News headlines relating cryptocurrencies appear on almost a daily basis, and reported decisions from the Court are almost as regular. Whilst cryptoassets still represent a relatively small proportion of the volume of assets traded globally, the speed of the growth of this sector appears to have led to a disproportionately high number of reported cases, and most legal practitioners in this area expect that to increase further. In most instances they represent interesting examples of the Court trying to reconcile long-established legal principles with new and rapidly evolving technology.
The significance of the impact of cryptoassets on the English legal system is borne out further by the Law Commission consultation paper entitled "Digital Assets" in which, amongst other things, it is suggested that a new form of property needs to be established in order to account for the novel features of cryptoassets. It demonstrates how the English judiciary and legal establishment is seeking to make England and Wales a leading jurisdiction for the resolution of disputes in this sector, with the aim of giving market participants greater reassurance of predictable and sensible results.
In this article we give some perspective to recent developments in relation to three issues of particular importance and explain their significance for legal practitioners and industry participants.
- The nature of cryptoassets as "property";
- The rights that may be owed to cryptoasset holders by third parties; and
- The remedies that may be available to cryptoasset holders that lose their assets,
The English legal system has led the way for several years in finding that cryptocurrency, and now wider classes of cryptoassets, were property. In decisions such as AA v Persons Unknown  EWHC 3556 and Ion Science Ltd v Persons Unknown (Unreported)  the English Courts began to establish a consistent view on the status of cryptocurrency as property in English law, and the remedies available in claims relating to cryptocurrency.
In this context, the Commercial Court's decision in Osborne v Persons Unknown & Anor  EWHC 1021 (Comm) represents the next step in the development of English law on cryptoassets insofar as it relates to their status. The court has held that Non-Fungible Tokens (NFTs) are also property for the purposes of English law. Further, it gave guidance on questions of jurisdiction and the remedies available to the owners of such assets.
In Osborne the Commercial Court was asked to grant an injunction restraining the dissipation of NFTs that had been taken from the claimant's crypto asset account. In considering the application the court had to consider the nature of NFTs as an asset and, in particular, where they can be said to have been located for the purposes of jurisdiction. Applying the approach taken in the abovementioned decisions on cryptocurrency, HHJ Pelling held that, whilst "there is clearly going to be an issue at some stage as to whether [NFTs] constitute property for the purposes of the law of England and Wales", for the purposes of the application at hand "there is at least a realistically arguable case that [NFTs] are to be treated as property as a matter of English law".
It is little surprise that the Law Commission's consultation paper focussed, to a large extent, on this question of property rights. The stand-out proposal was that there should be a third category of property (beyond the established categories of a thing in possession and a thing in action) called a "data object", which addresses some of the idiosyncrasies of a cryptoasset. It recognises the efforts that the English Court has made so far to fit cryptoassets into existing categories in order to effect justice but indicates that law reform is needed in order to ensure that cryptoassets can be protected fully.
There is further analysis discussion in the consultation paper relating to the characteristics of data objects, being that:
- It is represented in an electronic medium;
- It has an independent, factual existence outside of legal obligations and persons; and
- It is rivalrous – which means that its use by one person necessarily prejudices the ability of others to use it. This ensures a distinction between a data object and, for example, information which can be used by anyone.
What happens next
The majority of cases on the question of the legal status of cryptoassets have concerned asset tracing and fraud. It is little surprise that fraud cases were the first to emerge with any degree of regularity from this new sector because the appropriation of assets represents the simplest, and starkest, of failings in value-based interactions. The explosion of value, flaws in the underlying technology and almost total anonymity in a decentralised network meant that the opportunities for theft and fraud were, and remain, high. Whilst there is no reason to suppose that these fraud claims will decrease, there is very likely to be an increase in other types of litigation, where the establishment of cryptoassets as property, and the subsequent availability of proprietary remedies, will be significant.
Duties owed to cryptoasset holders by third parties
In our view it is equally significant that the English courts are developing beyond the issues relating to the intrinsic properties of cryptoassets themselves and are addressing issues such as the duties of participants in this sector. The law that governs the relationship between industry participants becomes more important as cryptoassets become more and more prominent in terms of trading and business activity.
