Cryptocurrencies and other cryptoassets such as NFTs have exploded in popularity in recent years. As a new and rapidly evolving asset class, they raise a variety of novel legal issues. The English Courts have reacted positively and there is now a growing body of caselaw confirming that longstanding English law property principles apply to cryptoassets.

This article reviews the trends arising from the key decisions to date.

How are cryptoassets defined in the UK?

The UK’s Financial Conduct Authority has defined cryptoassets as “cryptographically secured digital representations of value or contractual rights that use some type of distributed ledger technology (DLT) and can be transferred, stored or traded electronically”. In practice, this is likely to cover any cryptocurrencies using blockchain protocols, as well as non-fungible tokens (NFTs).

Does English law recognise cryptoassets as property?

Yes. In Robertson v Persons Unknown [2019], the claimant had been victim to a ‘spear-fishing’ attack in which he was deceived into sending 100 Bitcoin from his Coinbase account to a fraudster. The Court accepted that he had a proprietary claim and granted an asset preservation order over the stolen Bitcoin, finding that there was a serious issue to be tried.

Shortly after this decision, the UK Jurisdiction Taskforce of the LawTech Delivery Panel declared in a ‘Legal Statement’ that cryptoassets can, in principle, be treated as property. While this statement is not legally binding, it is likely to form a persuasive starting point for future cases, some of which we summarise below. More info

In AA v Persons Unknown [2019] EWHC 3556, the High Court found that the analysis in the UK Jurisdiction Taskforce statement was “compelling” and should be adopted by the Court. In this case, an insurer was the victim of a malware ransom demand in which its systems were encrypted by hackers who demanded the equivalent of US$ 1.2m in Bitcoin in exchange for the decryption tool. The ransom was paid and an investigation determined the identity of the recipient of the Bitcoins. The claimant sought a proprietary injunction to recover the Bitcoin.

The Judge found that cryptoassets such as Bitcoin constitute property capable of being the subject of a proprietary injunction. Crucially, Bitcoin was found to meet the four criteria set out in Lord Wilberforce’s seminal definition of property in National Provincial Bank v Ainsworth [1965] 1 AC 1175. More info

Are cryptoassets a “chose in action”?

In Fetch.ai Ltd and another v Persons Unknown Category A and others [2021] EWHC 2254 (Comm), the Court confirmed that cryptoassets are a “chose in action” (a type of property right) and granted a proprietary injunction, a worldwide freezing order and various disclosure orders.

In this case, Fetch.ai alleged that fraudsters had accessed its cryptocurrency accounts on the Binance exchange and executed several trades at a significant undervalue, causing Fetch.ai losses exceeding US$2.6 million. The Court was satisfied that the stolen cryptocurrency was property under English law and that it was a “chose in action”, i.e., an asset in respect of which it is not possible to take physical possession of the asset, but over which securities and rights may be granted. More info

Can cryptoassets be held on trust?

In Wang v Derby [2021] EWHC 3054 (Comm), the Court considered whether a trust might apply over cryptoassets in the context of a summary judgment application. This dispute concerned two related contracts under which the parties exchanged specified quantities of two types of cryptocurrency (Tezos and Bitcoin), with the option to repurchase the exchanged cryptocurrencies at a later date. There was a dispute after the claimant sought to exercise his option, but the Defendant did not sell-back the Tezos.

The Court held that the bilateral exchange and obligatory re-exchange on demand constituted a sale and buy-back arrangement, which precluded any trust arising (as there was no surviving ownership in the traded cryptoassets). Whilst the Court did not find the existence of a trust in that case, it made clear that, in principle, there was no reason why cryptoassets could not be held on trust like any other property. More info

What happens if my cryptoassets are stolen?

Recent case law shows that the Courts will grant traditional asset preservation remedies to parties who are victims of crypto fraud.

