UK Court docket Opens Door to Cryptocurrency Software program Builders Owing Fiduciary Duties to Customers | Dechert LLP

Key Takeaways:

• The English Court docket of Attraction has opened the door to the chance that cryptocurrency software program builders could owe fiduciary duties to cryptocurrency customers. 
• The judgment, though not ultimate, is an instance of the English Court docket’s readiness to adapt established authorized ideas to the fashionable digital world.
• For the declare to in the end succeed, a big improvement of the legislation on fiduciary duties could be wanted.
• One can anticipate the Court docket of Attraction’s findings to be hotly contested on the full trial.

Introduction

In a latest judgment¹, the English Court docket of Attraction has opened the door to the chance that cryptocurrency software program builders could owe fiduciary duties to cryptocurrency customers. These duties might have far-reaching penalties, together with aiding customers with the restoration of their stolen cryptocurrency, significantly the place the fraudsters are unknown (as is frequent in crypto fraud circumstances).

Whereas not a ultimate resolution, and with a full trial to happen in the end, the judgment is an additional instance of the English Court docket’s readiness to adapt established authorized ideas to the fashionable digital world.

Fiduciary Duties: An Overview

A fiduciary is “somebody who has undertaken to behave for or on behalf of one other in a specific matter in circumstances which give rise to a relationship of belief and loyalty”.²

The principal, to whom the fiduciary responsibility is owed, is entitled to the single-minded loyalty of the fiduciary. The fiduciary should act in good religion, not make a revenue out of his belief or act for his personal profit (or the advantage of a 3rd occasion) with out the principal’s consent.

The precise scope of the duties owed is dependent upon the character of the connection in query. Fiduciary relationships could come up on an advert hoc foundation if the connection has the requisite traits.

The Declare

On this ongoing declare (the “Declare”), Tulip Buying and selling Restricted (“TTL”) alleges that it’s the proprietor of a really substantial quantity of bitcoin (valued at approx. US$4bn in April 2021) (the “TTL Bitcoin”). TTL claims that it can not entry the TTL Bitcoin as a result of, following a hack on the house laptop of its CEO in February 2020, its personal keys and the data that might enable entry to these keys had been misplaced (probably stolen).

With a purpose to regain management of its property, TTL commenced the Declare towards a number of defendants (the “Builders”) whom it says are the core builders of and/or in any other case management the software program behind 4 digital asset networks related to the blockchain addresses at which the TTL Bitcoin is at present held: the Bitcoin Satoshi Imaginative and prescient community, the Bitcoin Core community, the Bitcoin Money community and the Bitcoin Money ABC community (the “Networks”). TTL contends that:

• On account of their place of management and ensuing energy over the Networks, the Builders owe fiduciary and/or tortious duties to the true homeowners of bitcoin held on their respective Networks (together with, on this occasion, TTL). 
• These duties ought to prolong to taking steps to make sure that TTL has entry to, and management of, the TTL Bitcoin. By means of a software program “patch”, TTL claims this could possibly be effected pretty simply.

With all the Builders resident exterior of the jurisdiction, TTL utilized for, and was granted, the required permission to serve the Declare out of the jurisdiction.  All however two of the Builders subsequently utilized to put aside this permission (in order to successfully finish the Declare) (the “Utility”).

Choice at First Occasion

In figuring out the Utility, the Court docket concluded that TTL didn’t have a practical prospect of building that there had been a breach of fiduciary responsibility owed by the Builders to TTL. Specifically:

• Bitcoin homeowners can not realistically be described as “entrusting” their property to a fluctuating, and unidentified, physique of builders of related software program. In flip, the builders can’t be stated to owe persevering with obligations to bitcoin homeowners. 
• The defining fiduciary obligation of undivided loyalty could be compromised if the Court docket had been to search out in favour of TTL: fixing TTL’s predicament could be for TTL’s profit alone, and never for the advantage of different bitcoin customers usually, who might even be deprived by such actions.