The importance of establishing legal principles in this sector was explained by Lady Justice Andrews, when granting permission for Tulip Trading Ltd to appeal the decision of Mrs Justice Falk, in which permission to serve out of the jurisdiction was denied.
In the first instance decision of Tulip Trading Ltd v Bitcoin Association for BSV & others  EWHC 667 (Ch), it was held that Bitcoin software developers owed neither fiduciary duties nor a common law duty of care to users of that code to store or trade their crypto assets. The Claimant, Tulip Trading Limited (a Seychelles-incorporated company owned by Dr Craig Wright) claimed that it owned $4.5 billion of Bitcoin across several networks. The Defendants were made up of software developers and entities with significant control over those networks. Following a hack on Dr Wright's computer, in which the private keys to the account were allegedly stolen and deleted, the Claimant argued that the Defendants (rather than the alleged perpetrators of the hack, who had not moved the assets anywhere) owed it a fiduciary or tortious duty to take reasonable steps to ensure that Tulip could access and control the Bitcoin. Tulip's case was that, in the absence of any access via the private key, it would not be technically difficult for the Defendants to have implemented a software "patch" enabling Tulip to regain control of the stolen assets.
The Judge found that the Defendants did not owe Tulip any fiduciary duties, nor were they under any tortious duty of care to take positive steps to alter the network in order to allow Tulip to regain access to its assets. Unpacking the two parts to that decision:
- The Judge was not convinced that Bitcoin users would have entrusted their property to a fluctuating and unidentified body of software developers – at least not in the sense and to the extent claimed. One of the defining characteristics of a fiduciary relationship is the obligation of "undivided loyalty" to the other party that is placed upon a fiduciary. This presented a difficulty in this case because Tulip was seeking certain actions from the developers which may have not been advantageous to other users of the network, to whom the developers would, on Tulip' case, also owe a fiduciary duty.
- With regard to the alleged tortious duty, the potential class of persons to whom such a tortious duty would be owed was unknown and potentially limitless. It would have also required developers to investigate every potential circumstance in which a party professed to have lost the private key to its assets. This, compounded by inherent anonymity in the system, would have been overly burdensome, if not impossible, to conduct.
However, Lady Justice Andrews granted Tulip permission to appeal her decision. In doing so, Lady Justice Andrews stated: "The issue as to whether developers owe duties of care and/or fiduciary duties to the owners of digital assets and if so, what is the nature and scope of those duties is one of considerable importance and is rightly characterised as a matter of some complexity and difficulty."
Many practitioners were surprised that permission to appeal was granted because of the high threshold that is usually required by the Court in order to establish that any duty, let alone a fiduciary duty has been established. The decision of the Court of Appeal is therefore eagerly awaited, because it will establish some precedent as to how a duty of care may arise in this sector. The implications of this decision could therefore be significant in circumstances where crypto investors have suffered losses in respect of cryptoassets, but do not have any proprietary remedies that they can rely upon.
In our view, it will not be long before the Court is asked to determine issues of the existence and scope of duties in other sectors and situations, such as:
- A body such as an exchange, or financial institution lending in bitcoins or otherwise offering financial products based around cryptoassets.
- Brokers and other investment managers involved in buying / selling cryptoassets. This could also bring about regulatory issues depending on whether the broker advises and arranges investments directly or through an independent fund manager.
One final point to address is the views of the Law Commission on the potential causes of action and remedies that may be available in respect of cryptoasssets. The Law Commission's approach to this is driven by the fact that cryptoassets have a number of unique features. The most obvious question is whether an award concerning the payment of cryptoassets is something that should be treated as unliquidated damages (the value of which is therefore to be assessed by the Court) or whether it is a liquidated, agreed amount that can be enforced. Similarly, there has been discussion as to whether a contractual payment obligation that is expressed in cryptocurrency can be directly enforceable. In both instances, the Law Commission's view reflects the fact that cryptoassets are regarded as property, rather than money, and so (i) cryptoasset obligations will most likely need to be valued by the Court on an unliquidated damages basis and (ii) absent any new legislation it is currently unlikely that a Court would make an order for payment of cryptocurrency or cryptoassets (rather, it will order the payment of their value in an appropriate fiat currency).