February 17, 2023
As explained in our previous article, after alleging their private keys to over £3bn worth of bitcoin was stolen after a hack, TTL claimed the Bitcoin association and the blockchain developers, who are responsible for running the relevant bitcoin networks, owed TTL fiduciary and tortious duties, which included to patch 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.
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.”
TTL’s grounds of appeal included the following points:
- The case raises complex issues that merit 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 erred in holding that TTL had no real prospect of establishing that fiduciary or tortious duties existed.
- The conclusions erred as they were based on findings impermissibly assumed against TTL.
Interestingly, the COA did not consider fiduciary and tortious duties separately, rather the COA stated tortious duties would arise only where a fiduciary duty has been established. Furthermore, despite the international nature of the case not being a key point to the appeal, the COA affirmed that as TTL resides 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”.
The COA held that arguments can be made to establish how bitcoin’s developers owe fiduciary to duties to TTL, noting however that these arguments were disputed by bitcoin’s developers and will no doubt need to be explored in detail at full trial:
- The developers have “complete power” over the blockchain network, including the ability to maintain and patch the underlying software, which means the developers exert a level of control over the blockchain network and maintain a level of authority “on behalf of” all participants in the blockchain network.
- There is no mechanism among nodes to collectively refuse a software update to the protocols that govern the blockchain itself, as the consensus mechanism that does exist is limited to accepting blocks of transactions verified by other nodes, and any node that does refuse a software update could not participate in mining and so is incentivised to accept it.
- Any digital assets that exist 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 have no control other than the ability to use their private keys.
- The developers therefore owe a fiduciary duty to bitcoin owners, as a consequence of which they are or can be required to provide bitcoin owners with access to and control of their bitcoin and to ensure that any fraud is 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”. On this particular point, the COA held that the judge at the first instance made an error by accepting “… a highly contested fact as a premise.”
By permitting the appeal, the case will be sent back to the High Court for a full trial. The COA recognised if Tulip succeeded it would represent a “significant development of the common law on fiduciary duties.” 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, which whilst not a closed list would be exceptional for such duties to be found in other circumstances.
While you could dismiss this case 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 UK and globally. As we previously mentioned, 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 UK.
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 digital asset owner’s security has been compromised.
We’ll be exploring the arguments raised in this case and the technical workings of blockchain networks in upcoming articles.
We frequently advise clients on potential legal, regulatory and commercial issues at the forefront of converging technologies in the technology sector, including blockchain software developers, software licensing arrangements and technology transactions. Get in touch if you’d like to have a further discussion about your project and we’d be delighted to assist.
To read the COA decision, please click here.