English Court of Appeal to hear trailblazer case over fiduciary duty of bitcoin developers

The eventual ruling in the case will clarify serious issues in a developing area, potentially create another avenue of redress for victims of crypto fraud and may well divide the international crypto community, legal experts have said.

The novel case brought by multi billion dollar digital assets owner Tulip Trading against 16 bitcoin software developers will have “wide-ranging repercussions for the crypto sector”, according to financial crime investigation expert Hinesh Shah of Pinsent Masons. He said that the Court of Appeal judgment “creates significant uncertainty for software developers in the interim” as a verdict is unlikely to be obtained until 2024 at the earliest.

Tulip Trading, the owner of $4.5bn (£3bn) worth of digital assets commonly known as bitcoin, is taking legal action against 16 software developers. The claim relates to a hack where Tulip Trading lost control of private keys which accessed the digital assets, resulting in the theft of those assets by an unknown third party. The key question for the appeal is whether the developers, who essentially “look after” the bitcoin, may owe fiduciary duties or duties in tort to the true owner of that cryptocurrency.

“This judgment will have wide-ranging repercussions for the crypto sector, particularly for software developers of digital assets and what exactly they need to consider in respect of fiduciary duties towards end users of the digital assets. A key factor to be considered at trial will be the notion as to whether networks such as blockchain are in fact decentralised or controlled by a small number of developers,” said Shah.

Tulip Trading first issued High Court proceedings in England against the 16 developers in early 2022. It claimed that those developers were the core developers of the software in respect of numerous cryptocurrency networks of bitcoin, and that they owe the true owner of the stolen digital assets fiduciary or tortious duties to restore its ability to access and retrieve the digital assets. Tulip Trading argued that the developers could simply move the assets to another online wallet under their control. However, the developers denied that they are capable of such power or control.

The High Court held that the developers do not owe fiduciary duties or duties in tort to Tulip Trading. But the Court of Appeal reached a unanimous decision to allow the appeal last week, concluding that “this is a developing, complex and uncertain area of law and should therefore go to trial” and that the High Court judge was wrong to hold that Tulip has no real prospect of establishing that the claimed fiduciary duties exist.

The Court of Appeal explained in its judgment that the developers of a given network are a sufficiently well-defined group of people and, viewed objectively, have undertaken a role which involves making discretionary decisions and exercising powers for and on behalf of other people. The bitcoin has been entrusted into the care of the developers and the developers are therefore fiduciaries. The court held the view that the developers may realistically be said to have duties to not act in their own self-interest and also to introduce a code so that an owner’s bitcoin can be transferred to safety in the circumstances alleged by Tulip.

Sam Ballin of Pinsent Masons said: “If successful, Tulip Trading will have demonstrated that there is another avenue of redress for victims who have had their digital assets lost or stolen. The case, yet again, highlights that the English courts are a leading jurisdiction for the resolution of crypto-disputes and showcases their willingness to assist victims of crypto fraud.”

The Court of Appeal also found that the High Court’s conclusions were erroneous because they were based on findings impermissibly assumed against Tulip, giving the case another ground on which to proceed to a full trial.

In its judgment, the Court of Appeal said: “To rule out Tulip’s case as unarguable would require one to assume facts in the defendant developers’ favour which are disputed and which cannot be resolved this way. 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.”

The significant “international nature” of the case will make it a highly anticipated trial among the global crypto community, according to litigation expert Jennifer Craven, also of Pinsent Masons. 

“This case is interesting on two fronts. Firstly, given its international nature, it provides a useful overview of the key legal grounds that a claimant will need to evidence when seeking permission to serve its claim out of the jurisdiction. When reaching its decision, the Court of Appeal highlighted the importance of the court not deciding controversial points of law in a developing area on assumed or hypothetical facts. In this case, there was a serious issue to be tried, even if there was no conclusion as to whether a fiduciary duty in law existed in the terms described by Tulip,” she said.

“Secondly, it will be the first time that the English court will need to examine the concept of decentralisation in the context of whether a fiduciary duty of care is owed by the software developers. In the judgment, the Court of Appeal highlighted academic literature authored outside of England, in the context of whether the decentralised governance of bitcoin is a myth. It will be interesting to see how and whether the court draws on the views of the international crypto community when addressing such a notion. The answer may well divide the international crypto community, but the case will no doubt be closely watched by all concerned,” she said.