that he states that Ozzy did this for himself.
During the conversations, Sharon repeatedly repeats his request to Ozzy to send him Cryptobatz #XXX1.
Only then does Ozzy confirm the purchase of Cryptobatz #XXX2. Ozzy does not dispute that he bought Crytpobatz #XXX2 for himself, let alone indicate that he would have bought it for Sharon.
When Sharon asks Ozzy again to send him Cryptobatz #XXX1, Ozzy responds negatively.
Ozzy then sends the wrong Cryptobatz, #XXX2, to Sharon. Sharon then called in his lawyer and informed the police about the theft.
However, the publicly verifiable transaction history on the blockchain clearly shows that Ozzy first bought Cryptobatz #XXX1 from Sharon’s resources – about which the parties have evidently consulted – and then, with his own Coinbase resources, Cryptobatz #XXX2 – about which the parties have not consulted. lined.
Sharon sends Ozzy a letter of formal notice and still tries to get out. However, Ozzy expressly refuses to hand over Crtypobatz #XXX1.
Still, Ozzy apparently doesn’t feel completely at ease, and transfers Cryptobatz #XXX1 to another newly created wallet. This embezzlement makes Sharon decide to request the court to have the NFT seized. After leave and preparation, this attachment will be made on 9 February. Due to the uncertainty created by Ozzy about who the third wallet belongs to, it was necessary to seize it at two locations. However, the fitting is spot on. The NFT is given to the bailiff in judicial custody. The court will then have to consider whether Ozzy is obliged to surrender.
An interim proposal to come to a settlement is rejected by Ozzy. Sharon therefore decides to sue. Ozzy then defends himself with a statement of defense, after which an oral hearing is scheduled in court. This oral hearing took place on 30 August 2022.
Legal design
Because we are convinced of the power of legal design, we had this Cryptobatz NFT infographic made about the case before the oral proceedings in order to clarify the above facts and circumstances for the judge. We also submitted a just-prepared transaction summary, with a clear explanation that this conclusively shows that Cryptobatz #XXX1 was purchased for Sharon.
Ownership of NFTs
Sharon argued in the lawsuit NFTs could be owned by property. In similar cases in England/Wales and Singapore, the court has already ruled that the owner of NFTs can exercise property rights. These judges have therefore already expressed a positive opinion about the application of the existing legislation to this new phenomenon. The fact that the NFTs in question are also owned by Dutch law has been extensively argued in the legal literature. Sharon has taken the position that ownership of the Cryptobatz-NFT in question belongs to her.
NFT as a “zaak”?
For example, it appears from the legal literature that Van der Steur, who takes a functional approach to the “zaak” concept (the requirements of human controllability and materiality should, in her view, be explained in the light of the umbrella term ‘individuality’) that NFTs could even can qualify. This is because the purchaser of the NFT can dispose of the token by means of the private key, and it is clear to third parties that this dominion may not be infringed, because transactions are immutably recorded.
Also in the context of Kleve’s opportunity (it is the judge who decides whether an object is a case in the light of the requirements of practical legal life), NFTs can qualify as cases. After all, the unique tokens are considered a form of digital ownership (as opposed to a reproducible data file). NFTs are also used within decentralized finance as the carrier of a security object. Case Qualification Facilitates Property. A fist pledge by taking the private key out of the debtor’s control, and a silent pledge can also be converted into a fist pledge by handing over the private key.
This is also closely in line with the approach of the Supreme Court, which, according to Tjong Tjin Tai, in the Image Brigade judgment leaves open the question whether software is ‘capable of human control’, but establishes that an incorporeal but manageable object is central, which is close to case qualification . On the basis of the Beeldbrigade judgment, Reehuis & Heisterkamp and Van Erp & Loof conclude that software is susceptible to human control: Sharon can exercise actual power over it and the data file is susceptible to human control.
The purchaser of an NFT can have a cryptographic token with his private key and transfer this token to another person via smartcontract platforms. NFTs therefore qualify as a digital object in a decentralized environment. An absolute right is in line with the nature of the token and the economic reality. After all, the tokens are traded as ‘property’ on a large scale and even pledged. A remedy as a revocation is therefore considered more appropriate than just a ‘weaker’ contract law claim.
NFT as “absoluut vermogensrecht”?
Others in the literature argue that NFTs qualify as absolute property rights. (Subjective) property rights are rights that are transferable, either separately or together with another right, or which are intended to provide the rightholder with material benefits, or which have been acquired in exchange for material benefits provided or promised (Article 3: 6 CC). In general, they have the property of being valued in money. A property right is a special power conferred on someone by law. It gives substance to the concept of ‘good’ and it clarifies that certain powers are recognized in private law, and that an infringement thereof constitutes an unlawful act. Property rights are subject to transferability, pledge and attachment.
First of all, it is clear that NFTs are intended to provide the purchaser with a material advantage.
