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Court of Appeal to consider whether Bitcoin developers owe duties to owners of digital assets

Posted on 25 August 2022

Blue abstract

The Court of Appeal is to consider whether Bitcoin developers owe a legal duty to re-instate access to those who have lost their private wallet keys or had them stolen.

In late March 2022, the English High Court held that a claim aimed at imposing such duties on Bitcoin developers had no real prospect of success (Tulip Trading Ltd v Bitcoin Association for BSV & others [2022] EWHC 667 (Ch)). The Claimant, Seychelles-based Tulip Trading Ltd, appealed to the Court of Appeal, which has now given permission to appeal.

In the meantime, one of the Defendants, Bitcoin Association for BSV (the 'Bitcoin Association), has settled with Tulip by agreeing to bring in software which will allow miners to freeze coins which are determined by valid legal process to have been lost or stolen, allowing them to be returned to their rightful owner.

Background

The High Court's decision, which is now being appealed, was made in the context of a jurisdiction challenge launched by certain defendants to a claim brought in England by Tulip. Tulip is beneficially owned by Dr Craig Wright and his family. Dr Wright, an Australian national resident in the UK, claims that he is Satoshi Nakamoto, the pseudonymous developer of Bitcoin.  

Tulip maintains that it is the owner of Bitcoin valued at over £3 billion held in two addresses on four Bitcoin networks (the Bitcoin Satoshi Vision network, the Bitcoin Core network, the Bitcoin Cash network, and the Bitcoin Cash ABC network). Tulip claims it cannot access these funds because it lost the private keys associated with the addresses after a hack was committed against it. 

In an attempt to re-gain access to the funds, Tulip brought claims against 16 individual Bitcoin software developers, who it alleges are the core developers or individuals in control of the four Bitcoin networks. Tulip argues that the developers owe it fiduciary duties, including a duty to make systemic changes to the software to reinstate Tulip's access and control over the Bitcoin held on the networks.

Tulip also argues that the developers owe a tortious duty of care to provide those who have lost their private keys with means to access their Bitcoin, and general duties to protect cryptocurrency owners from fraud, including by ensuring there are sufficient safeguards to protect against wrongdoing.

At first instance, the Judge had to consider whether the English court had jurisdiction to hear the claims against the relevant defendants, all of whom are resident outside of the English jurisdiction. In order to establish jurisdiction, the claim brought by Tulip had to amount to a "serious issue to be tried". The Judge held that the claim by Tulip did not amount to a serious issue to be tried, with a real (as opposed to fanciful) prospect of success, as it was not seriously arguable that the defendants owe fiduciary or tortious duties of care to Tulip.

Importantly, the Judge held there is no special relationship between the developers and Tulip from which a tortious duty of care would arise.

The Judge also noted that Tulip seeks relief solely for its own benefit in circumstances where the relief sought would require systemic software changes to the bitcoin networks generally. The Judge held that other users may not agree that a systemic change, which would allow digital assets to be accessed and controlled without the associated private keys, would be for their benefit as a whole, as this could be contrary to their understanding of how the system is intended to operate.

Update

Following its decision to grant permission to appeal, the Court of Appeal will now hear Tulip's arguments on whether the bitcoin developers owe fiduciary duties and/or duties of care to the owners of digital assets. If they do hold such duties, the corollary question is what is the nature and scope of such duties?

In granting permission to appeal, Lady Justice Andrews noted that this issue 'is one of considerable importance and is rightly characterised as a matter of some complexity and difficulty. Given that in addition to its complexity and difficulty the underlying facts will play a significant role in determining that issue, it is arguable with a real prospect of success that it is not susceptible of summary determination in the context of a challenge to the jurisdiction, and therefore that the judge fell into error in deciding that there was not even a serious issue to be tried and in the approach she adopted.' It is not yet known when the Appeal will be heard.

It is also noteworthy that in June 2022, the Bitcoin Association Defendant, which was not involved in the jurisdiction challenge as it had accepted the English Court's jurisdiction, settled with Tulip and issued a press-release stating that it did so because it was 'already planning' to release the software argued for by Tulip. It will be interesting to see whether and to what extent Tulip's claim can be resolved by the Bitcoin Association fix, and whether the other Defendants will make similar concessions.

Discussion

The Court of Appeal's decision to hear this appeal is the latest in a series of rulings by the English Courts demonstrating their willingness to engage with the digital space and to hold wrongdoers in this arena to account. For example:

  1. The decision in D'Aloia v Persons Unknown & Others [2022] EWHC 1723 (Ch) to grant alternative service by NFT airdrop, and to recognise a good arguable case that the cryptocurrency was being held by the exchanges as constructive trustees. 
  2. The decision in Osbourne v (1) Persons Unknown and (2) Ozone Networks Inc trading as Opensea [2022] EWHC 1021 (Comm) that there was a realistically arguable case that NFTs are to be treated as property, and to grant orders for a proprietary freezing order against persons unknown and a Bankers Trust order against Opensea.
  3. The decision in Ion Science Ltd v Persons Unknown (unreported, 28 January 2022) which granted the first third party debt order in respect of cryptocurrency.

While cryptocurrency exchanges may historically have been perceived as unpoliced and unregulated, this trend shows a movement to hold them and other players in the crypto ecosystem to account. The Courts are willing to provide remedies for the victims of fraud in this space, and we can expect the scope and availability of such remedies to continue to develop in novel ways. Of course, what remains to be seen is the extent to which the exchanges themselves will be willing to assist the victims of fraud. In this regard, the Bitcoin Association has drawn a line in the sand, but the question is whether other exchanges will follow or, as noted by the first instance Judge in Tulip, whether this would be antithetical to how users expect digital assets to operate.

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