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English Court Decision Sheds Light on Software Developers Legal Relationship and Duties Owed to Cryptoasset Owners

Linklaters | | Jun 27, 2022

English court decision - English Court Decision Sheds Light on Software Developers Legal Relationship and Duties Owed to Cryptoasset OwnersThe judgment in Tulip Trading Ltd v Bitcoin Association for BSV and Others sheds light on the legal relationship between the software developers behind various bitcoin networks and their participants. Notably, the court found that there was no case to be made that the developers had a duty to take action to undo the effects of an alleged theft. At the same time, the possibility of other legal duties falling on developers in the future was left open. Players in the crypto markets should be cognisant of this position, amid ongoing market turmoil.

The decision 

Earlier this year, the High Court denied a prominent bitcoin holder, whose private keys to substantial holdings were allegedly taken in a cyber-attack, the right to serve a legal claim on a group of developers for failing to take action to restore the lost value into the claimant’s hands.

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The case was brought by Tulip Trading Ltd (“Tulip”), which claimed that the defendants were the core developers behind various bitcoin networks and/or otherwise controlled the relevant software, and that they owed the claimant fiduciary and/or tortious duties to rectify the “theft” of private keys by writing and implementing a software “patch” that would restore Tulip’s access to the bitcoin assets. In setting aside permission to serve the claim out of the jurisdiction, Mrs Justice Falk held that there was no serious issue to be tried on the merits of the claim. Last month, Falk J also declined Tulip leave to appeal.

No fiduciary and tortious duties – for now

Falk J rejected the argument that the software developers owed the claimant a fiduciary duty. In particular, she noted that the defining characteristic of a fiduciary relationship is the obligation of undivided loyalty, and if the claimant’s argument were accepted, the steps that the defendants would have to take would be for the claimant’s benefit alone, to the exclusion of other users, to whom the defendants would also owe the same duty and who would have a legitimate complaint against the defendants.

Bitcoin networks are not financial institutions 

Tulip argued that bitcoin networks “could be equated with financial institutions”, in the sense that “[f]unds were being entrusted to controllers of the Networks, who profited from their activities, and public policy required the imposition of a corresponding duty of care”, and therefore a duty of care similar to the duty of care on banks established in Barclays Bank v Quincecare [1992] 4 All ER 363 should be imposed on bitcoin networks.

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Falk J was not persuaded by the argument: in particular, she noted that the starting point for the Quincecare duty of care is the relationship of contract and agency between the bank and its customer. It is interesting that such arguments seen in the more traditional financial sphere were being deployed in the context of a decentralised network with no contractual framework, and the court’s rejection of the direct analogy should be welcomed.

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NCFA Jan 2018 resize - English Court Decision Sheds Light on Software Developers Legal Relationship and Duties Owed to Cryptoasset OwnersThe National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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