UK Court Opens Door to Cryptocurrency Software Developers Owing Fiduciary Duties to Users

Key Takeaways:

• The English Court of Appeal has opened the door to the possibility that cryptocurrency software developers may owe fiduciary duties to cryptocurrency users. 
• The judgment, although not final, is an example of the English Court’s readiness to adapt established legal principles to the modern digital world.
• For the claim to ultimately succeed, a significant development of the law on fiduciary duties would be needed.
• One can expect the Court of Appeal’s findings to be hotly contested at the full trial.

Introduction

In a recent judgment¹, the English Court of Appeal has opened the door to the possibility that cryptocurrency software developers may owe fiduciary duties to cryptocurrency users. These duties could have far-reaching consequences, including assisting users with the recovery of their stolen cryptocurrency, particularly where the fraudsters are unknown (as is common in crypto fraud cases).

While not a final decision, and with a full trial to take place in due course, the judgment is a further example of the English Court’s readiness to adapt established legal principles to the modern digital world.

Fiduciary Duties: An Overview

A fiduciary is “someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and loyalty".²

The principal, to whom the fiduciary duty is owed, is entitled to the single-minded loyalty of the fiduciary. The fiduciary must act in good faith, not make a profit out of his trust or act for his own benefit (or the benefit of a third party) without the principal’s consent.

The exact scope of the duties owed depends on the nature of the relationship in question. Fiduciary relationships may arise on an ad hoc basis if the relationship has the requisite characteristics.

The Claim

In this ongoing claim (the “Claim”), Tulip Trading Limited (“TTL”) alleges that it is the owner of a very substantial amount of bitcoin (valued at approx. US$4bn in April 2021) (the “TTL Bitcoin”). TTL claims that it cannot access the TTL Bitcoin because, following a hack on the home computer of its CEO in February 2020, its private keys and the information that would allow access to those keys were lost (likely stolen).

In order to regain control of its assets, TTL commenced the Claim against multiple defendants (the “Developers”) whom it says are the core developers of and/or otherwise control the software behind four digital asset networks relevant to the blockchain addresses at which the TTL Bitcoin is currently held: the Bitcoin Satoshi Vision network, the Bitcoin Core network, the Bitcoin Cash network and the Bitcoin Cash ABC network (the “Networks”). TTL contends that:

• Due to their position of control and resulting power over the Networks, the Developers owe fiduciary and/or tortious duties to the true owners of bitcoin held on their respective Networks (including, in this instance, TTL). 
• These duties should extend to taking steps to ensure that TTL has access to, and control of, the TTL Bitcoin. By way of a software “patch”, TTL claims this could be effected fairly easily.

With all of the Developers resident outside of the jurisdiction, TTL applied for, and was granted, the necessary permission to serve the Claim out of the jurisdiction.  All but two of the Developers subsequently applied to set aside this permission (so as to effectively end the Claim) (the “Application”).

Decision at First Instance

In determining the Application, the Court concluded that TTL did not have a realistic prospect of establishing that there had been a breach of fiduciary duty owed by the Developers to TTL. In particular:

• Bitcoin owners cannot realistically be described as “entrusting” their property to a fluctuating, and unidentified, body of developers of relevant software. In turn, the developers cannot be said to owe continuing obligations to bitcoin owners. 
• The defining fiduciary obligation of undivided loyalty would be compromised if the Court were to find in favour of TTL: solving TTL’s predicament would be for TTL’s benefit alone, and not for the benefit of other bitcoin users generally, who could even be disadvantaged by such actions.

The Court also rejected TTL’s case on tortious duties: while in certain circumstances a limited duty of care could be owed by the Developers, a positive responsibility to safeguard bitcoin owners to the extent sought by TTL went too far.

Decision at Appeal

On appeal by TTL, the Court of Appeal reversed the decision of the lower court, finding that there was a realistic argument that the Developers owed a fiduciary duty. In reaching this conclusion, the Court of Appeal considered the following:

• Arguments on the extent to and manner in which the Developers exercise control over the relevant software (the sole source of bitcoin’s properties), are too significant to be determined at an interlocutory stage of proceedings (i.e., without a full trial).
• Arguments that the Developers (who are a sufficiently well-defined group) have undertaken a role which bears some relationship to the interests of bitcoin owners, on which a fiduciary duty might be founded. Consistent with principles underpinning fiduciary relationships, the Court considered that the Developers have sole authority to modify a network’s software as they alone have access to modify the source code: they make decisions in relation to the bitcoin on behalf of all the participants of a bitcoin network (including bitcoin owners).
• Arguments that bitcoin owners have a legitimate expectation that developers will not exercise their authority in their own self-interest to the detriment of owners. Even if a change made by developers is only for the benefit of one bitcoin owner, that does not preclude the existence of a fiduciary relationship to all bitcoin owners.

Conclusion

Consistent with other recent English Court judgments involving stolen crypto assets, the Court of Appeal’s decision to allow the Claim to proceed to a full trial is probative of the English court’s continued commercial approach to the resolution of crypto disputes, with an emphasis on crypto investor protection.

The Court rightly recognised that “the internet is not a place where the law does not apply”.³ However, for TTL’s claim to ultimately succeed (this recent decision of the Court of Appeal being an interlocutory judgment, not a final and conclusive one), a significant development of the law on fiduciary duties would be needed, based on a detailed consideration and analysis of cryptocurrency, the networks on which it is held and the roles of participants in those networks. One can expect the Court of Appeal’s findings to be hotly contested at the full trial. The potential impact of this development could be ground-breaking, for all users of crypto asset networks and beyond in the crypto markets: 

• On the one hand, it would further aide users’ prospects of recovering their stolen crypto assets in addition to the variety of tools already available through the English courts (about which see our previous OnPoints⁴).
• On the other, a determination that developers owe a fiduciary duty to claimants such as TTL and as such could be required to modify a network to restore lost or stolen crypto assets, would undermine the foundational principal of immutable transactions in crypto assets networks, and arguably the value of all assets on that network (e.g., bitcoin in the case of the Bitcoin network). This would mean that bitcoin, an asset that can presently only be controlled by the party holding the corresponding private keys, could possibly be reassigned to another user pursuant to a court order or otherwise. Further, there is no guarantee that any such modification to the network principles imposed by network developers would be effective: it could be universally rejected by miners by refusing to upgrade to the new software that contains the modification, rendering it redundant. Alternatively, certain miners may accept the change whilst others reject it, resulting in a “fork” to the network where both the new network with changes exists (e.g., TTL regains access to the bitcoin) and the older, unmodified network continues to exist (e.g., TTL does not regain access). This has occurred in the past with crypto asset networks where contentious changes to the network were not universally accepted by miners.

Either way, while market participants will have to watch this space and await the outcome of the substantive hearing of these pivotal issues, the English Court has, in the meantime, again shown itself to be willing to adapt English law to cater for new technologies.

Footnotes:

1. Tulip Trading Limited & Ors v Bitcoin Association for BSV and Ors [2023] EWCA Civ 83.
2. Bristol & West Building Society v Mothew [1998] CH 1 [18A].
   
3. [2023] EWCA Civ 83 [83].
4. Here and here.