Are cryptocurrencies outside the reach of conventional law? The Criminal Litigation department, examines an intriguing case that presented a dilemma for judges when it came before the High Court.
On March 25 2022 the High Court passed a judgment which deliberated upon significant questions in relation to jurisdiction and cryptocurrency in the case of Tulip Trading Ltd (TTL) v Bitcoin Association for BSV, the original Bitcoin.
The claimant, TTL is a holding company of Dr Craig Wright, incorporated in the Seychelles. TTL alleged that they were locked out of their Bitcoin account following a hack on Dr Wright’s computer and Bitcoin worth £1.1 million owned by TTL was subject to this hack.
Additionally, the private keys needed to access the account had been stolen and deleted from Dr Wright’s computer. Therefore TTL was unable to access or control the Bitcoin.
Unlike other cryptocurrency hacks we have seen recently, the Bitcoin in question had not actually been taken from its original location or transferred elsewhere. However, without the private keys TTL was unable to access it.
In light of this, TTL did not seek remedies against the alleged perpetrators of the hack. Instead, they issued proceedings against the 16 core developers (the defendants) who controlled the software in respect of ‘the Networks’ on which the Bitcoin was stored.
TTL claimed that the defendants owed a fiduciary or tortious duty to assist TTL in regaining control and use of the Bitcoin. If that was not possible, TTL sought equitable compensation or damages if the former remedy was not successful.
A key defining issue in this case, was the fact that none of the defendants were based in the jurisdiction of England and Wales. Therefore, as opposed to a full trial, the judgement was in fact an interim application specifically related to a number of defendants’ challenge to the court’s jurisdiction and ability to permit service outside of England and Wales.
In order for the defendants to succeed with their jurisdictional application, the following requirements had to be satisfied:
- Whether there was a serious issue to be tried
- Whether there was a good arguable case that the case fell within one or more of the jurisdictional gateways set out in CPR PD 6B, para 3.1; and
- Whether in all the circumstances:
- England is clearly or distinctly the appropriate forum for the trial of the dispute; and
- The court ought to exercise its discretion to permit service of the proceedings out of the jurisdiction.
Considering this, the court found that TTL had not established a serious issue to be tried on the merits of its claim. Additionally, it held that developers did not owe TTL any fiduciary duties for the following reasons:
- Bitcoin owners could not realistically be described as having entrusted their property to a fluctuating, unidentified body of software developers
- The distinctive characteristic of a fiduciary relationship is the obligation of ‘undivided loyalty’. However, the steps that TTL required the defendants to take – such as writing and implementing a software ‘patch’ which would enable TTL to recover the Bitcoin, would only benefit TTL – rather than the other users of the network. In fact, the court argued that the changes sought by TTL could even be disadvantageous to other users of the network; and
- TTL’s demands could have exposed the defendants to risks, for example if the developers had created the software patch for TTL, there would be a possibility that potential rival claimants to the Bitcoin would have a legitimate claim against the defendants
It can be deduced from this outcome that although this case has left open a narrow potential route to liability and remedy, the judgment could be seen as highlighting the key concerns that tort and common law may be proving themselves incapable of adapting to new technologies and characteristically international/cross-border business and commercial structures.
Furthermore, while legislation and regulation are the only viable route - any such legislation and regulation must reflect international cooperation. Unless that cooperation is global, it has limited chance of being effective.
This begs the question: does this mean that Bitcoin and other cryptocurrencies are outside the reach of conventional law?
The answer is currently being unravelled and it will be interesting to see how legal developments in this space will progress in the coming years, particularly considering the recent volatility of Bitcoin and other cryptocurrencies, which may well leave many investors holding a loss.