January 16, 2023
Tulip Trading v Wladimir van der Laan & Ors was heard in December 2022 before the UK Court of Appeal (COA). The COA must now decide if the High Court in Tulip Trading v Bitcoin Association & Ors (25 March 2022) (High Court Case) was correct in holding that there is “no serious issue to be tried” regarding whether Bitcoin’s software developers owe a duty to Tulip Trading Limited (TTL) to assist in recovering bitcoins that were stolen in a computer hack.
TTL is a company based in Seychelles and its CEO, Dr Craig Wright, claims to be “Satoshi Nakamoto”, the pseudonymous creator of Bitcoin. Dr Wright discovered his computers were hacked, which resulted in over £3b of Bitcoin going missing. TTL claimed it owned such digital assets and sought assistance from the Bitcoin network and its developers.
Although the COA’s decision is not expected until later this year, it is worth highlighting this critical case as it is the first time an English senior court will address the issue of whether software developers behind blockchain networks owe duties to those who own digital assets on such networks.
The High Court Case
In the High Court Case, Falk J dismissed the claim that the developers owed a fiduciary duty to TTL, noting that the developers cannot “… realistically owe continuing obligations to… remain as developers and make future updates whenever it might be in the interests of owners to do so”. Falk J further held that as Bitcoin developers are essentially a fluctuating body of individuals, to impose “… a duty of care of the nature sought… cannot realistically be argued to be fair, just and reasonable”.
Falk J also dismissed the claim that the Bitcoin developers failed to make appropriate changes to the network that would have allowed TTL to regain control and access to their stolen Bitcoin, as such changes would have changed “…how the networks work, and were intended to work, rather than to address a known defect…”. TTL should have instead protected itself against its private keys being stolen by keeping copies in different places or by being insured. If, however, TTL had established an issue to be tried, England would have been the appropriate forum.
On appeal to the COA
In granting TTL permission to appeal the High Court Case, Lady Justice Andrews stated that Falk J “…fell into error in deciding that there was not even a serious issue to be tried and in the approach she adopted”.
Before the COA, TTL argued that as this case involves developing complex areas of law, a summary High Court determination was inappropriate, considering that digital assets (whether held by financial institutions or individuals) are susceptible to hacks much like the one TTL suffered. TTL had a legitimate expectation that the Bitcoin developers would act in their best interest regarding the Bitcoin software protocol, as such code governs TTL’s access to and control of their digital assets. On the other hand, the defendants argued that imposing such duties would be untenably wide and would be owed to “… an unlimited class of persons, in an unlimited set of circumstances” and that “there is no special and coherent reason to impose and establish such duties”, which if owed to such a broad class of users would risk competing multi-jurisdictional ownership claims for the same digital assets.
The COA will now consider whether “there is a serious issue to be tried”. If the appeal is granted, the case will be sent back to the High Court to determine whether the Bitcoin developers owe fiduciary or tortious duties to TTL.
In the balance are not just the rights of the parties involved but also the potential implications for tokenholders and developers across the entire crypto industry. If UK courts find that developers owe fiduciary or tortious duties to digital asset owners, blockchain developers could be compelled to assist digital asset owners in regaining control and access to their assets. This would have significant implications for the industry and lead to changes in how developers approach the design and maintenance of blockchain networks.
The outcome of this case will clarify the legal responsibilities of blockchain network developers towards digital asset owners, which is a crucial step in the ongoing development of the crypto and blockchain industry.
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 High Court decision, please click here.
To listen to the Court of Appeal hearing, please click here.