Finance litigation update - July 2022

FINANCE LITIGATION UPDATE – JULY 2022 30 Losing the keys to the (bitcoin) kingdom: Tulip Trading v Bitcoin In Tulip Trading Ltd v Bitcoin1, Falk J considered whether developers involved with the development and custodianship of the software underlying digital assets ("Developers") owed either fiduciary duties, or a duty of care, to those using their software. While the Defendant Developers were not found to owe the specific duty alleged in this case (namely a duty to create a software patch to restore access to bitcoin following the theft of private keys), Falk J suggested that in some circumstances, Developers could owe more limited duties to users of their software. Falk J's judgment represents the first engagement by the English courts over the existence, and scope, of fiduciary duties or duties of care in the context of cryptocurrency software development. However, given the losses sustained by investors in cryptoassets recently (including from the hacking of exchanges, wallets and decentralised autonomous organisations2 or from stablecoins being untethered3), it is unlikely to be the last. Background The Claimant, Tulip Trading Limited ("Tulip Trading"), claimed that it owned bitcoin (the "Bitcoin"), valued at approximately $4.5 billion at the time the claim was issued, on a variety of networks controlled by the 16 Defendants, who were the core Developers of those networks. Tulip Trading 1 Tulip Trading Ltd & others v Bitcoin Association for BSV & others [2022] EWHC 667 (Ch). 2 For example, the DAO Hack, which took place in 2016, which resulted in the unlawful transfer of 3.6m Ether valued at the time at around $50m (now worth approximately $71bn). claimed its access to that bitcoin was lost following a hack on the home computer of its CEO, Dr Craig Wright, during which the private keys needed to control the Bitcoin were deleted. Dr Wright had no other record of the private keys. The proceedings Tulip Trading brought a claim against the Developers (all resident outside the jurisdiction) for declarations that: i) it owned the Bitcoin; ii) the Developers owed it fiduciary or tortious duties which required them to assist it in regaining control of its Bitcoin; and/or iii) it was owed equitable compensation in damages for breach of those duties. In essence, Tulip Trading argued that the Developers were required to take active steps to create and apply a ‘patch’ to the four networks identified, which would allow it to regain control of its Bitcoin. It claimed that the Developers had control over the identified blockchain networks, the ability to amend the underlying software, and the obligation to make those amendments in order to comply with their tortious and/or fiduciary duties. The Developers disputed this on a number of grounds. First, they denied being in control of the networks; countering that they were "part of a very large, and shifting, group of contributors without an organisation or structure", being the "decentralised model" pursuant to which the bitcoin network 3 See for example, the recent collapse in value of the Terra Luna and TerraUSD stablecoins.