Court of Appeal finds that Bitcoin's developers may owe fiduciary duties to bitcoin owners

In a highly anticipated judgment, the Court of Appeal has handed down its decision in Tulip Trading Limited v van der Laan and others [2023] EWCA Civ 83, allowing the claimant's appeal. The court found that the developers looking after Bitcoin arguably owed fiduciary duties in tort to an owner of bitcoin, and whether such a duty did arise in the specific proceedings would depend on the facts established at trial.

Background

The background to these proceedings can be found in RPC's article on the High Court judgment in this case. In brief, the claimant company Tulip Trading is controlled by Dr Craig Wright, who claims to be Satoshi Nakamoto, the inventor of Bitcoin. Tulip allegedly lost access to a significant amount of bitcoin as a result of a cyber-attack in which the private keys needed to access a significant amount of bitcoin were deleted. 

Tulip brought proceedings against the developers and controllers of the relevant Bitcoin networks seeking, amongst other things, to compel them to implement a software patch that would enable Tulip to regain control of its bitcoin. Tulip argued that the defendants were obliged to do so as result of fiduciary and/or tortious duties owed to it. 

High Court decision

Tulip was initially granted permission to serve the various defendants out of the jurisdiction, but a number of the defendants successfully challenged jurisdiction and the relevant order was set aside. The High Court held¹ that there was no good arguable case – the (reasonably low) standard required for permission to serve out of the jurisdiction to be granted – that the defendants owed either fiduciary duties to Tulip or a tortious duty of care to include in their software the means to allow those without access to their private keys to access their bitcoin. Tulip was denied permission to appeal by the High Court judge but was subsequently granted permission by the Court of Appeal.

Court of Appeal decision

The Court of Appeal overturned the High Court decision, finding that Tulip's case on fiduciary duties was arguable. The Court of Appeal did not consider whether the defendants also owed tortious duties to Tulip as well because, on Tulip's case, such a duty could only arise in circumstances where the defendants also owed a fiduciary duty, and the issues were so closely related that if the fiduciary duty appeal succeeded the right course was to allow the appeal regarding the tortious duty as well.

The Court of Appeal's reasoning is set out at paragraphs 70 to 88 of the judgment. In summary, the court considered that a realistic argument could be made that the defendants owed fiduciary duties along the following lines: 

a) The developers of a given bitcoin network were a sufficiently well-defined group to be capable of being subject to fiduciary duties. The court observed that this was a fact sensitive and a contentious point between the parties and found that the first instance judge, in finding that the developers were a "fluctuating and unidentified body", had erroneously accepted a highly contested fact as a premise.

b) The developers were fiduciaries because they had undertaken a role which involved making discretionary decisions and exercising power for and on behalf of bitcoin owners, in relation to the owners' bitcoin, which had been entrusted into the developers' care. Such trust was said to arise because the developers could decide what software changes would be implemented for the relevant Bitcoin networks, which enabled them to make decisions on behalf of all the participants in those networks. 

c) The fiduciary duty owed by the developers comprised both a 'negative' duty not to act in their own self-interest as well as a duty to act in positive ways in certain circumstances, such a fixing code errors.  The court observed that identifying what actions might fall into the 'positive' category was fact sensitive and it would not always be straightforward to delineate from actions falling into the 'negative' category.  Of the duty to act in positive ways, the court also remarked that it:

i. would be a "significant step to define a fiduciary duty in that way" but considered it was arguable because on Tulip's case the developers had, via their exclusive access to the relevant password for the bitcoin software account, the practical ability to prevent anyone else from amending the source code; and

ii. might realistically include, in the circumstances alleged by Tulip, a duty to act to introduce code so that an owner’s bitcoin could be transferred into a safe account controlled by the true owner or otherwise safeguard it.

The Court of Appeal also did not accept what the High Court regarded as a "fundamental difficulty" with Tulip's case – a tension between the obligation of undivided loyalty to a class (which characterises fiduciary relationships) and the fact that the action sought by Tulip was for its own benefit, which might be to the detriment of other users of the Bitcoin networks such as rival claimants to the relevant bitcoin. In its conclusion the Court of Appeal accepted Tulip's submission that it was arguable that such a duty would be owed only to the "true owners of the property", removing the conflict. 
 
Comment

The upshot of this decision is that the issue of whether Bitcoin developers owe fiduciary and/or tortious duties to users of the network remains very much live.  It will need be determined at trial in the proceedings. 

However, although Tulip's claim lives to fight another day, it faces formidable legal and factual challenges. The Court of Appeal acknowledged that, for Tulip’s case to succeed, a significant development of the common law on fiduciary duties was needed, and that while the established categories in which fiduciary relationships arose were not closed, it is exceptional for fiduciary duties to arise outside of them. Tulip will also need to make good on its factual arguments regarding the extent to which the developers do control the operation of Bitcoin and the extent to which they are a sufficiently well-defined group. 

Regardless of whether Tulip is ultimately successful in establishing a fiduciary duty for the developers to take the positive steps it seeks, the decision will be of particular comfort to holders of cryptoassets who might wish to take action against relevant developers in respect of negative steps.  This is because the Court of Appeal was far less hesitant about finding that negative duties may arise, including a duty not to take actions for their own advantage at the expense of the participants in the relevant network.

¹[2022] EWHC 667 (Ch)