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Seizure or freezing order of bitcoins, other crypto or NFTs under Dutch law

  /  Chantal Bakermans   /  Seizure or freezing order of bitcoins, other crypto or NFTs under Dutch law

Seizure or freezing order of bitcoins, other crypto or NFTs under Dutch law

As a Dutch IP and IT lawyer, I am often asked whether bitcoins, other crypto currencies or NFTs can be subject to a conservatory seizure (also referred to as a freezing order) in the Netherlands. With the introduction and popularity of non-fungible tokens (NFTs) and fungible tokens such as Bitcoin, Ether and other cryptocurrencies, the legal discussions in the Netherlands in this regard are also emerging.

I regularly get calls from people who have somehow lost (part of) their cryptos. Sometimes they have been hacked and the private keys have been stolen or (unintentionally) transactions have been authorized. Or there is a situation that the company that manages the cryptos (wallets) does not want or cannot proceed with a transaction, or a mutual agreement for the delivery of an NFT is not being fulfilled.

The legal qualification of cryptocurrencies and NFTs

First of all, the qualification of crypto currencies and NFTs under Dutch law is important to determine whether they can be transferred, encumbered, and whether the attachment of crypto or NFT is possible. However, the legal qualification of crypto assets is not unambiguous, especially due to the nature of cryptocurrencies and the dependability on the underlying blockchain technology.

A legal feature of cryptocurrencies such as Bitcoin and Ether is that they are initially intended to facilitate electronic payments. One Bitcoin does not represent a similar monetary value like for options, stocks or other traditional securities do. It is really merely a piece of code. Nevertheless, in Dutch legal literature – as well as in Dutch case law – it has been suggested that cryptocurrencies do have characteristics of a ‘good’ or ‘property right’.

An NFT represents even clearer features of a (property) right. For example, it entitles the holder to a particular good, service, or to a certain influence- or profit percentage towards the issuer.

Legal risks of blockchain

Buying cryptocurrencies does not expose you to, for example, price, market or credit risks, but to risks associated with the dependence on blockchain. For example: (i) programming errors or bugs in the blockchain protocol, (ii) miners who are not (any longer) willing to validate transactions, with the result that cryptocurrencies can no longer be transferred, (iii) loss of the private key, whether or not caused by a hack, which means that you will no longer have access to your cryptos, (iv) the price risk in the intervening period in which a transaction is being validated and recorded on the blockchain, or (v) the so-called ‘51%- attack’, which concerns an attack on the blockchain of a group of (malicious) miners who collectively possess more than half of the required computer power and can, thus, reverse or change transactions.

Despite the lack of a legal framework in the Netherlands with regard to cryptocurrencies and tokens (not being securities), it is expected that cryptos will eventually become regulated, also under Dutch and/or European law. In that context, it would be expedient for service providers in the Netherlands to also observe the special duty of care in providing their crypto services, as has already been assumed with regard to providers of financial and investment products. Under Dutch law, that means in any case information, investigation and warning obligations.

No access to your cryptos; what now?

Criminal hackers are increasingly targeting people who own cryptocurrencies or (rare) NFTs. These criminals surreptitiously try to steal passwords from crypto wallets or install malware on your computer allowing them to gain access to the cryptos themselves.

A first complexity is often: who is behind the unauthorized access of theft? This is often difficult to find out because the cryptos are quickly passed on to unknown addresses whose rightful owners are difficult or impossible to trace.

A second complexity is often whether the perpetrator is based, established or holds address in the Netherlands? If this is not the case, it can cause major problems in executing a court ruling in the Netherlands.

If the party to be addressed – which could also only be merely an ‘intermediary’ or ‘money mule’ – is established or holds address in the Netherlands, the next step is to investigate and determine how this person or organization can be held accountable for the theft of the cryptos. In that regard, it may be considered to seize or freeze the stolen cryptos or NFTs in order to prevent the embezzlement thereof.

