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The world of digital assets is not a lawless one

Worldwide, the courts are beginning to have their say.

Tezos blockchain illustration
Photo by Shubham Dhage on Unsplash

Even with crypto trading platforms reeling and blockchain's utility being called into question, people are still investing and trading digital assets in an arena that is not as lawless as you may think. 

Take, for example, non-fungible tokens (NFTs) -- part of the crypto family, characterized by their decentralized nature and tracked on a blockchain. NFTs are unique in the crypto family because they represent, or are, digital originals of art, images, videos, and more. In May of 2022, the General Division of the High Court of Singapore asserted its ability to rule on civil matters dealing with NFTs in Janesh s/o Rajkumar v Unknown Persons. 

The claim arose after an individual purchased an NFT and used it as collateral for a loan from an anonymous Twitter user. The Twitter user exercised the "foreclose option" under the loan, and the NFT was transferred into the Twitter user's digital wallet. Following the transfer, the NFT was put up for sale. The borrower brought a claim to assert they still had an equitable proprietary right over the asset despite it being collateral for the loan. The borrower asked the court for an injunction to reverse its transfer. 

Notably, the court found that it has jurisdiction over disputes involving digital assets despite the assets being borderless. It also held that a binding contract can exist despite not knowing the "true" identities of the parties to it and that NFTs have property attributes and are not merely information or code.

Ultimately, the court granted an injunction not limited by jurisdiction of where the NFT, or the NFT owner, resided. 

Meanwhile, more recent decisions from courts in England have expanded the legal framework for NFTs and digital assets. 

The 2022 decision in Jones v Persons Unknown involved the transfer of 89.616 Bitcoin (then worth about £1.54m) to, what he believed was, a crypto trading platform. When the plaintiff asked to withdraw from the platform, he was denied the request. A forensic investigator traced his Bitcoin to a wallet associated with a different entity than the platform he originally sent his funds. Jones did not know this digital wallet's "true" identity or owner. Nonetheless, the court granted an injunction against the owner of the original crypto trading platform wallet and the second unknown wallet, a similar injunction to the one granted by the High Court of Singapore in Janesh. After this proceeding, the plaintiff brought a summary judgement application claiming, among other things, that his Bitcoin was held in the digital wallet in a constructive trust for his benefit. The court agreed and further ordered that the Bitcoin be delivered back to him.

In coming to its findings, the English Court relied on two earlier decisionsAA v Persons Unknown and D'Aloia v Persons Unknown. The first set the stage to find that crypto assets are property, the latter for permitting injunctive relief in respect of digital assets. 

The Jones decision was the first time the English Commercial Court found that a digital asset, like crypto, can be held in a constructive trust for its "true" owner. Jones also affirmed the D'Aloia ruling by allowing airdrop (digital service on the blockchain) as an acceptable method by which to serve parties whose "true" identity is not known.

When litigating my first crypto claim several years ago, I would have been grateful to have these decisions to guide the courts here in Alberta and Canada. It is hard to believe that just a few years ago, we were still debating whether digital assets, like a cryptocurrency or a token, were property. Parties argued that ownership of a digital asset or "code" was too complex or even impossible to determine. 

Of course, none of these decisions are binding on Canadian courts. However, legal frameworks developed by any reputable court are valuable in the fast-paced and rapidly evolving technology-based industries. 

Contrary to what many believe, digital assets do not operate in a legal vacuum. Digital assets are property, can be owned, and have value. The courts have now found that digital assets can be held as part of an equitable trust. Service of documents, orders, and remedies need not be tied to one jurisdiction. And, given recent bankruptcies of crypto trading platforms worldwide, we soon expect courts in Canada to adjudicate on digital assets.