Tulip Trading Limited ("Tulip Trading") claims that it is the owner of digital assets worth some $4.5 billion but after an unknown party hacked the computer of its CEO in 2020, the private keys which enabled Tulip Trading to access and control the digital assets were lost.
Tulip Trading brought a claim in the High Court against the developers associated with the blockchain networks on which its digital assets are held, claiming that as the developers effectively control and run the blockchain networks, they owed its users fiduciary or tortious duties to assist them in regaining control of their property.
Bitcoin, as well as other major cryptocurrencies, use private keys to authenticate the owner of the digital assets. A cursory internet search will reveal countless horror stories of individuals who have lost, or have had stolen, private keys to extremely valuable digital assets, leaving them unable to access or use these assets, with no mechanism for restitution.
Tulip Trading put to the Court that the blockchain software developers would easily be able to assist its users recover and safeguard their assets by implementing a "software patch". Tulip Trading's case is that the developers should be obliged to do so to comply with their legal duties or should be liable to pay damages in compensation.
The High Court summarily dismissed the claim, finding that Tulip Trading had no realistic prospect of establishing that the software developers owed them any fiduciary duty of this nature. Tulip Trading appealed this decision, and the case was heard in the Court of Appeal in December 2022.
The Court of Appeal's Judgment
The Court of Appeal unanimously voted to overturn the judgment of Justice Falk, having evaluated the merits of Tulip Trading's case, and ruling that there was in fact a "serious issue to be tried".
In reaching its decision, the Court considered the extent to which the software developers had assumed a position of responsibility in their role and whether their relationship with the owners of the digital assets was one of trust and confidence. Tulip Trading maintain that such a relationship exists and can be demonstrated by how the developers would react if a bug was to be identified in a blockchain network's software. Their argument is that the developers would make the decision on behalf of its users to update the source code of the network to remove the bug, and the users would update their computers' software accordingly to continue using the network.
The developers deny that they have any such power or control over the software like Tulip Trading alleges. They point to the concept of decentralisation, which is considered fundamental to the operation of blockchain networks, claiming that if they were to introduce any such changes to the software, the other users could simply refuse to run the update. The developers argue that the decentralised nature of the blockchain network is incompatible with the existence of fiduciary duties, particularly as the developers are "part of a very large, and shifting, group of contributors without an organisation or structure".
Justice Falk accepted the defendant developers' characterisation of the blockchain networks as decentralised with scrutiny, stating "I do not think that bitcoin owners can realistically be described as entrusting their property to a fluctuating, and unidentified, body of developers". The Court of Appeal agreed with Tulip Trading that this was a ground for appeal, as the extent to which blockchain networks are truly decentralised is highly contested by experts. The Court of Appeal found that this point should not just have been assumed by Justice Falk to be fact, but instead should be determined on evidence at trial.
The Court of Appeal also questioned the High Court's finding that there was a fundamental conflict between Tulip Trading's case and the obligation of undivided loyalty, which is a defining characteristic of fiduciary relationships. The High Court had found that Tulip Trading's case relied on the existence of a fiduciary relationship between the developers and the owners of digital assets, but this was undermined by the fact that Tulip Trading was demanding the developers take steps for its own benefit, rather than for the benefit of all the networks' users. Justice Falk determined that Tulip Trading's case was not consistent with the duty of a single-minded loyalty owed to the other users and therefore ruled that Tulip Trading could not realistically argue that a fiduciary duty should be established.
The Court of Appeal disagreed with this analysis after exploring whether the software developers owed any form of duty to their users in principle. Its judgment considered it arguable that a positive duty exists for the developers to introduce code to fix bugs in the software which are drawn to their attention. The Court of Appeal considered that if this positive duty was found to exist it would undermine the defendants' case about competing interests and undivided loyalty. It pointed out that with fiduciary relationships, it is sometimes necessary for a trustee to make decisions which have the result of favouring one beneficiary over another. The fact that the software developers could be expected to make decisions on behalf of its users as a class, where there may not be a consensus among that class on how to act, is evidence of the users placing trust in the developers to make good decisions on their behalf. It found that by the same logic even if the decision was only for the benefit of one owner, as in Tulip Trading's case, it does not preclude it from being a fiduciary relationship.
The Court of Appeal concluded by recognising that the success of Tulip Trading's case would require a significant development of the common law of fiduciary duties, but the fact that this is such "a developing, complex and uncertain area of law" makes it necessary to be heard at trial.
The Impact of the Decision
If Tulip Trading are successful in its case, this would set a remarkable precedent that the blockchain developers owe a fiduciary duty to their users who are victims of cyber fraud and digital hacks. The software developers will be obliged to provide assistance to their users who have had their digital assets stolen, to help them trace and regain access to their property or will be liable to pay compensation. Any such decision would be ground-breaking for the digital market and the final judgment on this case will be of great interest to both crypto investors and the developers who may, for the first time, find themselves owing legal duties to the users of their networks.
Tulip Trading's original case was that the software developer's breach of fiduciary duty would occur when a user raised a claim with the developers, but the developers failed to take action. Tulip Trading amended its pleadings so that the case heard by the Court of Appeal, was that the duty would only arise where a Court with competent jurisdiction ruled that a user's digital assets had been stolen. A successful result at trial for Tulip Trading would therefore only set a direct precedent that software developers owe fiduciary duties to victims of cyber fraud in this narrow set of circumstances. However, the novel decision that the blockchain developers owe any sort of duty to their users will inevitably result in further claims being brought to Court to explore the extent to which the developer's legal duties extend.
The extent to which blockchain networks truly operate on a decentralised system will be key to both the defendant and claimant cases once this matter proceeds to a substantive trial. The English Court's scrutinisation of the decentralised model will be of great interest to the wider crypto sector, where this has been the subject of extensive debate for years. A decision by the Court in Tulip Trading's favour would provide significant recognition to the argument that the decentralised model is only an illusion, and the software developers hold a position of power and responsibility for their users. As concluded by the Court of Appeal: "if the decentralised governance really is a myth, then… there is much to be said for the submission that bitcoin developers, while acting as developers, owe fiduciary duties".