The Court docket additionally rejected TTL’s case on tortious duties: whereas in sure circumstances a restricted responsibility of care could possibly be owed by the Builders, a optimistic duty to safeguard bitcoin homeowners to the extent sought by TTL went too far.

Choice at Attraction

On enchantment by TTL, the Court docket of Attraction reversed the choice of the decrease courtroom, discovering that there was a practical argument that the Builders owed a fiduciary responsibility. In reaching this conclusion, the Court docket of Attraction thought of the next:

• Arguments on the extent to and method wherein the Builders train management over the related software program (the only supply of bitcoin’s properties), are too important to be decided at an interlocutory stage of proceedings (i.e., and not using a full trial).
• Arguments that the Builders (who’re a sufficiently well-defined group) have undertaken a task which bears some relationship to the pursuits of bitcoin homeowners, on which a fiduciary responsibility is likely to be based. Per ideas underpinning fiduciary relationships, the Court docket thought of that the Builders have sole authority to change a community’s software program as they alone have entry to change the supply code: they make selections in relation to the bitcoin on behalf of all of the members of a bitcoin community (together with bitcoin homeowners).
• Arguments that bitcoin homeowners have a reputable expectation that builders is not going to train their authority in their very own self-interest to the detriment of homeowners. Even when a change made by builders is just for the advantage of one bitcoin proprietor, that doesn’t preclude the existence of a fiduciary relationship to all bitcoin homeowners.

Conclusion

Per different latest English Court docket judgments involving stolen crypto property, the Court docket of Attraction’s resolution to permit the Declare to proceed to a full trial is probative of the English courtroom’s continued industrial strategy to the decision of crypto disputes, with an emphasis on crypto investor safety.

The Court docket rightly recognised that “the web just isn’t a spot the place the legislation doesn’t apply”.³ Nonetheless, for TTL’s declare to in the end succeed (this latest resolution of the Court docket of Attraction being an interlocutory judgment, not a ultimate and conclusive one), a big improvement of the legislation on fiduciary duties could be wanted, based mostly on an in depth consideration and evaluation of cryptocurrency, the networks on which it’s held and the roles of members in these networks. One can anticipate the Court docket of Attraction’s findings to be hotly contested on the full trial. The potential affect of this improvement could possibly be ground-breaking, for all customers of crypto asset networks and past within the crypto markets: 

• On the one hand, it might additional aide customers’ prospects of recovering their stolen crypto property along with the number of instruments already accessible via the English courts (about which see our earlier OnPoints⁴).
• On the opposite, a willpower that builders owe a fiduciary responsibility to claimants resembling TTL and as such could possibly be required to change a community to revive misplaced or stolen crypto property, would undermine the foundational principal of immutable transactions in crypto property networks, and arguably the worth of all property on that community (e.g., bitcoin within the case of the Bitcoin community). This might imply that bitcoin, an asset that may presently solely be managed by the occasion holding the corresponding personal keys, might presumably be reassigned to a different consumer pursuant to a courtroom order or in any other case. Additional, there isn’t a assure that any such modification to the community ideas imposed by community builders could be efficient: it could possibly be universally rejected by miners by refusing to improve to the brand new software program that comprises the modification, rendering it redundant. Alternatively, sure miners could settle for the change while others reject it, leading to a “fork” to the community the place each the brand new community with adjustments exists (e.g., TTL regains entry to the bitcoin) and the older, unmodified community continues to exist (e.g., TTL doesn’t regain entry). This has occurred previously with crypto asset networks the place contentious adjustments to the community weren’t universally accepted by miners.

Both method, whereas market members should watch this area and await the result of the substantive listening to of those pivotal points, the English Court docket has, within the meantime, once more proven itself to be keen to adapt English legislation to cater for brand new applied sciences.

Footnotes:

1. Tulip Buying and selling Restricted & Ors v Bitcoin Affiliation for BSV and Ors [2023] EWCA Civ 83.
2. Bristol & West Constructing Society v Mothew [1998] CH 1 [18A].
3. [2023] EWCA Civ 83 [83].
4. Right here and right here.