Obligations arguably owed by bitcoin developers to bitcoin owners

The English Court of Appeal has recently ruled that the developers who maintain the bitcoin network can owe fiduciary duty and indemnity to the owners of that cryptocurrency. The Supreme Court had previously decided that such obligations could never apply. It is important to note that in overturning that decision, the Court of Appeal has not finally determined that such obligations are owed. Instead, it has sent the case back to the Supreme Court for it to be fully argued on the law and the facts. However, this case is important because it appears to establish the nature of the relationship between the developers and owners of bitcoin, and because it may also have broader implications for expanding the law of fiduciary obligations.

Background

IN Tulip Trading Limited -v- van der Laan and others, the claimant (Tulip) says that access to a bitcoin wallet containing (as of April 2021) USD 4 billion in bitcoin had been disabled as a result of a hacking incident by a third party. As such, bitcoin is at risk of being stolen by the hackers. Tulip claims that access to that account can be easily restored by the defendants, who are sixteen bitcoin software developers (the developers) of the network on which the account sits, so that the bitcoin can be moved to a secure wallet. Fourteen of the developers dispute that they owe any legal obligations to Tulip to help it. They also raise factual disputes, pointing out that it will not be easy to activate Tulip’s access to the wallet. Furthermore, they say that if they are required to restore that access, it would potentially undermine the foundation on which bitcoin is established (ie, that such access is solely determined by who holds the private key to the wallet). The Court of Appeal said that these factual disputes were not for determination at this stage and that the Supreme Court had erred in taking any of them into account in its decision. Instead, at this preliminary stage of determining whether there is a serious issue to be tried, the court should take the facts alleged by Tulip to be true and determine whether, based on this, there may be any obligations owed to them by the developers.

Decision

The Court of Appeal said it could be argued that the developers owed Tulip a fiduciary duty to act to protect Tulip’s interests if a court required the developers to do so. The Court of Appeal accepted that this would be a significant extension of the law in this area, but also noted that the law on fiduciary relationships could be developed to deal with new situations such as that created by the development of bitcoin.

The essence of the decision is that the Court of Appeal accepted that there is a realistic argument that the developers control the bitcoin software and are able to make decisions about the bitcoin that has been placed under their care by its owners. These are classic features of a fiduciary relationship which arguably therefore impose fiduciary obligations on the developers towards owners of bitcoin such as Tulip. The scope of these obligations includes an obligation for the developers not to act in their own interests when making decisions and exercising the powers they have, and may also extend to a positive obligation to act as Tulip requests by restoring its access to the wallet in which the bitcoin resides.

Implications

The gist of this decision seems to be that if Tulip is right that $4 billion worth of bitcoin is at risk due to the activity of hackers, why shouldn’t the law impose an obligation (whether fiduciary or tort) on someone? otherwise to take steps to remove that risk, provided that the necessary steps are not unduly burdensome?

This illustrates that if the Supreme Court finds that the Developers actually have a fiduciary duty towards Tulip in the manner claimed, this could have far-reaching consequences for establishing obligations in a far wider range of situations, whether the parties intended this or not. For example, what if information is held in an email account of a deceased person that would be of great value to the beneficiaries of that person’s estate? Can the controller of this account be given a fiduciary or other obligation to provide access to it so that the information can be obtained?

Obviously, we’ll have to wait and see what the Supreme Court decides once the case is fully argued, but the Court of Appeals has at least opened the door to imposing legal obligations on bitcoin developers to bitcoin owners.

The full judgment from the Court of Appeal can be found here.

If you require any further information on anything covered in this briefing, please contact Jolyon Connell, Ian De Freitas or your usual contact at the firm on +44 (0)20 3375 7000.

This publication is a general summary of the Act. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, March 2023