Free Flare Network tokens known as Spark ($SPARK) are coming. They will be distributed by airdrop to those cryptoasset wallets holding $XRP – a cryptoasset native to the XRP Ledger created by US-based technology giant Ripple, Inc. – at 00:00 on 12 December 2020.
Unfortunately – and controversially – not all wallets and exchanges are "supporting" the airdrop, i.e. owners of $XRP that hold their $XRP in those wallets or on those exchanges will not receive their much sought-after $SPARK. This article provides an introduction to Flare and $SPARK, lists some of the high profile exchanges that have confirmed their support for the airdrop, and provides some recommended steps if you are reading this article after the airdrop and want to understand your rights.
Background – Flare Network's $SPARK
$SPARK is the native cryptoasset of the Flare Network, a system intended to bring smart contract functionality to the XRP ecosystem, enabling trusted automation and efficiencies. Smart contracts have been a central part of the blockchain ecosystem since Ethereum's launch in 2014, and the MDRxTech team have been engineering and auditing them for a number of years.
Interestingly, Flare Network claims to be "the world's first Turing complete Federated Byzantine Agreement (FBA) network." This is an important development as, if implement properly, it will enable a new way of scaling smart contract platforms while decoupling security with the value of the token, i.e. it will no longer rely on economic incentives that can be distorted to maintain a robust system. This marks a step change from many of the major blockchain platforms including Bitcoin (using proof of work consensus) and Ethereum (now using proof of stake consensus).
Which exchanges are supporting the airdrop?
A large number of exchanges have announced that they are supporting the $SPARK airdrop, most recently including Coinbase. Others include Binance, Huobi, Kraken, Kucoin and Poloniex.
If you are reading this before the airdrop and hold your $XRP either in self custody or on an exchange that will not be supporting the airdrop, you need to act to ensure you receive $SPARK. There are many guides online setting out the required steps, but get in touch if you are unsure and require any assistance.
I missed out. What are my rights?
In short, it's complicated. This section sets out some of the law that might apply to disputes with exchanges who have declined to support the $SPARK airdrop, as well as the steps you might take to bring a claim.
UK legal regime for cryptoassets
From a legal (as opposed to regulatory) perspective, the UK Jurisdictional Taskforce issued a statement in November 2019 confirming that cryptoassets are capable of being owned and transferred as property under English law. This was subsequently expressly considered and agreed with by Bryan J in AA v Persons Unknown [2019] EWHC 3556 (Comm). The importance of AA v Persons Unknown cannot be overstated, and dictates the remedies available to users of an exchange or wallet provider under common law. A user of such a facility will need to consider the rights she has in respect to $SPARK under the express terms and conditions between itself and the platform, in addition to her common law rights.
Do cryptoasset exchanges hold tokens on trust for their users?
This very question was considered in the Singaporean International Commercial Court, in 2019 (B2C2 Ltd v Quoine Pte Ltd [2019] SGHC(I) 03). In respect of the "three certainties" required for the creation of a trust, it was held that:
- the requirement for certainty of subject matter was established as cryptoassets do have the fundamental characteristics of an intangible property in that they are an identifiable thing of value;
- the requirement for certainty of beneficiary was also met as beneficiaries are identifiable from the individual accounts; and
- as for the certainty of intention to create a trust, while there was an absence of express wording in the Agreement to create a trust, nonetheless such intention existed as Quoine stored its users' cryptoassets in a cryptoasset wallet segregated from its own trading assets.
The SICC's finding that a trust relationship existed could have significant ramifications on the operation of a cryptoasset exchange. Fiduciary duties are owed by trustees, who are obliged to act in good faith and comply with a duty of loyalty. It would be interesting to see how the imposition of such fiduciary duties may play out (for instance) in the event (for example) that an exchange receives $SPARK and does not pass on that windfall to the customer, or where an exchange is hacked.
Possible legal remedies
Assuming that cryptoassets are treated as property by the English and other common law Courts, and the decision in B2C2 is followed more widely, there could be a number of legal remedies available to owners of $XRP that have been denied the opportunity to receive $SPARK tokens by an exchange that does not support the airdrop.
Legal remedies should be available to individuals who have been denied the benefit of their property, and there are a number of ways that beneficiaries of property held on trust can hold a trustee to account for a breach of fiduciary duties.
Depending on the terms of the agreement between the user and the exchange, contractual remedies may exist. Those will vary depending on the governing law and precise terms of the agreement. Even if the contract doesn't appear to assist, the laws of many jurisdictions will imply terms into a contract (particularly between a business and a consumer) that could offer a solution.
There may also be remedies in tort, which operate independently of the contract between user and exchange, particularly if a user has been misled about its options by an unscrupulous exchange.
And whilst the loss suffered by an individual user may be too small to justify a legal claim on its own, there are ways that users can cooperate to bring a number of claims together, so that a group of users with claims based on materially the same facts can share the costs of proceedings, and make litigation commercially viable.
In certain jurisdictions, litigation funding and adverse costs insurance may also be available. This means that in exchange for a share of any proceeds from the litigation users would not need to front the costs of litigation, or the risk of adverse costs.
Hugo Hoyland, Director in the Crypto Compliance and Investigation Solutions team of Kroll, a division of Duff & Phelps says: "If you missed out and think you might be able to make a claim, we recommend that you start gathering information about your $XRP: When did you purchase them? From where or whom? Where were you holding them?"
Hoyland further says: "Having documentary evidence to support your answers will make it much easier for you to bring a claim. We may be able to determine whether the $XRP you purchased did in fact attract $SPARK tokens that, instead of being credited to you, were credited to a third-party, such as the exchange holding your $XRP, for their own benefit."
The Mishcon de Reya Blockchain Group are well placed to assist on these matters, bringing together our best-in-class technologists and contentious lawyers to bring robust claims. We work closely with Kroll, a division of Duff & Phelps, who bring expert cryptocurrency analytics to help gather the requisite evidence to support your case.