Debating the nature of decentralisation in the context of the blockchain

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Tulip Trading Limited v Wladimir van der Laan and ors [2023] EWCA

Tulip Trading Limited v Wladimir van der Laan and ors [2023] EWCA was the first case before the English court to examine the role and duty of crypto asset software developers.

Facts

The claimant, Tulip Trading Limited (TTL), a company incorporated in Seychelles, is owned by Dr Craig Wright. An expose published by Wired in 2015 claimed that the Australian computer scientist was in fact Satoshi Nakamoto- the pseudonymous inventor of bitcoin. However, since his own public declaration in 2016, Dr. Wright has been unable to produce the private keys to Satoshi’s Bitcoin address- the only proof of identification needed.

The widely publicised, multi-billion-dollar claim relates to a large amount of bitcoin- estimated to be worth $4 billion in April 2021- which TTL claimed to own but was unable to use due to a hack of computers at Dr Wright’s home office in February 2020. As a result, TTL removed from those networks its “private cryptographic keys”, to prevent dealings in assets and the spread of information giving potential access to such keys.

Issue

The case is concerned with whether the Seychelles company can reclaim its hacked digital assets from the developers of the cryptocurrency networks. TTL claimed that as core developers, the Defendants were in control of the software used in the four relevant cryptocurrency networks: the Bitcoin Satoshi Vision Network, the Bitcoin Core network, the Bitcoin Cash network, and the Bitcoin Cash ABC network.

The main issue resided as to whether the digital currency networks are decentralised or not, and how the role of software developers fits into that. Arguing that they were not decentralised, TTL contended that the developers should be recognised as a new ad hoc class of fiduciary. In turn, they argued that the Defendant owed them positive duty (fiduciary or tortious) to assist them in regaining access to and control of their digital assets; or, at best, to take reasonable steps in safeguarding TTL’s assets, and/or supplying appropriate compensation.

The Defendants argued that they held no such power over the cryptocurrency networks and that the duties TTL proposed would be entirely unachievable. They contended that any changes made to the software might be refused by crypto miners, causing a fork in the blockchain. Furthermore, some of the Defendants were located abroad and challenged the Court exercising jurisdiction over them.

The court’s ruling

Overturning Mrs Justice Falk’s judgment at the High Court, the Court of Appeal granted permission for TTL to serve the Claim Form out of the jurisdiction to all parties. This substantiated that there was a good arguable case for the claimant and a serious issue to be tried.

The Court of Appeal held that, in TTL’s case, the software developers “have undertaken a role which involves making discretionary decisions and exercising power for and on behalf of other people” in the relevant Bitcoin networks. Decision-making and exercising authority are both common features relating to fiduciary duties (Al Nehayan v Kent [2018] 1 CLC 216). The Court also summarised that Falk J was wrong to suggest that, because the developers are an unidentified, “fluctuating body of individuals”, the owners of digital assets are unable to “entrust” their property to them. They stated that it was realistic to assume that Bitcoin owners have a legitimate expectation that developers will use their skills to fix software issues, and not exercise their authority out of self-interest, but with “single minded loyalty to the users”.

TTL is now able to bring substantive proceedings against the crypto asset software developers, in an attempt to hold them liable for failing to recover its digital currency.

How will this affect the cryptocurrency industry and UK legislation?

This ground-breaking decision has potentially wide-reaching implications for the greater crypto world. It suggests that UK courts are willing to adapt complex areas of the law to cater to ever-growing technology. The decision is likely to be welcomed by crypto asset investors, providing future victims of crypto theft or fraud a path to recovery which is currently unavailable. Yet, the threat of liability in relation to losses suffered by users may deter software developers from taking on such roles, due to a heightened risk of fiduciary duties.

The impact of this case on the arbitration of future blockchain-related disputes is still unknown. Finding in favour of TTL could lead to a fundamental (and necessary change) in the law. As Lord Justice Birss noted, if a duty is found to exist it would require “a significant development of the common law on fiduciary duties.” A new, applicable law could acknowledge that duties of care are owed to owners of digital assets by core developers and/or their blockchain networks.

While the Court acknowledged that there was no basis for TTL’s claims under current law, it referred to the Law Commission’s project on digital assets, and the possibility for legislative developments to cater for similar situations.