News focus: Tulip mania

At some stage in the hearing, the judgment suggests, the riot act was read. After that, Mrs Justice Falk observed, ‘all counsel focused their submissions on the legal issues. They were right to do so’.

Feelings were running high in Tulip Trading Ltd v Bitcoin Association for BSV & others not just because of the sum – £3bn – allegedly at stake, but because the parties say they were fighting for the core values of the $2tn phenomenon that is the bitcoin digital currency. Last week’s High Court ruling is one of the first to deal with some of the questions of rights and responsibilities raised by cryptoassets. It will be read widely within the industry, and no doubt by the master of the rolls, whose 2019 legal statement on cryptoassets and smart contracts is cited.

The Tulip judgment follows a three-day hearing in a claim brought by one of the most controversial – and litigious – individuals in the bitcoin world. Dr Craig Wright, an Australian computer scientist resident in the UK, says that he is ‘Satoshi Nakamoto’, the pseudonymous author of the 2008 white paper which set out the principles of a digital coinage system based on blockchain distributed ledger technology. His claim is vehemently contested in bitcoin circles.

As the Tulip judgment put it, ‘a significant amount of animosity exists’ predating the dispute. Falk stated that the issue of Nakamoto’s identity ‘does not need to be resolved in these proceedings’. However another bitterly contested dispute did: the role of ‘nodes’ in the distributed ledger network in which bitcoins are ‘mined’ and transactions recorded.

In 2020, Wright says he detected evidence of a hack attack on bitcoin ‘wallets’ owned by Tulip Trading Ltd, a Seychelles-incorporated company controlled by him via an Antiguan company owned by Wright and his family. The attack involved the erasure, presumably after copying, of layers of encrypted private keys needed to gain access to digital assets now worth billions of pounds. The hack was reported to Surrey Police but the perpetrator remains unknown.

'It cannot realistically be argued that [the defendants] 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'

Mrs Justice Falk

In Tulip, Wright is seeking to force 16 developers of open-source bitcoin software based around the world to write software ‘patches’ to enable him to recover the missing fortune. (There is no suggestion that any of them were involved in the hack.) He argues that the defendants control the bitcoin network by their choice of software. The defendants dispute this, saying that what Wright seeks goes against ‘the core values of bitcoin as a concept’, which is that no one is in control. Two of the defendants say that acceding to Wright’s demands would damage their reputations.

In her judgment, on a challenge to a ruling last year allowing Tulip’s claims to be served out of jurisdiction, Falk said she is satisfied that Tulip owns the bitcoins and that the hack occurred. But she dismissed the claim that the defendants owe any fiduciary duty to users of their open-source system. Software developers, she noted, are a fluctuating body of individuals. ‘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.’

Likewise, the developers were not in breach of a duty of care by failing to include in their software the means to recover stolen private keys. ‘The failures alleged are failures to make changes to how the networks work, and were intended to work, rather than to address a known defect,’ the judge said.

In consequence, Tulip ‘has not established a serious issue to be tried on the merits of the claim’. She set aside last year’s order granting permission to serve the claim form out of the jurisdiction. However she added that, if there had been an issue to be tried, England would have been the appropriate forum.

The ruling was received with relief across the crypto community. James Ramsden QC of Astraea Group, who appeared for 10 of the defendants, said: ‘The judgment is the most important so far in the cryptocurrency and blockchain space as its consequences are fundamental to how the underlying technology works within the law.’ A contrary result, he said, would have had a chilling effect on blockchain development.

Oliver Cain, partner at Ontier LLP, which acted for Tulip, said he would seek leave to appeal.

Whatever the outcome, passions across the crypto community – in which it was once boasted that hard mathematics would remove the need to go to law – will continue to rage.