Seizure or freezing of Bitcoin and NFTs under Dutch criminal law

Under Dutch criminal law, it has turned out to be possible for, among others, the Dutch police, the Fiscal Information and Investigation Service (FIOD) and the Public Prosecution Office (in Dutch: Openbaar Ministerie) to seize crypto currencies as security for a fine or confiscation order to be imposed by the Dutch court. To this end, the cryptos are being transferred to a wallet specially created by the Public Prosecution Office. And the Public Prosecution will then -almost immediately- convert the cryptos into euros in order to prevent depreciation. This immediately raises the question: What if it turns out that (part of) the cryptos are not related to the criminal offense committed? At what point should the value be determined in the context of the return by the Dutch district attorney?

In light thereof the Dutch Court of Appeal of The Hague (available in Dutch only) determined that the starting point should be the exchange rate of the currency at the time of the actual seizure (or: freezing order). That was a bitter pill to swallow for the suspect in this case, because on the day of the court ruling his Bitcoins had become worth more than EUR 3 million (!). The suspect obviously appealed to the Supreme Court in the Netherlands (available in Dutch only), but the appeal was rejected.

On 30 March 2022, Dutch police seized digital art in the form of NFTs for the first time. After all, NFTs also represent a value, which means that they can be seized as the proceeds of criminal offences. In short, in addition to expensive cars or cash, it also seems to be becoming a trend to seize digital assets on the blockchain in the Netherlands.

First Dutch civil law conservatory seizure of an NFT

By a decision of 4 February 2022, the Dutch District Court granted permission for a conservatory attachment (also: a freezing order) of an NFT for the first time. Accordingly, the Dutch court seem to accept that an NFT can legally qualify as a property right under the laws of the Netherlands.

What happened in this case? The case involved an NFT of an image of a bat from rock legend Ozzy Osborne’s so-called “Cryptobatz ” collection. The plaintiff had entered into an agreement in which he had ordered the defendant to buy a Cryptobat-NFT. After the purchase, it turned out that the purchased Cryptobat possessed rare features and was therefore worth a lot of money. The defendant then decided to keep this Cryptobat for itself and to buy an additional Cryptobat-NFT to pass on the buyer. However, the second Cryptobat did not have such rare features.

Although the defendant did purchase the NFT in accordance with the agreement, he did not transfer this NFT to the plaintiff. As a result, there was non-compliance and the plaintiff argued that his property rights had been infringed. The defendant was then in default. The latter defended himself by transferring the additional, second Cryptobat to the plaintiff thereby stating that he had bought the rare Cryptobat for himself.

On the basis of the public, verifiable blockchain transaction results, the plaintiff was able to substantiately refute before the Dutch courts that the NFT transferred by the defendant concerned a different NFT than the NFT that he originally purchased for the plaintiff. At the time of the first Cryptobat purchase, nothing was known about its value, because the special, rare features of the NFT (such as glasses, crowns, laser eyes, etc.) were not yet visible and known to any prospective buyers. After the “reveal” had taken place, it turned out that the NFT was rare and therefore possibly worth a lot of money. The blockchain transactions showed that the second Cryptobat, with less rare features, was purchased after the reveal, and that this specific Cryptobat was then transferred to the plaintiff.

The defendant then tried to embezzle the rare Cryptobat by transferring it to another wallet. However, that wallet turned out to belong to a friend of the defendant.

With the freezing order of the Dutch District Court, the plaintiff received permission to seize the private keys and get the access and security codes with regard to the wallets that were under the control of the defendant and his friend. The NFT was also allowed to be taken into judicial custody, whereby the defendant was therefore also required to cooperate fully, and for example to make the transaction to the judicial custodian possible. The seizure has been carried out successfully and the rare Cryptobat has been secured!

I am curious to find out whether the Dutch judge will also address the legal qualification of NFTs in the further proceedings on this issue. Although it may be the case that it will not come to that because the matter may be mutually settled. In any case, there is now a Dutch civil court that considers the conservatory attachment of NFTs possible under Dutch law.

Do you also have a question about Dutch IT law, the seizure of (stolen) Bitcoins / cryptos or NFTs, please contact Chantal Bakermans < https://penrose.law/en/chantal-bakermans/> of Penrose, via c.bakermans@penrose.law or tel.: +31(0)6-19304389.