UK crypto exchanges should welcome court confirmation of market mitigation rule

It follows the Court of Appeal of England and Wales’s dismissal (10 pages/190 KB) of the bulk of a $13.3 billion class action against crypto exchange Binance.

Tom Aries, litigation specialist at Pinsent Masons, said: “It is interesting to see that the UK courts appear to be looking to further align digital assets with traditional financial instruments in terms of legal treatment by reinforcing the principle that speculative further gains are not compensable. Despite the at times novel nature of digital assets, this case reinforces that the legal principles governing damages and mitigation will nonetheless for now remain rooted in established legal doctrine.”

The case centred around allegations that several major cryptocurrency exchanges colluded between April and June 2019 to delist Bitcoin Satoshi Vision (BSV) in breach of article 101 of the Treaty on the Functioning of the European Union and/or under the UK Competition Act 1998, causing the value of a BSV coin to fall from £55 to £39. BSV claimed that its coin could have reached bitcoin-level value if it had not been delisted.

The claimants were divided into three sub-classes. Sub-class A sold BSV before July 2022 and claimed for immediate loss; sub-class B held BSV throughout and claimed for both immediate loss and “foregone growth” – for instance, missed opportunity for BSV to become a top-tier coin. Sub-class B sought 352 times the original value of BSV they held. Finally, sub-class C lost access to BSV on Binance or Kraken, two of the cryptocurrency exchanges involved in the case, and had claims similar to either sub-class A or B depending on the cryptocurrency exchange.

Sub-class B claimed up to £8.99bn, based on speculative growth of BSV. Binance sought to strike out this claim, particularly the ‘foregone growth’ effect and ‘loss of chance’ arguments. The Competition Appeal Tribunal (CAT) declined to strike out the claims entirely but narrowed its scope.

The sub-classes all appealed to the Court of Appeal, arguing that the CAT was wrong to find that the market mitigation rule applied to all the claims. Under the market mitigation rule, where there is an available market for substitute performance, a party should seek to make a substitute contract to mitigate and crystallise their loss. Damages should then be assessed based on the difference between the market value at the time of the breach, and the time at which the party ought to have mitigated. In addition, the sub-classes argued that the CAT was wrong to strike out their loss of chance claim.

The Court of Appeal dismissed the majority of the appeal. It ruled that the damages claimed were speculative and unsupported. The court found that BSV was tradeable and substitutable, and the investors therefore had a duty to mitigate losses by selling in an open market under the market mitigation rule.

The Court of Appeal rejected the foregone growth argument, stating that the claim that BSV could have grown in value like bitcoin was speculative and not legally recoverable. The loss of chance argument was also rejected because the claim did not depend on third-party decisions but on speculative market growth. Finally, the Court of Appeal found that, in terms of awareness of delisting, only those unaware of the delisting might have a claim beyond immediate loss. This means that sub-class B holders can only claim immediate loss, for instance £55 to £39 – not speculative future gains.

Jennifer Craven, litigation expert at Pinsent Masons, said: “The court’s confirmation that the market mitigation rules should apply to readily tradeable digital assets should now limit exchanges’ exposure to massive speculative liability claims following the delisting decision.”

While the scope of the case was significantly narrowed, smaller claims from investors who lost access or sold currency at a loss may still proceed.