Blockchain networks begin to allow enforcement of court orders | Latham & Watkins LLP

The Bitcoin Association for BSV will release software to facilitate court orders to freeze stolen or lost coins, while some courts recently approved service procedures by tokenized airdrop.

Earlier this year, in Tulip Trading Ltd (TTL) v. Bitcoin Association for BSV (Bitcoin Association) and others, the UK High Court held that bitcoin software developers do not owe a duty of care to bitcoin owners who have lost their private keys, and are not obliged to take steps to protect or recover such keys or bitcoin. For more information on this case, see Latham’s blog post, UK High Court Rules on Liability of Bitcoin Software Developers.

Software update

In June 2022, the Bitcoin Association announced that it had agreed to a settlement with TTL in the proceedings following the High Court decision, and will: (1) release an updated version of the Bitcoin SV Node software that allows bitcoin SV miners to freeze transaction output and act on court orders (the software update); and (2) seek to obtain a notary service provider to perform notarial aspects of the process as an independent entity (the notary service provider).

The software update will effectively allow court orders to freeze bitcoin SV to be enforced on the bitcoin SV network itself (rather than the less direct route of seeking enforcement via crypto exchanges). Essentially, when a court issues an order to freeze stolen or lost coins:

• The claimant/plaintiff will forward the court order to the Notary Service Provider to confirm the court order, translate the order into machine-readable language and broadcast the court order to bitcoin SV miners using a “notary tool”.
• Bitcoin SV miners will decide whether to trust the information received from the notary service provider and, if the order applies to them, take action to respect the court order to freeze coins. If bitcoin SV miners decide not to take action, they will be in violation of network rules, their blocks could be orphaned, and they could be held in contempt of court for not complying with a court order.

The Bitcoin Association has clarified in its press release that the bitcoin SV miners decide whether to install the software update and whether to take action to respect the court order. Accordingly, the Bitcoin Association will have no role in implementing the software update itself or in enforcing relevant court orders on the bitcoin SV network.

Legal Service of Tokenised Airdrop

In a further development of digital assets, also in June 2022, the New York State Supreme Court approved the first ever service of court documents on an anonymous defendant using tokenized airdrop. The case involved a cryptocurrency exchange and fintech company based in Liechtenstein that was hacked and lost almost £6.5 million. The majority of the stolen funds were traced to two cryptocurrency wallet addresses, and the plaintiff was authorized to serve legal documents via tokenized airdrop to those addresses. The tokenized airdrop took the form of a non-fungible token (NFT) containing a hyperlink to the relevant legal documents, and a mechanism that tracks when a person clicks on the hyperlink. The airdrop was a success as lawyers for the accused submitted notices of attendance in the case.

More recently, in July 2022, the UK Supreme Court also granted permission to serve proceedings from an NFT over the blockchain on “persons unknown”. The case involved unknown individuals impersonating an online broker and encouraging the claimant to transfer funds from their crypto wallets to trade on the platform. The plaintiff was granted permission to serve the lawsuit on the unknown persons by means of an NFT airdrop to the two wallets in which the claimant had deposited his cryptocurrency. Furthermore, the court found that the cryptocurrency exchange (also a defendant in the claim) held the claimant’s cryptocurrency on trust for the claimant, meaning that the exchange could be held liable for breach of trust if the exchange failed to protect misappropriated funds on its platform, if the courts require it.

Takeaways

The Bitcoin Association is rolling out the software update against a backdrop of a growing willingness in English courts to recognize and protect digital assets. The UK Supreme Court recently demonstrated this willingness when it ruled that NFTs are legal property and can be protected as such, in the particular case of a proprietary freezing order.

Whether other blockchain networks and their users will adopt similar tools to allow effective enforcement of court orders, and whether courts in key markets outside the UK and more generally in the US will begin to allow service of court documents by NFTs remains to be seen. The current trend towards better protection for victims of digital theft and fraud may also increase consumer trust and confidence in digital asset markets.