February 24 2023
Wiggin LLP | Tech, Data, Telecoms & Media – United Kingdom
After alleging that its private keys to over £3 billion worth of bitcoin were stolen after a hack, Tulip Trading Limited (TTL) claimed that the Bitcoin Association and the blockchain developers responsible for running the relevant bitcoin networks owed TTL fiduciary and tortious duties (for further details please see “UK Court of Appeal to decide whether the existence of fiduciary or tortious duties owed by blockchain developers to owners of digital assets held on such networks is a “serious issue to be tried“). These duties included patching the underlying bitcoin network software to restore access to its bitcoin.
In the initial High Court decision, Falk J dismissed TTL’s claim on the basis that it “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 bitcoin’s blockchain developers to TTL.(1)
At the Court of Appeal, in delivering the lead judgment and allowing the appeal, Lord Justice Birss held that “the conclusion is not there is a fiduciary duty in law in the circumstances alleged by Tulip, only that the case advanced raises a serious issue to be tried”.(2)
TTL’s grounds of appeal included the following points:
- The case raised complex issues that merited a full trial, as this area of law is uncertain and involves a novel factual matrix underpinning the parties’ obligations and involvement.
- The judge at first instance had erred in holding that TTL had no real prospect of establishing that fiduciary or tortious duties existed.
- The conclusions were incorrect as they had been based on findings impermissibly assumed against TTL.
Interestingly, the Court did not consider fiduciary and tortious duties separately. Rather, the Court stated that tortious duties would arise only where a fiduciary duty had been established. Further, despite the international nature of the case not being a key point to the appeal, the Court affirmed that, as TTL resided in England (despite TTL being registered in the Seychelles) and the relevant digital assets were also located in England, there “was no other jurisdiction with which the dispute had a closer link than England, or was even arguably the proper forum”.(3)
The Court held that arguments could be made to establish how bitcoin’s developers owed fiduciary duties to TTL. However, the COA noted that the following arguments had been disputed by bitcoin’s developers and would no doubt need to be explored in detail at full trial:
- The developers had “complete power” over the blockchain network, including the ability to maintain and patch the underlying software, which meant that the developers exerted a level of control over the blockchain network and maintained a level of authority “on behalf of” all participants in the blockchain network.
- There was no mechanism among nodes to collectively refuse a software update to the protocols that govern the blockchain itself, as the consensus mechanism that did exist was limited to accepting blocks of transactions verified by other nodes, and any node that did refuse a software update could not participate in mining and so was incentivised to accept it.
- Any digital assets that existed on the blockchain network were therefore entrusted into the care of the developers, whose actions could substantially affect the interests of bitcoin owners. In contrast, bitcoin owners had no control other than the ability to use their private keys.
- The developers, therefore, owed a fiduciary duty to bitcoin owners. As a consequence, they were or could be required to provide bitcoin owners with access to and control of their bitcoin and to ensure that any fraud was not given effect, or to otherwise provide equitable compensation.
Such points are in stark contrast to the High Court’s decision at first instance, which stated that fiduciary duties could not be placed upon a “fluctuating, and unidentified, body of developers of the software at least in the sense and to the extent claimed by TTL”.(4) On this particular point, the Court of Appeal held that the judge at the first instance had made an error by accepting “a highly contested fact as a premise”.(5)
By permitting the appeal, the case will be sent back to the High Court for a full trial. The Court of Appeal recognised that, if TTL succeeded, it would represent a “significant development of the common law on fiduciary duties”.(6) This case is significant as it is the first time an English court will consider whether and to what extent blockchain developers owe digital asset owners fiduciary and/or tortious duties. The blockchain network developers are not in a settled category of fiduciary duties, such as those owed by lawyers to their clients or by company directors to their company (while not a closed list, these would be exceptional for such duties to be found in other circumstances).
While this case could be dismissed as just someone trying to bypass a fundamental feature of blockchain networks, the ruling of this trial, which is expected in 2024, will undoubtedly hold important implications both in the United Kingdom and globally. An implication of a ruling in favour of TTL would significantly impact the risk profile for blockchain protocol developers, and no doubt impact the development of blockchain technologies in the United Kingdom.
Nevertheless, the case will be vital in outlining whether there is, in fact, legal duties owed to digital asset owners by blockchain developers, and whether developers could be compelled to make (or not make) software changes to blockchain networks where a digital asset owner’s security has been compromised.
For further information on this topic please contact Marcus Bagnall or Hamuzah Mawanda at Wiggin by telephone (+44 20 7612 9612) or email ([email protected] or [email protected]). The Wiggin website can be accessed at www.wiggin.co.uk.
(1) Tulip Trading Limited v Van der Laan & Ors  EWCA Civ 83, .
(4) Tulip Trading Ltd v Bitcoin Association For BSV & Ors  EWHC 667 (Ch), .
(5) Tulip Trading Limited v Van der Laan & Ors  EWCA Civ 83, .