Stolen crypto - UK Court of Appeal to decide on software developers' legal duties to users

The two-day hearing of Tulip Trading v Wladimir van der Laan & Ors concluded on Thursday, 8 December 2022. The judgment is not expected until early next year.

In this case, the UK Court of Appeal must decide if the High Court was correct in its March 2022 ruling (see the Order of Falk J (High Court, Chancery Division) dated 25 March 2022) that there is “no serious issue to be tried” on the question of whether Bitcoin developers owed a legal duty to Tulip Trading Limited (“TTL”) that would compel the developers to assist TTL in recovering bitcoins stolen in a computer hack.

This high-profile case has been the subject of great controversy in the crypto community because:

• TTL is owned by Dr Craig Wright, the computer scientist who claims to have invented Bitcoin under the pseudonym “Satoshi Nakamoto.”
• The stolen bitcoins are allegedly worth over £3 billion.
• Most importantly, the case has significant implications for millions of crypto-asset investors in the wider crypto and blockchain world and for blockchain developers/engineers.

Facts

TTL (the claimant) is indirectly owned by Dr Wright. The claim relates to a very substantial amount of digital currency assets that TTL claims to own but is currently unable to control or use following what it says was a hack of computers located at Dr Wright’s home office in Surrey in 2020. The attack allegedly involved the erasure, presumably after copying, of layers of encrypted private keys needed to gain access to digital assets now worth over £3 billion.
TTL’s case is that the defendants are the core developers and/or otherwise control the Bitcoin software in respect of certain relevant digital asset networks based around the world. TTL claimed that the defendants owe it fiduciary and/or tortious duties which have the effect that they should assist TTL in regaining control and use of its assets by writing software ‘patches’ to help with the recovery. There is no suggestion that any of the defendants were involved in the hack.

Falk J’s Order

In March 2022, Falk J concluded that TTL did not establish a serious issue to be tried on the merits of the claim and set aside the previous order of Deputy Master Nurse, which granted TTL permission to serve the claim form out of the jurisdiction and to set aside service of the claim form. However, Falk J added that, if there had been an issue to be tried, England would have been the appropriate forum.

In her judgment, Falk J said she is satisfied that TTL has a good arguable case that it owns the bitcoins and that the hack occurred, and its evidence cannot simply be dismissed on a summary determination. But in dismissing the claim that the defendants owe any fiduciary duty to users of their open-source system, she noted that software developers are a fluctuating body of individuals and that “as a general proposition it cannot realistically be argued that they owe continuing obligations to, for example, remain as developers and make future updates whenever it might be in the interests of owners to do so.”

Falk J also dismissed the claim that the developers were in breach of a duty of care by failing to include in their software the means to recover stolen private keys. She stated that “[t]he failures alleged are failures to make changes to how the networks work, and were intended to work, rather than to address a known defect” and that “owners of digital assets are able to take some steps to protect themselves against the loss of private keys, for example by keeping copies in different locations, and possibly by insurance.”

What’s next

Currently, the decision sits with the Court of Appeal as to whether Falk J’s Order should be reversed—at this stage, all they need to consider is whether “there is a serious issue to be tried.” If the appeal is granted, the case will be sent back to the High Court where the issue of whether blockchain developers owe fiduciary and/or tortious duties to users will be tried in full. Needless to say, the implication of the upcoming judgment will be significant, and we will follow up with another update in due course.