Cryptocurrency: A Duty of Care

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The much anticipated and widely publicised multi-billion dollar claim of Tulip Trading Limited v Bitcoin Association for BSV and others [2022] EWHC 667 (Ch), in which a Seychelles based company, TTL, brought a claim against a group of cryptocurrency developers, was summarily dismissed by the High Court.

The claim relates to a very substantial amount of digital currency assets that TTL claims to own but is unable to control or use following a hack of computers located at the home of the Claimant’s CEO, Dr Craig Wright. TTL’s case is that the Defendants are the core developers and/or control the software in respect of four relevant digital asset networks (the “Networks”):

  • The Bitcoin Satoshi Vision network – the First Defendant;
  • The Bitcoin Core Network – the Second to Thirteenth Defendants;
  • The Bitcoin Cash Network – the Fourteenth Defendant; and
  • The Bitcoin Cash ABC Network – the Fifteenth and Sixteenth Defendants.

None of the Defendants are in the jurisdiction.

In the first case of its kind to be considered by the English Courts, TTL claimed that the Defendants owed it fiduciary and/or tortious duties. Those duties create an obligation on the Defendants to assist TTL in regaining control and use of its allegedly stolen cryptocurrency.

Mrs Justice Falk rejected TTL’s claim, finding that it had no real prospect of success, and consequently setting aside orders from the lower court granting TTL permission to serve the Defendants outside of the jurisdiction.

The Claim

TTL, through Dr White alleged that his computer had been hacked in February 2020, resulting in the loss of approximately $4.5 billion of bitcoin on the Networks. The Claimant claimed that the Defendants controlled the Networks; and could write a patch which would allow the Claimant to regain control over its bitcoin; and that the Defendants owed fiduciary and/or tortious duties requiring them to do so. The Defendants did not accept this, and there was considerable disagreement between them as to virtually all points – Mrs Justice Falke commenting that:

“Apart from their shared interest in digital assets, there is very little common ground between the Claimant and the Defendants. Evidence was generally not accepted even where it was not specifically challenged. Dr Wright’s credibility is heavily contested by the Defendants, who are in turn heavily criticised by Dr Wright. A significant level of animosity exists which is much broader than, and the origins of which pre-date, the particular dispute before this court.”

One of the more interesting disputes between the parties was that Dr Wright claimed to be Satoshi Nakamato – the pseudonymous founder of the electronic payment system and author of the paper ‘Bitcoin: A Peer-to-Peer Electronic Cash System. Needless to say, the Defendants did not accept Dr Wright’s claim or indeed that his computer had been hacked in February 2020, because amongst other things, Dr Wright wiped his hard drives after the hack had allegedly occurred and none of the assets have been moved.

Merits: Serious Issue to be Tried

The Court went on to consider three broad points in arriving at its judgment:

  • Ownership of the bitcoin and the alleged hack;
  • Fiduciary duties; and
  • Tortious duties.

On the ownership of the bitcoin and the alleged hack, the Court held that it was satisfied that there was a serious issue to be tried that TTL is the owner of bitcoin at the 1Feex and 12ib7 addresses, and that the hack occurred. Whilst the Judge acknowledged that there were a number of deficiencies in Dr Wright’s evidence, it was held that these issues in dispute were likely to remain at trial.

As regards the fiduciary duties, the Claimant accepted that the Defendants were not in a category that has previously been recognised as owing fiduciary duties (such as trustee and beneficiary; principal and agent; solicitor and client; company directors and the company; partners and co-partners), but nevertheless argued that that this was a unique case in which the facts and circumstances supported the imposition of fiduciary duties. In short, the Claimant submitted that the Defendants have complete power over the system through which highly valuable crypto-assets are held and that the Claimant (as an owner of such crypto-assets) had entrusted the care of their property to the Defendants and were therefore vulnerable to abuse by them. Finally, the Claimant argued that the Defendants have the power to amend the protocol, to allow owners to recover control of their assets or to stop or (effectively) reverse a fraudulent transaction.

The Court dismissed the Claimant’s arguments:

“72. At first sight it is very hard to see how TTL’s case on fiduciary duty is seriously arguable. Having now given the matter more detailed consideration I have concluded that my initial impression was correct. Taking all features relied on by TTL fully into account, and assuming in its favour that it would be able to establish the facts on which it relies at trial, I am unable to conclude that TTL has a realistic prospect of establishing that the facts pleaded amount to a breach of fiduciary duty owed by the Defendants to TTL.”

The Court did not consider that “bitcoin owners can realistically be described as entrusting their property to a fluctuating, and unidentified, body of developers of the software, at least in the sense and extent claimed by TTL.”

As to tortious duties, the Court again rejected the Claimant’s arguments that the Defendants had breached a duty of care by failing to put measures in place to prevent their keys being stolen and then not allowing them to regain access and/or control. The Court concluded that it did not consider it arguable that there existed a special relationship to safeguard against pure economic loss.

Other Issues

Jurisdiction

A separate matter which arose during the proceedings, and which is of interest is, whether the damage occurred within England (the location of Dr Wright) or the Seychelles (where TTL is registered and allegedly made up its books). The Claimant’s case was that the assets were held in England and that the damage had been sustained, or will be sustained, in the jurisdiction, as it was from England that Dr Wright could not control or deal with the assets.

The Defendants submitted that if there was any damage, then it would be suffered in the Seychelles as the question was one of where TTL books its losses and/or where it was required to report its corporate activity.

Mrs Justice Falke preferred the Claimant’s submissions:

“in my view TTL has the better of the arguments on the basis of residence in the jurisdiction and any failure to regain control of the assets being directly experienced in England, and not in the Seychelles.”

Conclusion

This judgment has caught the attention of the crypto world, given the clear lines drawn on the duties of developers. The issue on jurisdiction will also be of note to those that hold cryptocurrency, as regards what jurisdiction their assets are held under.

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