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More digital asset litigation: round two – the Tulip Trading saga continues

Posted: 03/04/2023

Are blockchain developers liable as fiduciaries or otherwise to bitcoin owners who use their software? This is a question that the Court of Appeal decided ought to be considered when it granted permission for Tulip Trading Limited (Tulip) to appeal the High Court’s conclusion that they were not, in August 2022. You can review our article about this decision here.

The Court of Appeal has now determined Tulip’s appeal. Its decision will come as unwelcome news for blockchain developers (and others), which resurrects the possibility that they will be deemed to owe important duties to a class of cryptocurrency owners. It was found that there is a ‘serious issue to be tried' in deciding whether such a duty is owed. The case will now return to the High Court to progress to trial, which those within the community will await with bated breath.     

A reminder of the facts

In short, Tulip is a Seychelles registered company whose CEO is Dr Craig Wright. Dr Wright claims that he is Satoshi Nakamoto, the creator of Bitcoin. Tulip claims it has been the victim of a hack which has seen it lose access to the private keys to bitcoin worth approximately £3 billion (although it was valued prior to the 2022 crypto winter and so is now likely to be worth much less). Without the private keys, Tulip is unable to access its bitcoin or transfer them to safety.

In April 2021 Tulip issued a claim against the 16 defendants who are said to have each developed and/or controlled software relating to four Bitcoin networks. It is Tulip’s case that the defendants, via their control of the networks, can easily make safe its assets and that they are duty bound to do so given their role as fiduciaries to Tulip.

The defendants (i) dispute that they have any duty (fiduciary or otherwise) to Tulip, (ii) claim that they do not have the power or control over the networks that Tulip say they do, and (iii) say that the duty Tulip seeks to impose on them is highly onerous and unworkable.

May 2021 saw Tulip obtain an order giving it permission to serve its claim on all 16 defendants out of the jurisdiction, none of them being resident in England or Wales. This permission was challenged by several of the defendants and led to the High Court’s judgment of March 2022 which was analysed in our previous commentary.

The original High Court decision

The High Court found in Tulip’s favour on two matters. First, it had held that there was a good arguable case that Tulip’s claim would fall within the court’s jurisdiction. Second, the court was satisfied that England would be the proper forum for any trial of Tulip’s claim.

However, Tulip failed to persuade the court that it had realistic prospects of establishing that the defendants owed it fiduciary duties. This was assuming that Tulip would ultimately be able to establish its version of the alleged factual background at trial, with much of the factual background having been disputed by the defendants.

Whilst it was accepted that owners of digital assets might have certain expectations of developers, this did not go far enough to impose a fiduciary duty of single-minded loyalty on them. This was especially the case where the action that Tulip wanted the defendants to take – to essentially introduce a patch to the code that operates the relevant blockchain network, allowing Tulip access to its bitcoin – was for its benefit alone, and not for the benefit of all users of the blockchains.

If the defendants were fiduciaries, then taking the action Tulip demanded would pose a conflict with their fundamental duty of single-minded loyalty they would owe to all users of the networks.

The Court of Appeal’s judgment

The leading judgment was provided by Lord Justice Birss, with which Lord Justices Popplewell and Lewison unanimously agreed.

The unchallenged findings of the High Court
Lord Justice Birss started by identifying elements of the High Court’s decision that that were unchallenged by the parties. These were that: (i) the cryptocurrency the case centred around (Bitcoin) could properly be defined as property, (ii) there was a good arguable case that Tulip was resident in the jurisdiction (despite being registered in the Seychelles), (iii) the property was located in England, and (iv) there was no other jurisdiction to which the claim had a closer link than England. These elements provide welcome confirmation from the appellate court regarding crucial issues that often rear their head in disputes involving digital assets.

The Court of Appeal’s decision
Lord Justice Birss analysed in detail the nature of Bitcoin, the relevant networks, the role of developers, and Tulip’s submissions as to the background, which were assumed to be correct. He also touched upon the established law regarding the imposition of fiduciary duties, noting that the core feature of a fiduciary relationship sees one party acting for another with a duty of single-minded loyalty. He confirmed that the relevant test to be applied is an objective one, and it is not enough to merely establish that an imbalance of bargaining power exists between the parties.

Following these considerations, it was held that:

  • The defendants had clearly undertaken a role which bore some relationship to the interests of others (ie the owners of bitcoin).
  • Whilst the facts of this case were new and far away from cases considered by the courts historically, the categories of cases which give rise to potential fiduciary relationships are not closed. It was therefore not right for the common law to stifle the development of the law in this area.
  • The subject matter of this dispute was software (and software alone) which was controlled by the defendants. This was at odds with a traditional bank where software developers would be accountable to the board and have nowhere near as much control of the bank’s assets as the defendants did.
  • The defendants’ role involved decision making and the exercising of authority on behalf of all participants on the network. Further, their role was single-minded in that it puts the owners of bitcoin together as a class and placed their interests ahead of their own. It was difficult to see what duty this could be other than a fiduciary one.
  • The High Court’s finding that Tulip had not entrusted its property to the defendants was incorrect. In fact, bitcoin owners could not stop themselves from placing their property into the care of developers as they could not fix software bugs without the developers’ consent. Further, bitcoin owners could legitimately expect developers to act in good faith to fix software bugs. This is positive news for those holding crypto assets who may wish to take action against such developers for a negative action.
  • It did not matter that bitcoin owners may not all agree that a bug should be fixed in a certain way, or at all. Nevertheless, they could expect developers to act in good faith in deciding whether to provide a fix or not. It was noted that trustees often must make decisions which favour one beneficiary over another. As such, if a software fix was for the benefit of Tulip alone, this would not necessarily mean that a fiduciary duty did not exist.

Lord Justice Birss acknowledged that, if Tulip was to ultimately succeed with its claim, it would represent a significant development in the law on fiduciary duties. However, he concluded that there was a realistic argument that:

“…developers of a given network are a sufficiently well-defined group to be capable of being subject to fiduciary duties…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 content of the duties includes a duty not to act in their own self-interest and also involves a duty to act in positive ways in certain circumstances. It may also, realistically, include a duty to act to introduce code so that an owner’s bitcoin can be transferred to safety.”

In a final throw of the dice, the defendants sought to argue that Tulip’s case was not arguable given that it had not claimed against the alleged hackers or operators of the wallets from where its bitcoin had been stolen. This point was given short shrift as it was acknowledged that Tulip did not know who had stolen its private keys and so could not take action against them.

The future

It should be stressed that the Court of Appeal’s decision does not mean that network developers now owe fiduciary duties to the owners of digital assets. Rather, it means that this is a serious issue that is capable of being determined at trial. When, and indeed if, such a trial will take place remains to be seen.

In the meantime, the drive for reform in the arena of digital assets continues. The Law Commission is due to publish its report shortly following a consultation last year which considered whether law reform is required for digital assets. Further, in February 2023, HM Treasury published a consultation paper which contains proposals for a regulatory regime for cryptoassets. This consultation forms part of the UK’s drive to be seen as a crypto-friendly jurisdiction and is seen as a direct response to the EU’s Markets in Crypto-Assets (MiCA) Regulations which are expected to take effect in early 2024.

As far as Tulip’s claim goes, it has won the latest battle, but the war is set to continue for some time.

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