In Tulip Trading Ltd v Bitcoin Association for BSV and Others the High Court considered whether software developers of cryptocurrency networks could owe a duty of care to owners of digital assets that have been lost or stolen. The court held that, in this case, the claimant did not have any real prospect of success of establishing such a duty. Tulip Trading Limited (‘TTL’) has now been granted permission to appeal.
TTL brought a claim against 16 digital asset network developers seeking a declaration that the developers owed it fiduciary and/or tortious duties that required them to assist TTL to regain control of its assets following a hack of its CEO’s computer. TTL claimed to own Bitcoin worth over £3 billion to which it lost access when hackers allegedly removed the private keys that enabled the CEO to deal with the cryptocurrency. TTL argued that the software developers of the network where it purchased the Bitcoin should be held to have a fiduciary and/or tortious duty of care to assist TTL in regaining control of its lost assets by the creation of a computer code that would transfer the lost digital assets to a new private key to which TTL would have access.
As the defendants were all domiciled outside England and Wales, TTL had sought and obtained permission to serve the proceedings out of the jurisdiction from the High Court. 13 of the defendants challenged the jurisdiction of the court.
To assume jurisdiction over a claim, the court must be satisfied, among other things, that there is a serious issue to be tried on the merits of the claim. The court therefore considered whether TTL’s claim that the developers owed it a fiduciary or tortious duty of care to assist in regaining control over its lost assets represented a serious issue to be tried.
Was there a fiduciary duty?
Simply put, a fiduciary duty arises where someone has undertaken to act for or on behalf of another where the circumstances create a relationship of trust and confidence. The reason for recognising a duty in these circumstances is that this trust and confidence creates a potential vulnerability to abuse. The distinguishing factor of fiduciary duties is that the principal is entitled to the single-minded loyalty of their fiduciary and there is a legitimate expectation that the fiduciary will not use their position in a manner that adversely affects the principal.
Whether or not a fiduciary duty exists is highly fact dependent and any analysis of such a claim requires detailed consideration of the circumstances in which a duty is alleged to have arisen.
In this case, Mrs Justice Falk concluded there was no serious issue to be tried in relation to the claim that the developers owed TTL a fiduciary duty for the following reasons:
- An imbalance of power, together with vulnerability to abuse of that power, is often a feature of fiduciary relationships but is not a defining characteristic.
- It cannot realistically be said that Bitcoin users are entrusting their property to a fluctuating, and unidentified, body of developers of the software, or that a fluctuating body of individuals can owe continuing obligations to, for instance, remain as developers and make future updates whenever required by owners.
- A fiduciary duty creates a ‘single-minded loyalty’, which is its distinguishing feature. The concept of undivided loyalty did not align with TTL’s request for the defendants to take action to give it control of lost or stolen assets, as this was for the benefit of TTL alone rather than all users. In fact, such an action could disadvantage a rival claimant to the lost Bitcoin or conflict with other users’ security and anonymity expectations.
Was there a tortious duty?
To establish if a novel category of tortious duty exists, an incremental approach should be adopted based on analogy with established categories of liability. A critical part of the court’s assessment of whether a novel category should be recognised is the consideration of whether the imposition of a duty of care would be fair, just, and reasonable in the circumstances.
On the facts of the case, Justice Falk concluded that the imposition of a duty would not be an incremental extension of established categories and that it also would not be fair, just, or reasonable to impose such a duty because:
- TTL’s loss was pure economic loss, for which no common law duty of care can be imposed without a special relationship.
- TTL’s complaints related to a failure to act but there is no general duty to protect others from harm, nor is there a duty to prevent third parties causing loss or damage.
- If a duty was imposed, it would be owed to an unlimited class, namely anyone who had allegedly lost private keys or had them stolen.
- The scope of the duty would be too open-ended as developers would be obliged to investigate and address any claim that a person had lost or had their private keys stolen.
- The developers would not have protection from rival claimants and could be accused of having expropriated funds.
- Developers are a fluctuating body of individuals and there was no basis for imposing an obligation to continue being involved with a cryptocurrency network, particularly where developers have given no such assurances and any involvement may have been intermittent.
On the basis that (among other things) no relevant duty of care could be argued to have arisen, the order granting permission for service out of the jurisdiction and service itself was set aside.
Given that the global cryptocurrency market cap is over $1 trillion, the subject matter of this judgment is of enormous significance. It is, therefore, entirely unsurprising that TTL’s application for permission to appeal has been granted.
In granting permission to appeal, Lady Justice Andrews stated: ‘The issue as to whether developers owe duties of care and/or fiduciary duties to the owners of digital assets and if so, what is the nature and scope of those duties is one of considerable importance and is rightly characterised as a matter of some complexity and difficulty. Given that in addition to its complexity and difficulty the underlying facts will play a significant role in determining that issue, it is arguable with a real prospect of success that it is not susceptible of summary determination in the context of a challenge to the jurisdiction, and therefore that the judge fell into error in deciding that there was not even a serious issue to be tried and in the approach she adopted.’
As it is vital for all stakeholders that there be clarity on this issue, the fact that it is to be properly examined and determined by the Court of Appeal is to be welcomed. The decision will be pivotal.
  EWHC 667 (Ch)