Owner of US$4.5 Billion in Bitcoins Loses Suit against Bitcoin Developers

The English High Court in Tulip Trading Limited v Bitcoin Association for BSV and others [2022] EWHC 668 (Ch) dealt with interesting cryptocurrency legal issues. This was against a backdrop of a hack resulting in a loss of control of US$4.5 billion in bitcoins.

Summary of the Decision

After a hack, Tulip Trading, the owner of bitcoins, lost control of the private keys to access approximately US$4.5 billion in value of bitcoins. Tulip Trading filed a legal action in the UK to compel the Defendant developers to take steps like implementing a software patch to allow Tulip Trading to regain control of the bitcoins.

I highlight only four of the key legal issues relating to cryptocurrency in general.

First, the English High Court found that there was no serious issue to be tried in relation to the Defendant developers owing any fiduciary duty to Tulip Trading to implement such steps.

Second, the Defendant developers also did not owe a general duty of care to Tulip Trading.

Third, the law did seem to weigh in favour of the bitcoins being located within the jurisdiction of the UK. This is where the lex situs of the bitcoins would follow where the owner of the bitcoins resided.

Fourth, the damage suffered here could also be said within the jurisdiction of the UK. The loss of control over the bitcoins occurred within the UK and this is where it could be argued damage had occurred.

Background Facts

The Claimant is a company named Tulip Trading Limited and is incorporated in the Seychelles. Its CEO and ultimate controller is Dr Craig Wright, an Australian citizen who has been resident in England since 2015.

Tulip Trading claimed to own a substantial amount of bitcoins valued at over US$4.5 billion. Tulip Trading claimed that Dr Wright’s computers were hacked and the private keys to control the bitcoins were removed from the system. Without the private keys, Tulip Trading could not deal with the bitcoins. The bitcoins were said to still be located at two Bitcoin addresses or wallets.

Tulip Trading filed a claim in the UK High Court against 16 developers. Tulip Trading claimed that these developers were the core developers or otherwise controlled the software in respect of the four relevant cryptocurrency networks of Bitcoin (BTC), Bitcoin Cash (BCH) and Bitcoin Satoshi’s Vision (BSV).

Tulip Trading claimed that these 16 developers owe it fiduciary and/or tortious duties where the developers should assist Tulip Trading in regaining control and use of Tulip Trading’s bitcoins.

Tulip Trading sought a declaration that it owns the relevant bitcoins and for orders requiring the developers to take steps to ensure that Tulip Trading has access to and control of them. Tulip Trading’s case is that it would not be technically difficult to write and implement a software “patch” to enable Tulip Trading to regain control of the bitcoins.

All of the 16 developers were outside of the UK. Tulip Trading needed to satisfy the legal requirements to allow the UK court papers to be served outside of the UK jurisdiction on the 16 developers.

For the service out of jurisdiction, Tulip Trading essentially needed to show:

1. There is a serious issue to be tried on the merits of the claim.
2. There is a good arguable case that the claim falls within one of the recognised categories or gateways allowing for certain types of claims to be served out of jurisdiction.
3. That England is the appropriate forum for the trial of the dispute.

Decision

I pick out the four key legal points from a cryptocurrency perspective.

(1) The Developers Do Not Owe Fiduciary Duties to Tulip Trading

Tulip Trading’s case is the alleged imbalance of power and with an “entrustment” of property to the Defendant developers. This is where the developers have complete power over the system through which highly valuable digital assets are held.

The Court found that Tulip Trading’s case did not give rise to an imposition of a fiduciary duty in favour of Tulip Trading and where such a duty had been breached.

This was not a case where it is alleged that in making an update to the software, the Defendant developers acted in their own interests and contrary to the interests of owners. For example, if the developers introduced for their own advantage a bug or feature that compromised owners’ security but served their own purposes. Perhaps in that case, it was conceivable that some form of duty could be engaged in that situation.

In contrast, Tulip Trading was seeking to impose a positive duty on the developers to alter software to introduce a patch to allow Tulip Trading to regain control of its assets. It cannot be realistic to argue that the developers owe continuing obligations to, for example, remain as developers and make future updates whenever it might be in the interests of owners to do so.

Hence, there was no serious issue to be tried on the fiduciary duty issue.

(2) The Developers Do Not Owe Tortious Duty of Care

Tulip Trading asserted that the Defendant developers are in breach of a duty of care by failing to include in the software means to allow those who have lost their private keys, or had them stolen, sufficient safeguards against wrongdoing by third parties.

The Court would have to recognise such a novel duty of care. The Court did not consider it as an incremental extension of existing recognised duties of care.

Hence, there was no serious issue to be tried on the duty of care issue.

(3) Were the Bitcoins within the Jurisdiction?

The Court also considered whether there was a good arguable case or whether the subject matter of the claim was located within jurisdiction i.e. whether the bitcoins held at the digital wallet addresses would be treated as located in the jurisdiction.

There could be two possible locations where the bitcoins could be treated as legally located. First, as the bitcoins were owned by Tulip Trading, then in the Seychelles being the place of incorporation of Tulip Trading. Second, in the UK, being the place of where Tulip Trading’s central management and control is exercised. This is through Dr Wright’s residency in the UK.

On balance, the Court found that the bitcoins could be argued to be within the jurisdiction of the UK. The location of control of a digital asset, including by the storage of a private key, maybe relevant to determining whether the proprietary aspects of dealings in digital assets are governed by English law.

Dr Wright did have the ability to deal in the bitcoins from the UK jurisdiction. It was hard to see that Tulip Trading is resident in the Seychelles as it was a place where its directing minds have never visited, it keeps no books and records, and where it appeared to not even have filed accounts.

Hence, there was a good arguable case that Tulip Trading is resident in the jurisdiction and that the bitcoins are located in the jurisdiction.

(4) Where is the Damage Experienced?

On a related issue, the Court also had to determine the argument on where Tulip Trading experienced its loss or damage. Would it be in the Seychelles or in the UK?

Tulip Trading’s argument was that following the lex situs of the Bitcoin assets (i.e. the fact that the bitcoins are in the jurisdiction of the UK), Tulip Trading has sustained damage in the jurisdiction. It was from England that Tulip Trading (through Dr Wright) could not control or deal with the assets.

The Defendant developers argued that any damage is suffered in the Seychelles, being the place of incorporation of Tulip Trading.

The Court ruled that there was a good arguable case that the damage was experienced in the UK. The UK was the jurisdiction from which Tulip Trading could have, and would, exercise control of the bitcoins. On that basis, damage would be directly felt in the UK.

In conclusion, the Court held that Tulip Trading had not established a serious issue to be tried on the merits of the claim. The Court set aside the permission to serve the court papers out of jurisdiction on the Defendant developers.

 

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