Obligations arguably owed by bitcoin developers to bitcoin owners

The English Court of Appeal has recently ruled that the developers who look after bitcoin networks may owe fiduciary duties and duties in tort to the owners of that cryptocurrency. The High Court had earlier decided that no such obligations could ever be owed. It is important to note that in overturning that decision, the Court of Appeal has not finally decided that such obligations are owed. Instead, it has remitted the case back to the High Court for it to be fully argued on the law and the facts. However, this case is important because it looks set to establish the nature of the relationship between the developers and the owners of bitcoin and because it could also have wider impacts in extending the law on fiduciary obligations.

Background

In Tulip Trading Limited -v- van der Laan and Others, the Claimant (Tulip) says that its access to a bitcoin wallet that contained (as at April 2021) US$4bn of bitcoin had been disabled as a result of a hacking incident by a third party. As such the bitcoin is at risk of being stolen by the hackers. Tulip claims that its access to that account could 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 could be moved to a secure wallet. Fourteen of the Developers dispute that they owe any legal obligations to Tulip to assist it. They also raise factual disputes, pointing out that enabling Tulip’s access to the wallet will not be straightforward. Further they say that if they are required to re-establish that access it will potentially undermine the foundation on which bitcoin has been established (ie that such access is solely determined by who holds the private key to the wallet). The Court of Appeal said these factual disputes were not for determination at this stage and the High Court had fallen into error in taking some of them into account in reaching its decision. Instead, at this preliminary stage of determining whether there is a serious issue to be tried, the court should take the facts as alleged by Tulip to be true and decide whether, based on this, there can be any obligations owed to them by the Developers.

Decision

The Court of Appeal said that it is arguable that the Developers owe Tulip fiduciary duties to act to protect Tulip’s interests if a court requires the Developers to do so. The Court of Appeal accepted that this would be a significant extension to 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 which has been placed under their care by the owners of it. These are classic features of a fiduciary relationship which arguably therefore impose fiduciary obligations on the Developers to owners of bitcoin like Tulip. The extent of those obligations includes an obligation on the Developers not to act in their own self-interests when making decisions and exercising the powers that they have, and may also extend to a positive obligation to act as Tulip are requesting by restoring its access to the wallet in which the bitcoin is held.

Implications

The essence of this decision appears to be that if Tulip is right that bitcoin to the value of US$4bn is at risk because of the activity of hackers then why shouldn’t the law impose an obligation (whether fiduciary or tort based) on someone else to take steps to remove that risk, assuming that those required steps are not unduly onerous?

This illustrates that if High Court finds that the Developers do owe fiduciary duties to Tulip in the way that is being alleged, this could have far-reaching consequences in establishing obligations in a much 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 which would be of great value to the beneficiaries of that person’s estate? Could a fiduciary or other obligation be placed on the controller of that account to allow access to it so that the information can be obtained?

Clearly, we will have to wait to see what the High Court decides when the case is fully argued, but the Court of Appeal has at least opened the door to the imposition of legal obligations on bitcoin developers to bitcoin owners.   

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

If you require further information about 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 law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, March 2023