Lauren Pardoe, partner in London law firm Rosling King, reviews cryptocurrency, a new and fast-developing area, in which there has to date been little in the way of judicial intervention, and in which there is little regulation. The argument lies in whether the developers of cryptocurrency networks, working on behalf of bitcoin owners, are accountable as fiduciaries if such networks are hacked, as seen in Tulip Trading Ltd v Van Der Laan & Others [2023] EWCA Civ 83.<\/p>\n
Case Summary <\/strong>This claim was brought by a Seychelles-registered company, Tulip Trading Limited (\u201cTulip\u201d), which is the owner of some bitcoin (valued at approximately $4 billion as at April 2021), held across four cryptocurrency networks. The claim is brought against a number of software developers (\u201cthe Developers\u201d) who Tulip alleges had sufficient control over the cryptocurrency networks that they owed fiduciary duties to Tulip.<\/p>\n The claim arose when the owner and director of Tulip became aware in February 2020 that at some point prior to that date the private cryptocurrency keys held by Tulip, which gave Tulip access to its bitcoin in the various cryptocurrency networks, had been hacked by persons unknown. Tulip had as a result lost its ability to access its cryptocurrency assets, which Tulip believes are still held within the networks, or move them out of reach of the hackers.<\/p>\n Tulip\u2019s case is that the Developers control and run the networks in which the bitcoin is held. As such, they should be able to create some form of software patch which would secure Tulip\u2019s assets, e.g. by moving the bitcoin to different locations within the network and providing Tulip with access. The Developers argue that (1) they have no such duty to Tulip and (2) the solution sought by Tulip would be completely unworkable in practice.<\/p>\n Jurisdiction at First Instance<\/strong> The Developers are based across a large number of jurisdictions, and so Tulip made an application to the Court for service out of the jurisdiction, which was granted in May 2021. The Developers disputed jurisdiction and the matter went to a hearing before Falk J in March 2022.<\/p>\n Falk J found that, for the purposes of the jurisdiction challenge, Tulip was resident in England and the damage arising from the alleged losses would be suffered in England. This was on the basis that, although it is registered in the Seychelles, Tulip\u2019s controlling mind and director was at all relevant times in England, and access to the assets was possible from England.<\/p>\n However, Falk J found that there was no serious issue to be tried because there was no realistic prospect of establishing that the facts pleaded amounted to a breach of fiduciary or tortious duty owed by the defendants to Tulip. The Order allowing service out of the jurisdiction and the service of the claim form were therefore set aside.<\/p>\n Appeal <\/strong>Tulip appealed the decision of the High Court, and the matter went to a hearing before the Court of Appeal on 7-8 December 2022. The Developers did not contest Falk J\u2019s findings regarding the residence of Tulip within the jurisdiction, and so the only matter on appeal was whether there was a serious issue to be tried, namely whether there was a good arguable case that the Developers could be held to have fiduciary duties.<\/p>\n In a judgment delivered by Birss LJ and handed down on 3 February 2023, the Court of Appeal reversed Falk J\u2019s judgment, finding that there was a serious issue to be tried.<\/p>\n Birss LJ referred to the judgment in\u00a0Altimo Holdings and Investment Ltd v Kyrgyz Mobil Tel Ltd [2011] UKPC 7, [2012] 1 WLR 1804\u00a0and the warning therein that it is not normally appropriate in a summary procedure to decide a controversial question in law in a developing area. Birss LJ agreed with Tulip that Falk J had erred in accepting the Developers\u2019 arguments as to the networks\u2019 \u201cdecentralisation\u201d, which should properly be a matter for evidence at trial.<\/p>\n The Court of Appeal then considered the standard definition of a fiduciary as set out in Bristol and West Building Society v Mothew:<\/p>\n \u201cA 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 confidence. The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his fiduciary. This core liability has several facets. A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal. This is not intended to be an exhaustive list, but it is sufficient to indicate the nature of fiduciary obligations. They are the defining characteristics of the fiduciary.\u201d<\/p>\n It was, however, noted that \u201cthe facts of this case (whichever party is right about the details) are new and quite a long way from factual circumstances which the courts have had to examine before in the context of fiduciary duties\u201d.<\/p>\n On the facts of Tulip\u2019s case, should they be made out at trial, the Developers were found to have met the definition of fiduciaries because:<\/p>\n It was noted that the categories of fiduciaries are not closed, and \u201cthe common law often works incrementally and by analogy with existing cases, and rightly so; but if the facts change in a way which is more than incremental I do not believe the right response of the common law is simply to stop and say that incremental development cannot reach that far.\u201d<\/p>\n Conclusion <\/strong>Birss LJ concluded that: \u201cI recognise that for Tulip\u2019s case to succeed would involve a significant development of the common law on fiduciary duties. I do not pretend that every step along the way is simple or easy. However, there is, it seems to me, a realistic argument\u2026 [that if the facts of the case are found in Tulip\u2019s favour] The developers therefore are fiduciaries\u2026 The content of the duties\u2026 also involves a duty to act in positive ways in certain circumstances. It may also, realistically, include a duty to act to introduce code so that an owner\u2019s bitcoin can be transferred to safety in the circumstances alleged by Tulip.\u201d<\/p>\n The Court of Appeal therefore concluded it was indeed possible under common law for the Developers to meet the definition of fiduciaries. The issue of whether the Developers were in fact fiduciaries was a matter for evidence at trial, and was a serious issue to be tried.<\/p>\n Commentary<\/strong> It is notable that this was a jurisdiction challenge only, and the matter of whether or not the Developers are fiduciaries on the facts is yet to be tried. However, followers of cryptocurrency developments will be interested to see that the English Courts are open to accepting jurisdiction for these claims (subject to the facts of the case) and to considering how fundamental legal principles can be applied and indeed extended in an ever-changing and ever more quickly-developing world.<\/p>\n If it is found that the Developers are fiduciaries, victims of cryptocurrency fraud, who currently have little opportunity to seek redress, may find themselves able to claim against developers or others for restitution of their assets. No doubt developers and cryptocurrency owners will be watching with interest.<\/p>\n Lauren’s article was published in the New Law Journal, July 2023.<\/p>\n","protected":false},"excerpt":{"rendered":" Lauren Pardoe, partner in London law firm Rosling King, reviews cryptocurrency, a new and fast-developing area, in which there has to date been little in the way of judicial intervention,…<\/p>\n","protected":false},"author":3,"featured_media":21276,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[1],"tags":[],"acf":[],"_links":{"self":[{"href":"https:\/\/mediahouseinternational.com\/wp-json\/wp\/v2\/posts\/21275"}],"collection":[{"href":"https:\/\/mediahouseinternational.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/mediahouseinternational.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/mediahouseinternational.com\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/mediahouseinternational.com\/wp-json\/wp\/v2\/comments?post=21275"}],"version-history":[{"count":1,"href":"https:\/\/mediahouseinternational.com\/wp-json\/wp\/v2\/posts\/21275\/revisions"}],"predecessor-version":[{"id":21277,"href":"https:\/\/mediahouseinternational.com\/wp-json\/wp\/v2\/posts\/21275\/revisions\/21277"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/mediahouseinternational.com\/wp-json\/wp\/v2\/media\/21276"}],"wp:attachment":[{"href":"https:\/\/mediahouseinternational.com\/wp-json\/wp\/v2\/media?parent=21275"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/mediahouseinternational.com\/wp-json\/wp\/v2\/categories?post=21275"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/mediahouseinternational.com\/wp-json\/wp\/v2\/tags?post=21275"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}\n
\nown self-interest;<\/li>\n
\nfaith.<\/li>\n<\/ul>\n