Goods are assets on objects as objects or on certain phenomena that present themselves as objects through reification (such as intellectual property rights and rights of claim). This leaves room for recognition of new objects in property law. De Jong argues that if the object has sufficient property law weight, it acquires a kind of absolute law protection and it should then be possible to declare the property law arsenal applicable. De Jong therefore argues that a domain name has an independent substantive status and, just like a case or an intellectual property right, is a property right. Certain intangible goods can be qualified as a new object of a right due to social and technological developments. Whether an object has sufficient objectivity , according to him, depends on the popular views, which is given substance by the way in which the object is used in society.
Doerga argued that an NFT functions as an independent entity in society. It is the token over which a person can exercise control and this token can be traded on NFT marketplaces and may be pledged as collateral. A purchaser of an NFT can exercise control over the token, and not merely a form of exclusive control. In De Jong’s teaching, an NFT should therefore be regarded as a right under property law.
Tweehuysen believes that a (fungible) token such as bitcoin should be regarded as an absolute property right, because of the place that bitcoin occupies: they resemble things but are not, and that is why they fit in as absolute property rights in the system of the law. cases regulated by law such as intellectual property rights and business. Snijders and Verstijlen agree.
Due to the exclusive discretion to use NFTs and the irreplaceability of the object, there is an even greater need for economic and sentimental reasons than for bitcoins to recognize an absolute entitlement to NFTs. Doerga concludes that, due to its non-exchangeable nature, an NFT acts as a property right more than a bitcoin in society. NFTs are considered unique digital property, pledged through NFT platforms and widely traded because of their fluctuating and often explosively increasing value. This value is the result of the non-exchangeable and exclusive nature of the NFT. Due to their non-exchangeable nature, NFTs can be regarded as a digital equivalent of a physical item. NFTs are non-reproducible and exclusive in nature. This unique character justifies, even more than with other digital objects, a place in property law. The qualification as a matter or absolute property right is the only path to meet the interests of the purchaser. This recognizes that a purchaser is entitled to the token and can refinance the NFT. Precisely from the point of view of efficient planning, it is opportune to recognize an absolute property right with regard to the incorporeal equivalent of a material object: such a right is in line with the concept of the matter and is essentially ‘mirror image’, according to Doerga.
Ownership for buyer because NFT was bought by an intermediary
It has been argued in court that according to popular opinion, it is held that Ozzy kept the Cryptobat for Sharon and for that matter on the basis of external facts (Article 3:108 of the Dutch Civil Code). Art. 3:110 BW relevant. From art. 3:110 of the Dutch Civil Code, it follows that an intermediary who buys movable property in his own name but acting on behalf of another person acquires the possession for that other person.
Whether such a legal relationship exists can be the result of, among other things, the conclusion of an agreement (or an attempt to do so) and, according to the legislative history, depends on the prevailing opinion. This is usually guided by what will be the intention of the parties in the normal functioning of the legal relationship. According to the literature, giving an assignment can be a 3:110 legal relationship.
It is important here that Sharon had made Ozzy an amount in crypto currency and money available to buy the NFT for him. Moreover, Ozzy himself did not have enough money for the NFT to buy him together. Ozzy has also always indicated that he will buy the NFT for Sharon, and that the risk will lie with him. The parties’ intention was therefore that Ozzy bought the NFT in his own name, but on behalf of Sharon. Without this legal relationship, Ozzy would not have obtained the NFT.
That this was the intention of the parties is also apparent from the fact that the parties had already conducted such transactions before: Ozzy had already bought other NFTs for Sharon before, for which Sharon had also paid, which were later also made available to Sharon.
It is irrelevant that Ozzy would not have had the will to keep the Cryptobatz for Sharon, but for himself, at the time of acquiring actual dominion (or rather: after the reveal). The subjective will is out of the question: the facts must be viewed against the background of the legal relationship. Ozzy’s (inner) will to keep the NFT to himself is insufficient. Outward facts have not shown that Ozzy wanted to keep to himself.
So de facto the Cryptobat was delivered to Ozzy, but de iure to Sharon. The property that Ozzy acquires on the Cryptobat is therefore acquired for Sharon. This means that the possession on the Cryptobat took place directly to Sharon, as a result of which the delivery and, in principle, also transfer to Sharon took place. This means that there is a valid title for delivery, and thus transfer. Sharon had thus become the owner of the Cryptobat.
Claims
Sharon has therefore requested the delivery of the Cryptobat. In addition, Sharon claimed damages because she was unable to sell the Cryptobat in the meantime.
Amicable settlement
After hearing the parties, the judge asked the parties whether they would like to consult with each other again. This has resulted in the parties reaching an agreement to resolve the dispute among themselves. The regulation has been recorded in an official report and has thus obtained an enforceable title. The parties have instructed the custodian to hand over the Cryptobat to Sharon. Ozzy also pays Sharon a hefty compensation for the missed sales opportunities.
