Cryptoassets in Litigation: a new ‘Tulip Mania’? – English High Court clarifies duties owed by Cryptocurrency Developers to End Users

Introduction

The English High Court has delivered judgment in Tulip Trading Limited v Bitcoin Association for BSV & Ors[1], a seminal case considering the duties owed by open-source cryptocurrency developers to cryptocurrency end-users.

The claimant company, beneficially owned by Dr Craig Wright, Tulip Trading Limited (“TTL”) alleged that it suffered significant losses following a hack against Dr Wright’s computer. This hack resulted in the plaintiff becoming unable to access $4.5bn in cryptocurrency. TTL issued proceedings against the defendant developers alleging a breach of fiduciary and common law duties and seeking an alteration of the code (i.e.  a fork to the Bitcoin blockchain), allowing TTL to access the cryptocurrency it claimed was stolen from it.

The High Court rejected the claimant’s submission that there was a duty of care on the part of the open source software. Notably, the Court also considered whether it would be appropriate to grant an order for security of costs and whether it was permissible to provide security for costs in Bitcoin. 

Substantive Proceedings before the English High Court

The Court noted that the claimant was effectively seeking the recognition of a positive duty on the part of the developers to alter software, or to introduce a patch, to facilitate TTL regaining control of its assets. Whilst Falk J accepted that a negative duty might be ascribed to developers to refrain from introducing bugs or features which compromise the security of users, he found that no positive duty existed to alter software. Falk J concluded that the concept of a fiduciary relationship relies on ‘the obligation of undivided loyalty’, and that the relief sought by the claimant would potentially compromise the efficacy of ‘proof of work’ processes on the blockchain and the anonymity of BTC users.

Falk J further noted that it was unclear to whom such duty might be owed if it existed. Examining the claimant’s position, the Court noted that the ‘potential class in this case is unknown and potentially unlimited’, and that the defendants could be subject to a large number of claims from individuals who had their private keys stolen or otherwise no longer had access to their BTC.[2] If the Court held such a duty was owed, the defendants would ‘be obliged to investigate and address any claim that a person had lost their private keys or had them stolen’. The Court concluded that neither a fiduciary or tortious duty was owed by the defendants to TTL.

Bitcoin as a Medium for Payment of Security for Costs

In the course of an earlier application, the defendants sought an order for security for costs on the part of TTL.[3] TTL sought to make this lodgment in Bitcoin, rather than in traditional currency.  Master Clark, examining this proposal, determined that Bitcoin was not a satisfactory medium for the payment of security for costs orders, on three grounds, namely[4]:

• the claimant would have no legal claim to the Bitcoin held in escrow should it lose the matter;
• the defendants ability to segregate and transfer Bitcoin was an issue; and
• it was likely the defendants would incur significant costs and the exercise would be substantially burdensome.

Master Clark commented that cryptocurrency did not reach the required criteria to satisfy a security for costs order, as examined in Monde Petroleum case,  and that a depreciation in the value of Bitcoin “could result in any security being effectively valueless”, and declined to allow payment via cryptocurrency.[5]

Impact of Decision

Given the prevalence of fraud, misappropriation, and theft within the crypto sphere, “hard forks” may serve as a means of returning lost cryptocurrency to its lawful owners.[6] During a "hard fork", the protocol upon which a blockchain is mined is modified, effectively creating a new cryptoasset or cryptocurrency which may differ significantly in operation and functionality. However, the imposition of a duty to fork blockchains to remedy losses would be unduly burdensome on the individuals who develop and maintain these platforms, and risks causing significant instability in the value of such assets. This decision is to be welcomed by open-source developers and crypto-asset service providers.

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), Michael Byrne (Litigation) or Tom Mullen (Litigation).

Special thanks to Ruairi O’Connell, Aaron Leonard and Sam Elliott in helping prepare this article.