Bitcoin network developers may owe fiduciary duty to users
In a recent decision, the Court of Appeal held that the developers behind various bitcoin networks may owe fiduciary duties to owners of bitcoin held on their networks. Some market participants will understandably be alarmed by the potential implications of this. However, though the Court has opened the door to the existence of such duties, the legal position will only be decided after a full trial on the merits.
The High Court previously rejected the existence of a fiduciary or tortious duty.
In March 2022, the High Court declined Tulip Trading Limited (“Tulip”) permission to serve out of the jurisdiction on the developers behind various bitcoin networks (see our previous post for a summary of the facts and the judgment). In doing so, Mrs Justice Falk rejected the argument that the software developers owed a fiduciary or tortious duty to restore access to cryptoassets by implementing a software “patch”.
The Court of Appeal has now re-opened the door to such a duty.
The Court of Appeal reversed the decision of Mrs Justice Falk. Lord Justice Birss (with whom the other judges agreed) held that, on Tulip’s case, there was a realistic argument that the developers owed a fiduciary duty as they were a sufficiently well-defined group of people who (it was assumed for the purpose of this hearing) control the bitcoin software and make discretionary decisions on behalf of people in relation to property (i.e., in this case, bitcoin).
While Birss LJ recognised that recognition of a duty of care would require a significant (rather than an incremental) development of the common law, he also said that “I do not believe the right response of the common law is simply to stop and say that incremental development cannot reach that far.” Importantly, the Court of Appeal did not find that the fiduciary duty contended for by Tulip exists, merely that it was arguable that it could. At this early stage, the Court found that there are unresolved factual matters, and it could not rule out Tulip’s case without hearing the matter at a full trial.
Whether network developers owe any fiduciary (or tortious) duties to users, and the scope of those duties, will be hotly contested, and Tulip has a challenging road ahead if the matter gets to trial. The most obvious issue the Court will have to grapple with is exactly how a fiduciary or tortious duty should work in this context, were it to apply. Who owes the duty? To whom? And in which circumstances? What is its scope? These questions are particularly challenging to address in a decentralised environment, where, for example, participants are not legally bound to continue performing their roles and where there is likely to be an evolving pool of potential beneficiaries, often with conflicting interests.
There are also several other practical considerations that are unique to a decentralised or blockchain environment. For example, whether it is possible to create a simple patch argued for by Tulip; whether Bitcoin network participants (and in particular miners) will accept whatever patch the developers may be required to issue; whether a fiduciary relationship will open the floodgates for claimants who have been hacked (or lost their private keys); and whether this could potentially undermine the property status of bitcoin (which relies on a set of arrangements that allows one party to spend the asset to the exclusion of all others, including any administrator).
Whether the door remains open following trial is a separate question
While the Court of Appeal’s judgment has the potential to upend the dynamics between network developers and the participants on their networks from a legal perspective, this is just the first judicial step towards properly considering the question. At this stage, it’s clear that the Court recognises that this is a developing area of the law that justifies the rigour of a full trial before ruling on novel duties of care.