Software developers and duty of care to cryptocurrency owners

The hack that started it all

Tulip Trading Limited (“Tulip”) (a company associated with Dr Craig Wright, who has been in the news recently claiming that he is Satoshi Nakamoto, the father of bitcoin) claims that it owns 111,000 bitcoin, which was worth $4 billion in April 2021. The bitcoin was held at 2 blockchain addresses called 1Feex and 12ib7 with 4 networks involved BSV, BTC, BCH and BCH ABC.

In 2020 Dr Wright’s computer was hacked and the private keys to the bitcoin were lost without any other records. Without the private keys, Tulip could no longer access the bitcoin. Tulip requested the developers of the relevant networks to deploy a patch that could bypass the private keys and move Tulip’s bitcoin to another address that Tulip could access. The developers refused.

The first instance judgment

In 2021 Tulip brought a claim against 16 core developers of the bitcoin network (all resided outside of the UK), seeking a declaration of ownership and orders requiring the defendants to take steps to ensure that Tulip Trading regained access to the assets. The first instance hearing was held on 25 March 2022 (Tulip Trading Ltd v Bitcoin Association for BSV [2022] EWHC 667 (Ch)).

Tulip argued that given the level of control exerted by the developers over the relevant networks, they owed fiduciary duties to Tulip as the true owner of the bitcoin and thus they should be obliged to deploy the necessary software patch to protect and safeguard Tulip’s assets.

The developers disagreed, stating that “what [Tulip] sought went against the core values of bitcoin as a concept”. Under the decentralised model, developers did not have “the power or control Tulip alleges and that duties of the kind Tulip contend for would be highly onerous and unworkable”.

Falk J concluded that Tulip had not established a serious issue to be tried because there was no realistic prospect of establishing that the facts pleaded amount to a breach of fiduciary or tortious duty owed by the defendants to Tulip, and dismissed Tulip’s claim.

The application to appeal

Tulip appealed the High Court’s dismissal on 6 grounds, including that “the judge was wrong to hold that Tulip Trading has no real prospect of establishing that the claimed fiduciary duties exist”.

On 3 February 2023, the Court of Appeal allowed the appeal. However the Court did not conclude that there is a fiduciary duty in law, the appeal was granted on the basis that the case raises a serious issue to be tried, so that the underlying facts can be assessed properly to answer the point of law (see Tulip Trading Ltd v van der Laan [2023] EWCA Civ 83).

The Court of Appeal’s assessments highlighted that although there is not sufficient analysis to attribute the developers with fiduciary duties to the bitcoin owners, their role has some elements that point towards the characteristics of such duties, such as:

having a significant amount of control and decision making power for and on behalf of other people, in relation to property owned by those people (e.g. only developers having the password to access the relevant source codes can, and have the power to decide whether they want to, amend the source codes to fix bugs);

the owners of the bitcoin in a very real sense do place their property into the care of the developers, because they cannot avoid doing so. This is arguably an “entrustment”; and

bitcoin owners have a legitimate expectation that the developers will not exercise their authority in their own self-interest to the detriment of owners and that they will act in good faith to fix bugs or faults in the software that drawn to the attention.

What to expect

Next year’s hearing is expected to be a ground-breaking case on cryptocurrencies as potentially it will clarify for the first time some legal uncertainties in this area. Among others, the key points to look out for are:

To assert Tulip’s ownership of bitcoin, the High Court and the Court of Appeal seem to have accepted that bitcoin is property. If the trial concurs on this point, then this would be a significant development as the legal status of cryptoassets currently remains a grey area. Legislators and regulators have taken different view on whether cryptoassets are to be treated as property (but the concept of “possession” currently does not apply to digital assets), or a token which represents the underlying property or rights and may not be property itself.

The Court will have to examine the level and type of control that developers have over the networks, or the bitcoin itself. This question will challenge the very nature of the decentralised network concept, if the facts show that the control of a network indeed lies in the hands of a group of people and that the decentralised governance is nothing but “a myth”. Although this question has been asked before, there has been no case law or legislation to provide an answer. The impact of that finding will be significant, not only for digital assets but any other products that use blockchain as the underlying technology. However, it is anticipated that the conclusion will be heavily facts-driven and must be examined on a case by case basis, depending on the governance of each individual network and the role of the people involved.

If the developers exert the required level of control over other people’s digital assets, then the next question will be what duty of care they owe to the actual owners of those assets. This will open the gate to the tortious claim against the developers and potentially any other network participants that could arguable exert the same or a similar level of control. They may also become regulated or subject to regulatory requirements in the future.

The trial will be one of the top cases-to-watch for the blockchain and digital assets community. If you want to discuss this case further or have any legal questions on blockchain or cryptoassets, please feel free to contact Suzie Miles at s.miles@ashfords.co.uk.