Bitcoin and digital assets: UK Court of Appeal considers whether developers of blockchain protocols owe duties to owners – Commentary

Facts
Decision
Comment

Facts

After claiming that over £3 billion worth of bitcoin private keys were stolen following a hack, Tulip Trading Limited (TTL) claimed that the Bitcoin Association and the blockchain developers responsible for running the relevant bitcoin networks owed TTL- custodian and indemnification duty (for further details, see “UK Court of Appeal to decide whether 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 bitcoin.

In the original 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 constituted a breach of fiduciary duty or duty to indemnify”. by bitcoin’s blockchain developers to TTL.(1)

Decision

At the Court of Appeal, when delivering the main judgment and allowing the appeal, Lord Justice Birss held that “the conclusion is not that there is a duty of trust in law in the circumstances that Tulip alleges, only that the case presented raises a serious problem to be tried”.(2)

TTL’s grounds for 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 new factual matrix that underpins the parties’ obligations and involvement.
• The judge at first instance was wrong to think that TTL had no real prospect of establishing that fiduciary or indemnifying duties existed.
• The conclusions were incorrect as they were based on findings inadmissibly assumed against TTL.

Interestingly, the court did not consider fiduciary and tortious duties separately. Rather, the court stated that liability would only arise where a fiduciary duty had been established. Furthermore, despite the fact that the international nature of the case was not a key point of appeal, the Court confirmed that since TTL was resident in England (despite TTL being registered in the Seychelles) and the relevant digital assets were also located in England, there was ” was no other jurisdiction with which the dispute had a closer connection 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 a fiduciary duty to TTL. However, the COA noted that the following arguments had been contested 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 allowed the developers to exercise a level of control over the blockchain network and maintain a level of authority “on behalf of” all participants in the blockchain network.
• There was no mechanism among nodes that could collectively deny a software update to the protocols governing the blockchain itself, as the consensus mechanism that existed was limited to accepting blocks of transactions verified by other nodes, and any node that denied a software update could not participate in mining and was therefore encouraged to accept it.
• Any digital assets that existed on the blockchain network were therefore left to the developers, whose actions could significantly 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 effected, or otherwise provide fair compensation.

Such points stand in stark contrast to the Supreme Court’s decision at first instance, which stated that fiduciary duties could not be imposed on a “fluctuating, and unidentified, body of developers of the software at least in the sense and to the extent that TTL claims. “.(4 ) On this particular point, the Court of Appeal held that the judge in the first instance had made a mistake by accepting “a highly contested fact as a premise”.(5)

Comment

By allowing the appeal, the case will be sent back to the Supreme Court for full consideration. The Court of Appeal recognized that, if successful, TTL would represent a “significant development of the common law of trusts”.(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 indemnity obligations. 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 (although not a closed list, these would be exceptional for such duties to be found in other circumstances ).

Although this case could be dismissed as just someone trying to circumvent a fundamental feature of blockchain networks, the decision of this court case, which is expected in 2024, will undoubtedly have important implications both in the UK and globally. An implication of a ruling in favor of TTL would have a significant impact on the risk profile of blockchain protocol developers, and arguably affect the development of blockchain technologies in the UK.

Still, the case will be crucial in outlining whether there are indeed legal duties owed by owners of digital assets to blockchain developers, and whether developers can be forced to make (or not make) software changes to blockchain networks where a digital asset owner’s security has been compromised.

For more information on this topic, please contact Marcus Bagnall or Hamuzah Mawanda at Wiggin by phone (+44 20 7612 9612) or e-mail ([email protected] or [email protected]). Wiggins’ website can be accessed at www.wiggin.co.uk.

Endnotes

(1) Tulip Trading Limited v Van der Laan & Ors [2023] EWCA Civ 83, [5].

(2) Ibid [91].

(3) Ibid [7].

(4) Tulip Trading Ltd v Bitcoin Association For BSV & Ors [2022] EWHC 667 (Ch), [73].

(5) Tulip Trading Limited v Van der Laan & Ors [2023] EWCA Civ 83, [77].

(6) Ibid [86].