The Court of Appeal has allowed Dr Craig Wright’s appeal following a High Court Decision, which rejected his claim that developers owe fiduciary duties or duties in tort to the owners of cryptocurrency, namely bitcoin. The court found that there was “a serious issue to be tried” and the matter will now proceed to a full trial.

Background

Dr Craig Wright of Tulip Trading Limited, who claims to be the inventor of Bitcoin, also claims to be the owner of bitcoin valued at circa $4 billion which in April 2021 was allegedly stolen by hackers. The bitcoin is held at two addresses but the private keys for those wallets have allegedly been lost in a hack.

Wallets, or digital asset addresses, are associated with two keys – a private key and a public key. The public key is public and identifies the address on the blockchain network but the private key should, theoretically, be kept private as it is used by a wallet holder to sign transactions and record the movement of digital assets from one wallet to another wallet (think of it as your online banking “pin” or “password”). Once a transaction has been signed by the person using the private key, the transaction is recorded on the blockchain system and cannot be altered or changed.

Tulip Trading contends that the developers (the Defendants) in this case control the network where the bitcoin is located and therefore, they are able to secure those assets and transfer them to another address. The claim requires developers to be recognised as a new class of fiduciary, owing fiduciary duties to the owners of digital assets. The claim also alleges duties in tort.

By way of example, let’s assume the developers are makers of safes and Tulip put £100,000 of cash in the safe and received a unique key to access said safe. The key is stolen and so Tulip cannot access the money in the safe, but the money remains in the safe. It is Tulip’s case that the safe maker owes a duty to move the cash to another safe, which can be accessed by Tulip.

The case is at a very preliminary stage as essentially it is the developer’s argument that, even if Tulip establish all the facts on which they rely, those facts do not amount to the developers owing a fiduciary duty. The High Court ruled there was not duty but the Court of Appeal have decided there is a sufficiently good argument that the developers do owe a fiduciary duty and so the case is being allowed to proceed.

What is a fiduciary?

A fiduciary is a person who holds a position of trust and confidence. They act on behalf of another and must act in accordance with their duties and in good faith. Well known fiduciary duties are those of directors. Similarly, there are duties between trustees and beneficiaries, solicitors and clients.

Children’s Investment Fund Foundation (UK) v AG and others referred to a fiduciary as owing “essentially the duty of single-minded loyalty to his beneficiary, meaning that he cannot exercise any power so as to benefit himself.” Interestingly, there is already academic literature which supports the case for software developers as fiduciaries.

The Impact of the Court of Appeal’s Decision

The Court of Appeal’s decision to allow Tulip Trading’s case to proceed to a trial, having previously been dismissed for having no realistic prospect of success, is momentous for all those involved in cryptocurrency disputes and asset tracing claims.

As part of its reasoning, the Court of Appeal said that “this is a developing, complex and uncertain area of law and therefore the point ought to go to trial.” The court clearly recognises the need for such cases to reach trial, as lawyers continue to grapple with difficult issues relating to digital assets and how they are seen in the eyes of the law.

The Judge concluded with some chilling comments for developers that “If the decentralised governance of bitcoin really is a myth, then in my judgment there is much to be said for the submission that bitcoin developers, while acting as developers, owe fiduciary duties to the true owners of that property.”

That said, if the court were to rule in favour of Tulip Trading at trial, the decentralised blockchain system could be at risk of being undermined. The current status of matters is that blockchain is designed to be decentralised, with transactions (whether fraudulent or not) being irreversible. It does not follow that the safe maker – or developer – should have the power to move money or cryptocurrency in a decentralised financial system. 

It is likely that the outcome of the case at trial will have a prolific impact on the laws in England and Wales which relate to fiduciary duties, and the growing common law around digital assets and how they are dealt with by the courts. Should it be found at trial that developers do owe bitcoin owners duties, there could be a significant swing in the way stolen bitcoin is recovered in the future.

Please get in touch with our digital disputes team should you have any related queries (jemma.fleetwood@jmw.co.uk and graham.small@jmw.co.uk)