Rescue my Bitcoin – Tulip Trading Ltd v Bitcoin Association for BSV and others

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Rescue my Bitcoin – Tulip Trading Ltd v Bitcoin Association for BSV and others

Tulip Trading Ltd is a remarkable cryptocurrency claim. Never before have the English courts had to grapple so deeply with what cryptocurrencies are and how they work. Nor has cryptocurrency litigation ever threatened to upend the cryptocurrency landscape so completely.

Key issues

The claimant (“TTL”) alleges that it owns Bitcoin worth, at one point during the proceedings, approximately USD4.5 billion, and that the private keys needed to access the Bitcoin were deleted in a hack. TTL also happens to be owned by Dr Craig Wright and his family. Dr Wright is the infamous Australian computer programmer who purports to be Satoshi Nakamoto. Nakamoto, of course, being the author of the Bitcoin White Paper, which sets out how Bitcoin was to work.

TTL’s claim is against software developers who it alleges exercise control over four separate Bitcoin blockchain networks. It alleges that the developers owe TTL fiduciary and tortious duties to restore TTL’s access to the Bitcoin by amending the Bitcoin software. By way of analogy: TTL alleges that it has lost the keys to a safe, and is suing those who it says have the ability to break into the safe and rescue the contents.

The key issues in the claim go to the heart of cryptocurrency and its relation to the law. Do Bitcoin software developers owe such fiduciary or tortious duties to Bitcoin owners? If so, how would developers be required to manage the millions of ensuing claims?

Further, what would be the implications for Bitcoin of amending the software in the way sought by TTL? Is such an amendment consistent with the principles set out in the Bitcoin White Paper? Do Bitcoin software developers exercise sufficient control over the Bitcoin networks to ensure that Bitcoin users will accept such an amendment? Most broadly of all, should a court enter into these issues when the Law Commission is considering law reform in relation to digital assets?

Security for costs

The claim has required engagement with cryptocurrency issues from the start. Certain developers successfully obtained security for costs of their planned challenge to the court’s jurisdiction ([2022] EWHC 2 (Ch)), and TTL proposed paying in the form of Bitcoin. This was rejected by the Court because it exposed the developers to the risk of the security deteriorating in value ([2022] EWHC 141 (Ch)).

This is unsurprising, given the well-publicised volatility of cryptocurrency, but raises a further question: could a “stablecoin” (cryptocurrency that offers price stability by being backed by a reserve asset), or “fiat-collateralised stablecoin” (cryptocurrency which follows the value of a fiat currency), suffice as security? The courts will inevitably need to grapple

with these issues in due course. Institutional interest in stablecoins is growing. For example, it is clear from the UK Treasury’s plans announced on 4 April 2022 that it envisages stablecoins being a recognised form of payment in future. For the time being, we await a test case.

Jurisdictional challenge

The developers were successful in their jurisdictional challenge, on the ground that TTL’s claim raised no “serious issue to be tried” ([2022] EWHC 667 (Ch)). Although there were extensive factual disputes between the parties, the substantive merits of the claim were the focus of the Court’s decision.

The Court held that TTL’s fiduciary duty claim was not seriously arguable even if the facts were assumed in TTL’s favour. Imbalance of power, the foundation of TTL’s case, was insufficient to establish fiduciary duty. There was no reasonable expectation that developers would only act in TTL’s interests. Moreover, under TTL’s position, developers would be required to make software amendments in TTL’s favour but potentially to the detriment of other users to whom developers would also owe fiduciary duties; this was inconsistent with the obligation of undivided loyalty which defines fiduciary duty. The Court also held that TTL’s tortious duty claim was not seriously arguable on the assumed facts. The claim was that developers were liable for omitting to address harm caused by a third party; this required both a special relationship between developers and users and an obligation to take positive action, neither of which were established. Moreover, the alleged duty was not an incremental extension of the law, there was insufficient assumption of responsibility by the developers and the loss was purely economic. There was also indeterminacy in relation to the scope of the alleged duty, the potential class of persons to whom the duty would be owed and the developers who would be liable at any one time.

Having said all of that, the Court concluded that it “would have been satisfied that England is the appropriate forum” had there been a serious issue to be tried. The Court also held that there was a good arguable case that jurisdiction was established under CPR Practice Direction 6B on the basis that the tort claim was in respect of damage sustained within the jurisdiction, the same applied to the fiduciary claim because it was in substance tortious, and the Bitcoin was property situated within the jurisdiction.

Ramifications

The Court’s decision on the jurisdictional challenge is, unless overturned on appeal, a potentially fatal blow to the Tulip Trading litigation. It constitutes a High Court decision, from the leading jurisdiction in the cryptocurrency space, that the substance of TTL’s claim is not seriously arguable even if the facts are assumed in its favour. This makes it particularly difficult for TTL to bring its claim in another jurisdiction or against the many other Bitcoin software developers who were not joined to the claim.

The Court’s obiter comments could also have broader relevance. The Court considered it potentially arguable that developers could be under some form of duty not to introduce malicious software bugs, act in their own interests to the detriment of users, allow software defects to go unremedied, or compromise the security of a Bitcoin network. These comments may indicate that there is space for claims which are less ambitious than TTL’s and where it is clearer that developers have acted improperly.

In further obiter comments, the Court interpreted the two interim decisions that had considered the question of where cryptocurrency is situated. For the Court, the better view was that they had decided that cryptocurrency is situated not where its owner is domiciled, but where it is resident. This interpretation will be significant if it is followed in future; in respect of a corporation, country of residence can be much more difficult to ascertain than domicile.

Of significance for English lawyers in particular is that this jurisdiction remains at the vanguard of a nascent area of dispute resolution. It will be difficult for serious practitioners to ignore these implications for long.

Advising clients in this space

The cryptocurrency space raises difficult issues for clients and practitioners and is very likely to require specialist advice. It involves complex technology, cross-border issues, novel questions of law and regulatory developments which are gathering pace domestically and abroad. Moreover, when digital assets are lost, there are particularly significant barriers to recovery. Such assets can be moved out of reach with speed, and through a mix of “on-chain” transactions (publicly but anonymously recorded) and “off-chain” transfers (not so recorded).

Most cryptocurrency litigation in this jurisdiction has followed a similar model: a victim of a digital asset loss seeks a proprietary injunction and freezing and/or disclosure orders against persons unknown and/or the cryptocurrency exchange with which the assets were held. Tulip Trading is a different breed of case and may be part of a wider expansion in the sorts of cryptocurrency litigation arising in this jurisdiction.

Harmish Mehta

Harmish Mehta - Senior Legal Assistant Astraea Group

Matthew Allan

Matthew Allan - Solicitor-Advocate Astraea Group

John Wardell QC, Bobby Friedman and Sri Carmichael of Wilberforce Chambers, instructed by Ontier LLP, appeared for Tulip Trading Limited; James Ramsden QC of Astraea Group, instructed by Bird & Bird LLP, appeared for 12 defendants; Matthew Thorne of 4 Pump Court, instructed by O'Melveny & Myers LLP, appeared for two defendants.