In a significant case for investors in, and developers of, cryptocurrencies and other blockchain assets, the English Court of Appeal delivered judgment in Tulip Trading v Wladimir van der Laan and Ors1. The Court overturned an earlier High Court decision (also known as the Tulip Trading v Bitcoin Association case) which held that developers do not owe fiduciary duties to end-users. The Court of Appeal held that such duties may, in fact, be owed.
Round One: High Court
What Was the Claim For?
The plaintiff company, Tulip Trading Limited (“TTL”), alleged that it suffered significant losses following a hack carried out against TTL's owner, which resulted in TTL becoming unable to access $4.5bn in cryptocurrency. TTL issued proceedings against the defendant developers alleging a breach of fiduciary duties and tortious duties on the part of the developers. TTL also sought an order compelling the developers to change the codebase for the cryptocurrencies in question, to negate the alleged fraudulent transaction and return the $4.5bn to TTL's wallet (please click here for previous Matheson coverage of the High Court action).
What Did the Court Decide?
The High Court held that the developers owed no such duties to end users. It held that the relationship between cryptocurrency developers and end-users did not give rise to fiduciary duties, and that there no duty of care owed by the developers to TTL. The Court noted that such duty of care would effectively be unworkable, given there were a potentially unlimited number of end-users to whom the developers may owe such duty. The High Court concluded that there was no serious issue to be heard, on the facts of the matter, and dismissed TTL's claim.
Was That the End of it?
No, TTL appealed the decision.
Round Two: Court of Appeal
The Court of Appeal considered whether there was a real prospect of TTL succeeding in their claim, should it be allowed to move to a full hearing.
TTL's Appeal?
TTL submitted that the developers exercised direct control over, or significant influence over, the codebase of the cryptocurrencies in question. TTL argued that the developers determined what software and parameters are required to mine and carry out transactions using the cryptocurrency in question, and therefore had the capacity to effectively 'reverse' transactions by forking the codebase.
Developer's Position?
The defendants disputed this, arguing that development of the cryptocurrencies in question was carried out by way of a decentralised model, and that they were only members of a wider group of developers who maintained and developed the cryptocurrencies.
The developers argued that any order to restore the funds to TTL would be ineffective, given end-users could simply choose not to adopt the proposed fork to the cryptocurrencies, which would restore TTL's funds, and could instead choose to carry on operating on the current blockchain.
What Did the Court of Appeal Decide?
The Court noted that, for TTL's argument to ultimately succeed at full trial, it would require TTL to show ‘a significant development of the common law on fiduciary duties.’ Nevertheless, Birss LJ determined that TTL had set out an arguable case that such duties might vest in cryptocurrency developers.
The Court observed that the role of a cryptocurrency developer involves taking on a significant amount of control and decision-making power over those assets. Such control is exhibited, for example, by their acting on behalf of cryptocurrency owners to develop and maintain the respective cryptocurrency codebase. The Court noted that the role of developer is single minded in nature, in the sense that it puts the interests of all the owners as a class ahead of the developer's self-interest.
The Court also held there is arguably an "entrustment" of property to the care of the developers. He refused to rule out the possibility that developers are fiduciaries with a duty of care to cryptocurrency owners.
Birss LJ, departing from the decision of the High Court, held that there was an arguable case that bitcoin owners had a legitimate expectation that the developers would not exercise their authority in their own self-interest and would act in good faith to use their skills to make certain decisions impacting end-user's crypto assets.
The Court concluded that TTL had made an arguable case that developers owe a fiduciary duty to their end users, which could extend to a duty to modify code or to fork a cryptocurrency in order to restore access to stolen cryptocurrency. The Court permitted the matter to proceed to trial.
Impact of Decision
Waiting Game
It remains to be seen whether TTL's arguments would succeed at full trial. However, the decision is indicative of a potential shift towards recognising fiduciary or common law duties of care vesting in developers, including open-source developers. It remains to be seen whether TTL will succeed at full trial.
All or Core Developers Impacted?
Whilst the cryptocurrencies at issue are maintained by a core team of developers, and had relatively formalised structures and processes for amending or updating the codebase of their respective cryptocurrencies, the question remains as to whether all cryptocurrency developers owe such a duty to end users. A further question arises as to how such duties are allocated should a cryptocurrency be forked (effectively creating two parallel blockchains) – the Court refused to address this issue, and indicated that it should be left for a full hearing of the matter.
Matheson will continue to monitor developments in this space. If you would like to discuss any of the legal issues arising out of this publication, please get in touch with Rory O’Keeffe (Technology and Innovation), Karen Reynolds (Regulatory and Investigations), or Michael Byrne (Commercial Litigation). Special thanks for Sam Elliott, Anna Nichols and Lorna Murphy for assisting in the preparation of this insight.
References
1 [2023] EWCA Civ 83