Since 2020, the non-fungible token (NFT) market has grown rapidly. An NFT is a unit of data stored in a distributed ledger that represents a unique collection, artwork, or other asset that can be sold and traded. (For a handy introduction to cryptographic tokens, including NFTs, see Shermin Voshmgir Token economy.. )
At the beginning of 2021, interest in NFTs increased after some notable sales and art auctions. Similarly, smart contracts, especially those that can create and manage NFTs, are equally popular because they work to automate the execution of contracts. States such as Arizona, Nevada, Tennessee, and Wyoming have passed legislation on the use of smart contracts. In 2020, Iowa passed a bill that legally allows smart contracts within the state.
February 18, 2022, McKimi v.Open sea (Civil Action No. 4: 22-CV-00545) was raised in the Southern Texas area for a major NFT market. Timothy McKimmy claims that his Bored Ape Yacht Club NFT was stolen around February 7, 2022. This is because a security vulnerability in OpenSea has made it possible for an external third party to gain unauthorized access through OpenSea code. [McKimmy’s] NFT wallet. “
McKimmy claims in a lawsuit that OpenSea was aware of a security vulnerability in the platform. In January 2022, OpenSea refunded users after an inactive list loophole allowed opportunists to buy NFTs at a significant discount. A loophole in the user interface affected users who transferred previously listed NFTs to other wallets without canceling the old list (“Open Sea will refund users $ 2.8 million after accidentally selling an NFT at a significant discount due to a bug.” luck). Opportunists took advantage of the ability to buy these NFTs cheaper, at previously listed prices, and then resell them at much higher current market rates. According to some sources, OpenSea advised users to cancel the old list that puts NFTs at risk again (“OpenSea’s advice to cancel the old list puts the holder at risk … again” NFT evening).
Then, on February 19, 2022, OpenSea was hit by a phishing attack. During the three hours, 254 tokens were stolen, affecting 17 OpenSea users (“$ 1.7 million NFT stolen in an obvious phishing attack on OpenSea users” The Verge). The estimated value of stolen tokens is over $ 2 million (“Seventeen OpenSea users had their NFTs stolen by phishers and turned over for a total of $ 2.9 million.” Web3 is on track). The attack is described as the target signing a partial contract with general permission, leaving most of it blank. The attacker then fills it and acquires the target’s possession. At the time of the attack, OpenSea was in the process of updating its contract system.
McKimmy Claim His boring monkey # 3475 NFT was stolen, listed and sold to another individual at OpenSea around February 7, 2022. McKimmy claims that the OpenSea vulnerability “could allow others to break in through the code and force the listing of NFTs.” He tried to solve the OpenSea problem, but claims that OpenSea “ignored” him. OpenSea is clearly investigating the issue, but will not cancel the transaction. (Note that in this case immutability can manifest itself as a defense, as in this case the focus may be on the NFT used in the Ethereum blockchain being immutable. The required remedy may not be possible.) An individual who currently owns BoredAp # 3475 but has “refused to return”.
Complaints include counts of negligence and breach of fiduciary duty, trusts, contracts and implied contracts. McKimmy claims that OpenSea is obliged to pay him reasonable attention as a user and has not taken appropriate steps to protect the user. McKimmy further claims that OpenSea was unable to implement the steps of “preventing, identifying, detecting, responding, mitigating, containing, and / or fixing security breaches.” McKimmy claims that in addition to failing to protect against reasonably expected threats, OpenSea has entered into contracts and / or implicit contracts and failed to protect the digital wallet connected to the platform. ..
In this case, we will focus on the issues of contracts and smart contracts in the emerging digital world. The elements of the contract are the same, express or implied. These factors are represented by mutual agreement, valid offer and acceptance, and appropriate consideration, competence and legality.In the analog world, the wording of the contract is bound to the four corners of the contract, and as long as the contract is “clear and clear, parole or external evidence before or at the same time as the contract may change, inconsistent, or add terms. Not accepted. Contract. “See Sterling, Winchester & Long, LLCv. UnitedStates, 83 Federal Reserve System. Cl. 179, 184 (Fed. Cl.2008).
At this time, there is virtually no analysis of smart contracts based on resolved legal principles. As mentioned above, some states have passed legislation on smart contracts, but the majority have not yet addressed this issue. If the proceedings proceed without settlement, the court will provide a context for how to analyze blockchain, NFTs, and smart contracts under current analog law. This court addresses the issue of the enforceability of smart contracts and who can enforce them.
Contract disputes usually occur between a limited number of parties, but these smart contract disputes are from users like McKimmy who sue the NFT marketplace to hackers, people who bought NFTS by mistake, and so on. Can extend to. The court must determine whether the Shelter Rules of the Uniform Commercial Code are applicable to such transfers. Under UCC Section 3-203 (b), the Shelter Regulations protect the recipient of an instrument who receives the instrument from a well-meaning purchaser. The grantee is “protected” from other claims by the grantor’s status as a well-meaning purchaser. In these cases, if the NFT was purchased through a bug in the inactive list and then resold and resold, the court must answer whether it can support the transfer.
The rise of digital assets (including NFTs and cryptocurrencies) and smart contracts will give rise to settlement proceedings and their application to these new means. Expect proceedings in the areas of deceptive trading practices, breach of contract, breach of trustee obligations, fraud and negligence, among others. McGuire Woods’ professional litigation team is ready to protect clients from potential claims.