Fiduciary duties in bloom for crypto-developers

The courts are set to address whether software developers of Bitcoin networks owe fiduciary duties to bitcoin owners following the Court of Appeal’s decision in Tulip Trading Limited v Van der Laan & Ors, where it allowed the claim to proceed. The case is poised to be a landmark for future crypto-disputes as it seeks to address several important points in this uncertain and developing area of law.

Background

The Claimant (“Tulip”) is a digital asset trading company which claims to have owned over £3 billion worth of bitcoin and whose CEO is Dr Craig Wright. Dr Wright purports to be Satoshi Nakamoto, the author of the seminal Bitcoin White Paper which first introduced the concept of Bitcoin. In February 2020, Dr Wright was the victim of a hack in which he lost the files containing the private keys Tulip requires to access its bitcoin. Tulip’s bitcoin is held on four different digital ledgers, known as blockchains. Each individual blockchain operates on a ‘peer-to-peer network’ made up of many computer participants (consisting of ‘miners’ and ‘nodes’). The miners compete which each other to be the first to verify bitcoin transactions and are rewarded when they do so. Whereas, nodes operate to record every verified transaction on the blockchain and relay the same to the rest of the network. To participate in a given network, users must run the applicable software for that network. Tulip claims that the 16 defendants are software developers of the four networks in question.

Tulip contends that the developers owe fiduciary and tortious duties to the owners of bitcoin on its network. Tulip’s argument is that these duties oblige the developers to introduce a software patch which would reunite Tulip with its bitcoin.

The defendants are located around the world and Tulip obtained leave to serve the claim outside the jurisdiction. Most of the defendants contested jurisdiction and the matter came before the High Court, who dismissed the claim as there was no serious issue to be tried as there was no real prospect of establishing that software developers could owe Tulip fiduciary duties.

Decision of the Court of Appeal

Tulip appealed to the Court of Appeal, who unanimously overturned the High Court’s decision. Birss LJ, leading the judgment, made several notable conclusions.

Bitcoin is property

Birss LJ explained that bitcoin is not just transferrable, it is rivalrous as “the holding of it by one person necessarily prevents another from holding that very thing at the same time.” As such, bitcoin is capable of assumption by a third party and is therefore property.

Though this conclusion has previously been reached in the High Court, this confirmation from the Court of Appeal seemingly lays to rest any doubt whether crypto-assets are considered property.

 

Categories of fiduciaries are not closed

Birss LJ acknowledged that the categories of fiduciaries are not closed, though it is rare for new duties to arise. The common law has developed incrementally and by analogy. However, he said where the facts are a long way from what the courts have had to consider before, it is not the correct response to say the common law simply cannot go that far. Ultimately, the common law is based upon principles which are capable of being applied in new situations.

 

Developers could owe fiduciary duties

Any user on Bitcoin networks can propose software patches to that network. However, only certain developers with the necessary authority can decide which changes are made and have the ability to push through updates to the network.

Tulip contends that the defendants are such developers who have the ultimate control of the networks and that any patch they introduce will be implemented. The defendants’ case is that they are part of a decentralised body of developers which is large and shifting, without organisation or structure.

In Tulip’s case, Birss LJ recognised that the authority and discretion over decision-making which the developers have are common features of fiduciary duties. If that was the case, the developers have de facto power over the network and would have been entrusted with the owners’ property. Therefore, it was conceivable to the Court that developers could owe a duty to bitcoin owners to maintain the software and not compromise the owners’ security. If correct, Birss LJ said it would be hard to see what this duty could be but fiduciary in nature.

This point is set to be highly contested and much will likely hinge on whether the networks are truly decentralised or ultimately controlled by a select few.

 

Developers may have a positive duty to act

Generally, fiduciary duties restrict a fiduciary from doing something rather than requiring them to take positive steps, subject to some exceptions.

In Tulip’s case, part of the developers’ regular role includes introducing code updates to the network, for example, to fix software bugs. If Tulip’s case is correct and the developers exercise de facto control of the network, they could prevent anyone else from doing the same. Therefore, the Court considered it to be properly arguable that the developers could have a positive concomitant duty to introduce updates to protect bitcoin owners using the network as it would be similar to their usual responsibilities.

 

Comment

Should the case reach trial, much of the focus will be on whether blockchain is truly decentralised. Judicial clarity on this point will have huge ramifications for the decentralised finance industry as a whole. If Tulip succeeds, it will provide possible redress to those who have lost their digital property, while software developers could find themselves owing legal duties to an enormous number of unidentified digital asset owners.

Even if Tulip’s claim fails, it may just provide the impetus for invention, whether judicial or legislative, to protect victims in a global digital financial system which does not operate with the security of traditional financial institutions.

By recognising this case ought to be tried, the Court has demonstrated a willingness to keep up with a rapidly developing area which has so far outpaced regulation. The principles of fiduciary duties are nothing new but their consideration in the context of developers is. While technology develops at an increasing rate, Birss LJ’s comments on the incrementalism of the common law is an indication that the Court will not shy away from applying these old concepts to new technology when required.

FURTHER INFORMATION

If you have any questions or comments about the topics discussed in this blog, please contact Filton Pavier, Mary Young or any member of the  Dispute Resolution team.

 

ABOUT THE AUTHORs

Filton Pavier joined Kingsley Napley in 2018. He is currently a trainee solicitor in his second seat with the Medical Negligence and Personal Injury team, having completed his first seat with the Corporate, Commercial and Finance team. Prior to starting his training contract, Filton worked in the Medical Negligence and Personal Injury team as a paralegal. He assisted solicitors on a variety of cases arising from serious injuries to fatal accidents.

Mary Young is a Partner in the Dispute Resolution team. Her practice covers a wide range of areas but Mary’s particular interests and expertise lie in civil fraud and asset tracing as well as claims against professionals in negligence, breach of fiduciary duty and breach of trust.