For example, in Robertson v Persons Unknown [2019], the Court granted an Asset Preservation Order which prevented any dealings with the stolen Bitcoin, as well as a so-called ‘Bankers Trust’ Order requiring the currency exchange (Coinbase) to disclose the identity of the owner of the wallet which held the stolen Bitcoin. Notably, the orders were made against “Persons Unknown” as the Claimant was unable, without the ‘Bankers Trust’ Order, to identify the potential Defendants.

The Court also granted a ‘Bankers Trust’ Order in Ion Science Ltd v Persons Unknown and others [2020] (unreported), allowing the claimant to identify the company owning the account that was used to execute a fraud against the claimant. The order revealed that the account contained cryptocurrency and cash. The Court then made a Third Party Debt Order in favour of the claimant, allowing it to recover its losses from the account.

The English Courts have also granted numerous freezing orders and other injunctions in relation to cryptoassets which have been fraudulently misappropriated. In Danisz v Persons Unknown [2022] EWHC 280 (QB), the High Court granted the claimant an interim proprietary injunction and a worldwide freezing order, among other orders, against persons unknown. The Court noted that this was a case of exceptional urgency because “This is a form of transaction whereby, at the click of a mouse, an asset can be dissipated".

What about international disputes – does English law apply?

In Ion Science, the English Courts found that the governing law of a cryptoasset was the place where the person, or company, who owned it was domiciled.

This case related to an Initial Coin Offering fraud. Ion Science applied to serve a ‘Bankers Trust’ Order out of the jurisdiction on two cryptocurrency exchanges. The Court had to consider whether English law applied. It decided that the governing law of cryptocurrency is where the person, or company, that owns the asset is domiciled. This reasoning was subsequently followed in Fetch.ai Ltd.

Can cryptoassets be used as security for costs in litigation?

In Tulip Trading v Bitcoin Association BSV and others [2022] EWHC 2 (Ch), the High Court rejected a claimant’s proposal to post security for the defendant’s costs by transferring Bitcoin to its solicitors. The Court found that Bitcoin was too volatile to meet the test for adequate security.

Tulip had proposed to transfer Bitcoin to the value of the security ordered to its solicitors, plus a 10% buffer to address volatility in the value of Bitcoin, with a mechanism by which Tulip could top up the amount in the event of significant market volatility exceeding the 10% buffer.

The Court declined to permit security to be posted in the proposed manner on the basis that “a fall in value of Bitcoin…could result in their security being effectively valueless”. As a result, it could not be said that the proposed security would result in protection to the Defendants equal to a payment into Court or provision of a first-class London bank guarantee (which is the required standard).

As a result, it seems unlikely that English courts will accept Bitcoin or other cryptocurrencies as acceptable security for costs, unless an acceptable mechanism can be used to address price volatility. More info

Do crypto network owners or developers owe tortious or fiduciary duties to bitcoin users?

In a further judgment handed down in March 2022 in the Tulip Trading dispute, referred to above, ([2022] EWHC 667 (Ch)), Mrs Justice Faulk overturned the permission granted to the claimant to serve its claim out of the jurisdiction on the basis that the claimant could not establish that core developers of Bitcoin networks owed tortious or fiduciary duties to the claimant, a company partly owned by Craig Wright (who claims to be a creator of Bitcoin).

The claimant, Tulip Trading, alleged that it owned Bitcoin worth approximately $ 4.5 billion but that, as a result of a hack, it was unable to access it. Tulip claimed that the defendants were the core developers with control over the blockchains and networks in which the Bitcoin was held, and that they could write code to grant the claimant control over the Bitcoin. The claimant argued that the defendants owed tortious and fiduciary duties to the claimant which obliged them to write such code.

The Court declined to find that Tulip would be able to establish that the defendants owed either tortious or fiduciary duties to the claimant:

  • In the case of tortious duties, the Court held that, given the loss was purely economic, no common law duty of care could arise unless there was found to be a “special relationship”. It was not arguable that there was a special relationship to safeguard against pure economic loss. Such duties would be owed to a potentially unlimited class and be so open-ended as to be untenable.
  • It was also not arguable that fiduciary duties were owed given that, among other reasons, the distinguishing feature of a fiduciary relationship is “undivided loyalty” owed by the fiduciary to the subject. It was not arguable that such undivided loyalty applied in the case of the relationship between cryptocurrency developers and blockchain users. For example, the steps Tulip wanted the defendants to take would not be to the benefit of all users of the blockchain and would in fact likely cause detriment to other users.

Mis-selling of crypto-assets

In January 2022, the UK Government announced that it was planning to strengthen the rules on cryptoasset advertising to protect consumers from misleading adverts. In its consultation response[1], it confirmed that advertisements featuring certain cryptoassets would be brought within the financial promotion regime, which is intended to address risks to consumers from marketing by non-authorised firms.

The Government’s Cryptoasset Taskforce found that “misleading advertising and a lack of suitable information was a key consumer protection issue in cryptoasset markets.” In addition, findings from the FCA “suggest that ownership [of cryptoassets] has risen, while the level of understanding of cryptoassets appears to be declining, suggesting that some holders may not fully understand the risks involved.” These comments are noteworthy as the UK Government recognises that cryptoasset ownership is becoming more mainstream and consumer investors could now be targets for fraud or misrepresentation.

UK Crypto Hub

In early April 2022, HM Treasury announced plans to make Britain a global hub of cryptoasset technology and investment. The measures include:

  • steps to regulate so-called ‘stablecoins’ (cryptoassets pegged to a traditional fiat currency such as the US Dollar in order to maintain a stable value) to enable their use in the UK as a recognised form of payment;
  • establishing a Cryptoasset Engagement Group to work more closely with the crytpo industry;
  • introducing a ‘financial market infrastructure sandbox’ which is intended to help firms “experiment and innovate”. The ‘sandbox’, which should be up and running by 2023, will allow firms to experiment with modifications to existing legislation, rules and standard where they act as a “barrier to adoption” with a view to the Government and regulators understanding what changes to legislation are necessary;
  • exploring ways of enhancing the competitiveness of the UK tax system to encourage further development of the crypto market; and
  • working with the Royal Mint on an NFT as a sign of the “forward-looking approach” that the UK Government is “determined to take”.

The announcement shows that the UK Government intends to welcome crypto firms and initiatives to the UK with open arms and that it considers that cryptoassets will play a part in financial markets in years to come. The detail, however, is perhaps rather less compelling. The proposed NFT will attract attention but will not have any impact on financial markets. Stablecoins are pegged to a traditional currency such that the announcement does not, for example, herald the acceptance of non-stablecoins such as Bitcoin as a form of payment. In addition, the sandbox does not guarantee that the Government or regulators will introduce changes to legislation, rules and standards to meet the demands of the crypto sector. Nevertheless, the announcement is likely to increase mainstream acceptance of cryptoassets within the financial sector, and further Government and regulatory initiatives will no doubt follow over the months and years to come.

In a rapidly developing space, the English courts and the UK Government have shown their willingness to grapple with novel legal issues raised by cryptoassets. English court judgments to date confirm that cryptoassets are property in the legal sense and that the Courts can deal with ownership disputes and protect victims of fraud. Claimants have a range of tools to deal with cryptoasset fraud, including worldwide freezing orders, ‘Bankers Trust’ orders and third party debt orders. The UK Government has also stated that it is open for business and seeking to attract crypto firms with open arms.

We expect to see further developments in the case law extending the legal mechanisms available to victims of fraud or otherwise to those involved in crytpo disputes. We also expect to see an increase in disputes relating to securities or rights granted over cryptoassets, given the Court’s confirmation that cryptoassets may be classed as a “chose in action”. Finally, we expect additional regulatory oversight as cryptoassets become an increasingly mainstream asset class.