Is there a trust relationship between crypto owners and the software developers? If there is – and a definitive ruling is expected on this question – bitcoin and other crypto owners will have greater legal rights to take action if defrauded.
Cryptocurrency – particularly bitcoin – is thriving after a difficult patch. As its popularity continues to gain momentum through 2023, so do the potential risks. Crypto hacks by malicious actors and cyber criminals have already stolen millions of dollars’ worth of bitcoin and Etherium over the past year or so, leaving investors and owners with limited remedies.
However, we now have a noteworthy preliminary ruling1 on the relationship between crypto owners and network developers, particularly whether a fiduciary duty exists. The ruling was handed down by the Court of Appeal in the UK and is important for the courts in the Bahamas.
What is a fiduciary?
A fiduciary is someone undertaking a role with certain key characteristics: the role involves acting for or on behalf of someone else (‘the principal’) in a particular matter; and a relationship of trust and confidence exists between the them. Importantly, the distinguishing obligation of a fiduciary is that of loyalty. This means the fiduciary must act in good faith; must not profit from the position of trust; or place themselves in a position where there may be a conflict between their duty and interest.
Finally, unless the fiduciary has the principal’s consent, thy must not act for their own benefit or the benefit of a third person.
What’s the background?
A bitcoin owner (Tulip Trading Ltd) owned around US$4 billion in bitcoin, held at two addresses on the blockchain; and the private keys to it were lost in a hack – probably stolen. Tulip contended that the developers control and run the blockchain network and could simply reinstate its rightful control of the bitcoin, by providing a key to a new address.
Particularly, Tulip’s argument was based on fiduciary duty. It claimed that as developers, their role and power means they should be recognised as a new ad hoc class of fiduciary, owing fiduciary duties to the true owners of bitcoin cryptocurrency. On the basis that there is a fiduciary duty between the developers and Bitcoin owners – the developers were breaching their duty in failing to restore Tulip’s control of the crypto.
The developers denied having anything like the power or control Tulip claimed; and that such duties would be highly onerous and unworkable.
The court found that it was clearly arguable that the developers had undertaken a role that at least bore some relationship to the interests of other people, ie the bitcoin owners. But that in itself was not enough to “fix” them with fiduciary duties.
The fiduciary relationship argued by Tulip was “new and quite a long way from factual circumstances which the courts have had to examine before in the context of fiduciary duties”, although there are no closed categories of fiduciary relationships.
Even so, the CA said that for Tulip’s argument to succeed, a significant development of the common law on fiduciary duties would be involved. There is a “realistic argument… [that] the developers of a given network are a sufficiently well-defined group to be capable of being subject to fiduciary duties”.
The essence of such a duty is “single minded loyalty to the users of bitcoin software” – a duty that could include a duty to introduce code so that an owner’s bitcoin can be transferred to safety where it is hacked or stolen.
Once the facts in this case are established, the court can then rule on the fiduciary duty argument. We will report once again when a further ruling is issued.