03/23/2023 | News release | Distributed by Public on 03/22/2023 19:59
In a recent judgment1, the English Court of Appeal has opened the door to the possibility that cryptocurrency software developers may owe fiduciary duties to cryptocurrency users. These duties could have far-reaching consequences, including assisting users with the recovery of their stolen cryptocurrency, particularly where the fraudsters are unknown (as is common in crypto fraud cases).
While not a final decision, and with a full trial to take place in due course, the judgment is a further example of the English Court's readiness to adapt established legal principles to the modern digital world.
A fiduciary is "someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and loyalty".2
The principal, to whom the fiduciary duty is owed, is entitled to the single-minded loyalty of the fiduciary. The fiduciary must act in good faith, not make a profit out of his trust or act for his own benefit (or the benefit of a third party) without the principal's consent.
The exact scope of the duties owed depends on the nature of the relationship in question. Fiduciary relationships may arise on an ad hoc basis if the relationship has the requisite characteristics.
In this ongoing claim (the "Claim"), Tulip Trading Limited ("TTL") alleges that it is the owner of a very substantial amount of bitcoin (valued at approx. US$4bn in April 2021) (the "TTL Bitcoin"). TTL claims that it cannot access the TTL Bitcoin because, following a hack on the home computer of its CEO in February 2020, its private keys and the information that would allow access to those keys were lost (likely stolen).
In order to regain control of its assets, TTL commenced the Claim against multiple defendants (the "Developers") whom it says are the core developers of and/or otherwise control the software behind four digital asset networks relevant to the blockchain addresses at which the TTL Bitcoin is currently held: the Bitcoin Satoshi Vision network, the Bitcoin Core network, the Bitcoin Cash network and the Bitcoin Cash ABC network (the "Networks"). TTL contends that:
With all of the Developers resident outside of the jurisdiction, TTL applied for, and was granted, the necessary permission to serve the Claim out of the jurisdiction. All but two of the Developers subsequently applied to set aside this permission (so as to effectively end the Claim) (the "Application").
In determining the Application, the Court concluded that TTL did not have a realistic prospect of establishing that there had been a breach of fiduciary duty owed by the Developers to TTL. In particular:
The Court also rejected TTL's case on tortious duties: while in certain circumstances a limited duty of care could be owed by the Developers, a positive responsibility to safeguard bitcoin owners to the extent sought by TTL went too far.
On appeal by TTL, the Court of Appeal reversed the decision of the lower court, finding that there was a realistic argument that the Developers owed a fiduciary duty. In reaching this conclusion, the Court of Appeal considered the following:
Consistent with other recent English Court judgments involving stolen crypto assets, the Court of Appeal's decision to allow the Claim to proceed to a full trial is probative of the English court's continued commercial approach to the resolution of crypto disputes, with an emphasis on crypto investor protection.
The Court rightly recognised that "the internet is not a place where the law does not apply".3 However, for TTL's claim to ultimately succeed (this recent decision of the Court of Appeal being an interlocutory judgment, not a final and conclusive one), a significant development of the law on fiduciary duties would be needed, based on a detailed consideration and analysis of cryptocurrency, the networks on which it is held and the roles of participants in those networks. One can expect the Court of Appeal's findings to be hotly contested at the full trial. The potential impact of this development could be ground-breaking, for all users of crypto asset networks and beyond in the crypto markets:
Either way, while market participants will have to watch this space and await the outcome of the substantive hearing of these pivotal issues, the English Court has, in the meantime, again shown itself to be willing to adapt English law to cater for new technologies.
Footnotes: