On Friday 3 February 2023 the Court of Appeal allowed Tulip Trading Association (Tulip)'s appeal of the High Court's decision to dismiss their claim against the developers of the blockchain software underpinning Bitcoin. We previously discussed the first instance decision, and the fact it was being appealed.
In doing so, the Court of Appeal has re-opened the question of whether the developers of such technology can owe its users (in this case Bitcoin owners) fiduciary duties. Lord Justice Birss, giving the leading judgment, held that it was at least arguable that such duties are owed. Accordingly, it is a matter that should be addressed at trial, rather than dismissed on a summary basis by way of a refusal to grant permission to serve out of the jurisdiction.
The Court of Appeal's judgment provides an interesting analysis of why fiduciary duties may apply in this situation which is, factually, very different from any in which this question has been considered before. The Court of Appeal was clearly interested by the role that the developers have in the decentralised blockchain ecosystem and contrasted the relative control enjoyed by developers with the position of the users, who can do very little to influence the blockchain itself.
The issues in this case go to the very essence of decentralised technology because they concern the question of control. Regardless of the future of Bitcoin and other cryptocurrencies, decentralised ledger technology will continue to be a feature of our financial and social systems, and this may be an important step towards establishing a governance framework.
Tulip alleges that the private keys to a huge amount of Bitcoin (worth about $4 Billion at one stage) were lost in a hack, and likely stolen. Tulip is unable to access its Bitcoin without these keys, but asserts that the blockchain developers would be able to apply a relatively simple patch to the software to enable it to regain control. Tulip therefore seeks an injunction to compel various developers to apply the required patch. In order to obtain this injunction, it is necessary for Tulip to establish that the developers owe it (and other users of the relevant software) fiduciary duties.
There are a large number of factual questions to be addressed at trial – not least whether the developers are actually able to take the requisite steps. However, the Court of Appeal only addressed whether it was arguable, as a matter of law, that the relatively narrow category of instances in which fiduciary duties have been established could be extended to include this situation.
The Court of Appeal's assessment, set out at paragraphs 70 to 88 of the judgment, includes the following:
- it is clearly arguable that the developers have undertaken a role which at least bears some of the key characteristics of a fiduciary relationship in respect of the Bitcoin owners .
- The categories of fiduciary relationships are not closed, and the facts of this case are "new and a long way from factual circumstances that the Court has had to examine before". Given that the common law evolves incrementally, it would not be right to stop any incremental development when the facts change .
- The coins in question exist entirely as software and nowhere else. Tulip's case is that the developers, and only the developers, control this software, and that they enjoy a far greater degree of control than software developers at, for example, a bank do. A connected issue is the manner in which developers exercise that control, and the extent to which they are obliged to take, or refrain from taking, certain steps [72, 73].
- There is a real question as to the extent to which developers must abnegate their own interests for the sake of the Bitcoin users. This is at the heart of the fiduciary relationship .
- There is clearly an expectation by Bitcoin users that its developers will fix any 'bugs' in the software, not least because they are the only ones that can do so. The Court of Appeal found that the users have therefore placed their property in the hands of the developers, and that this is arguably "entrustment" . Further, just because some of the steps may be taken for the benefit of one user over others (ie the true "owner" of relevant Bitcoin over those that may have stolen it), it does not mean that the duty to do so is not fiduciary .
The Court of Appeal recognised that, for Tulip to succeed at trial, there would need to be a "significant development" of the common law. However, it concluded that the need for such a development is at least arguable. The Court of Appeal summarised the argument for such a development of the law as follows: "the developers have undertaken a role which involves making discretionary decisions and exercising power for and on behalf of other people, in relation to property owned by those other people. That property has been entrusted into the care of the developers. The developers therefore are fiduciaries. The essence of that duty is single minded loyalty to the users of bitcoin software." 
The Court concluded that there is clearly a serious issue to be tried, and that this must be decided at a full trial when all of the facts have been established. In respect of the wider question of the control of decentralised technology, Lord Justice Birss rather pointedly stated that: "If the decentralised governance of bitcoin really is a myth, then in my judgment there is much to be said for the submission that bitcoin developers, while acting as developers, owe fiduciary duties to the true owners of that property."
When the trial of this case is heard it will be watched with great interest by many.
If a fiduciary duty is established, the repercussions are likely to be widely felt across the crypto industry; for victims of crypto fraud, it could open up a significant additional avenue of redress.