The following is a guest post by Carson Lloyd, a foreign law intern working in the Global Research Directorate of the Law Library of Congress under the supervision of Louis Myers, a foreign, comparative, and international legal reference librarian.
This post summarizes recent cryptocurrency developments within the U.S. and the U.K. relating to non-fungible tokens (NFTs).
At first glance, the concept of non-fungible tokens may seem complex, so a definition may be useful. An NFT is a unique digital certificate of ownership that represents a physical or digital asset. When an NFT is created (“minted”) it is listed on an NFT marketplace and added to a blockchain, where it may then be sold or traded in accordance with “smart contracts” that govern transfers. A smart contract is a computer code that automatically executes a transaction when specific conditions are met. For instance, a smart contract may stipulate that the original creator receive a percentage of subsequent sales.
An NFT, like a piece of art, is unique and can function as an investment that stores and increases value over time. At present, the most widespread use of NFTs is in the form of digital collectibles, such as digital artwork. An example of a digital collectible NFT is “Everydays: The First 5000 Days,” which was created by the digital artist Mike Winkelmann (known as Beeple) and sold for over $69 million.
The cases below help to illustrate how U.K. and U.S. courts are applying laws to this new technology.
The Lanham Act, 15 U.S.C. §1051 et seq., is a federal statute that governs trademark law and provides federal causes of action for trademark dilution, cybersquatting, and several unfair competition claims. The term “cybersquatting” refers to instances when an individual other than the owner of a well-known trademark attempts to profit from the trademark without authorization. The application of the Lanham Act to NFTs is currently being tested in federal district courts.
On May 18, 2022, the U.S. District Court for the Southern District of New York denied alleged infringer Mason Rothschild’s motion to dismiss a suit brought against him by the luxury fashion business, Hermès. The design house’s suit includes claims for trademark infringement, trademark dilution, and cybersquatting under the Lanham Act. In particular, Hermès’ suit focuses on Rothschild’s act of creating digital images of faux fur-covered versions of the Hermès Birkin handbags. These images were collectively titled “MetaBirkins,” with each piece assigned a number. The NFTs were then sold for prices comparable to the real-world Birkin handbags. Hermès owns the trademark rights to Hermès and Birkin, as well as trade-dress rights for the Birkin handbag design. The suit includes the allegation that consumers posting on the MetaBirkins Instagram page expressed confusion and believed that Rothschild’s MetaBirkin collection was affiliated with Hermès.
In holding that the plaintiff’s claims were actionable under the Lanham Act, the District Court relied on the Second Circuit opinion in Rogers v. Grimaldi, 875 F.2d 994 (2d Cir. 1989). Rogers held that the Lanham Act could apply to artistic works where public interest in avoiding consumer confusion outweighed the balance for the public’s interest in free expression (Id. at p. 999). Under the Rogers two-pronged test, the Lanham Act will apply where the “title has no artistic relevance to the work whatsoever,” and if some artistic relevance is present where the “title expressly misleads as to the source or content of the work” (Id.).
Relying on Rogers, the District Court held that the complaint sufficiently alleged that the trademark was not artistically relevant to the defendant’s work and could not be considered non-commercial, as Rothschild had intended to associate Metabirkin with the popularity of Hermès. Additionally, the Court stated that even if artistic relevance had been satisfied, the complaint contained sufficient factual allegations that Rothschild’s use of the MetaBirkin mark was explicitly misleading as to the source and content of the work, as it induced the public to believe the MetaBirkin was affiliated with Hermès.
Criminal Charges for Digital Asset Insider Trading
On June 1, 2022, the U.S. Attorney for the Southern District of New York and the Assistant Director-in-Charge of the New York Field Office of the FBI announced the indictment charging Nathaniel Chastain, a former product manager at Ozone Networks (“OpenSea”), with wire fraud and money laundering. The indictment describes an insider trading scheme in which Chastain allegedly used confidential business information to make money for himself.
As part of the defendant’s employment at OpenSea, Chastain was responsible for selecting NFTs to be featured on OpenSea’s homepage. The featured NFTs were kept confidential by OpenSea. It is alleged that Chastain used his knowledge of which NFTs were going to be featured on the homepage to secretly purchase dozens of NFTs before their release. Chastain was allegedly able to purchase these NFTs by using anonymous cryptocurrency wallets and anonymous accounts on OpenSea. Chastain further allegedly sold the purchased NFTs at a profit shortly after they were featured on OpenSea’s homepage.
The case is currently pending in the U.S. District Court for the Southern District of New York.
In this landmark ruling issued on March 10, 2022, the England and Wales High Court held that NFTs are capable of being treated as legal property under the law of England and Wales. The applicant in this case opened an account with an NFT marketplace called Ozone (the second defendant), and acquired various NFTs in the form of digital art in her Ozone account. Subsequently, an unknown person removed the acquired NFTs from the claimant’s account without her knowledge or consent. The NFTs taken from the claimant’s account were later traced to two other accounts opened by Ozone.
Justice Trower stated in the High Court’s judgment that the issue of whether NFTs constituted property for the purposes of England and Wales law was clearly going to be a rising issue (Id. at para. 13). Therefore, the High Court held that as the claimant’s submissions satisfied that there is a realistically arguable case, that such NFTs are to be treated as property as a matter of English law (Id. at para. 13). In addition, the High Court referenced a “series of cases relating to cryptocurrency fraud” in which it has consistently been held that crypto assets are to be treated as located where the owner is domiciled. Thus, the Court ruled there was “no reason…at this stage to treat NFTs in any other way” assuming as the judge did that NFTs are to be considered property as a matter of English law (Id. at para. 15).
The High Court also granted the claimant’s request for an injunction against unknown persons to stop the dissipation of the non-fungible assets. The claimant further sought a Bankers Trust order directed to Ozone requiring it to provide information necessary to trace the persons unknown who control the wallets to which the NFTs had been transferred. This order was granted on the basis that Ozone would wish to cooperate with the English Courts for the purposes of supplying information to trace the proceeds of the fraud.
In this case, for the first time in the U.K., the England and Wales High Court issued a decision March 10, 2022 granting an order permitting the court to serve documents of court proceedings via the transfer of NFTs over blockchain.
In this instance, the claimant had been the victim of a scam that induced him to transfer sums of tokens called Tether (USDT) and USD Coin (USDC) from his crypto wallets to unknown individuals. There is evidence that he was deceived by a website that represented itself as being connected with a legitimate regulated business, which turned out to be untrue. The scam centered on a fraudulent trade brokerage encouraging investors to deposit funds into crypto wallets so that trades could be placed.
The High Court held in favor of granting service by the alternative method of NFT. Justice Trower noted that the NFT would effectively arrive in the form of an airdrop in the relevant crypto wallets associated with the scheme. The court also outlined the benefits of serving via NFT transfer, focusing on the fact that service in this case will be embedded into a blockchain. This means that there is a greater likelihood that those behind the alleged scam are made aware of the court proceedings and related order. The judgment also discussed matters such as service outside of the English courts’ jurisdiction.
As the concept and acceptance of NFTs continues to emerge and evolve, it is likely that more legal developments will occur in this area in the U.S., the U.K. and across the globe.
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