Is the decentralised governance of Bitcoin a myth? Court of Appeal finds real issue to be tried as to whether developers owe fiduciary duties to Bitcoin owners

In the latest development in a line of cases involving Dr Craig Wright, who claims to be the creator of the Bitcoin system, the Court of Appeal has held that there is a realistic argument that Bitcoin developers, while acting as developers, owe fiduciary duties to the true owners of that property, which could include taking active steps to introduce code so that an individual owner's Bitcoin can be transferred to safety: Tulip Trading Limited v Wladimir van der Laan and ors [2023] EWCA Civ 83.

While the effect of the judgment is not to decide whether such a duty exists, in general or in this specific instance, it means that the question will need to be determined at trial, once the relevant facts have been established. If a duty is found to exist, it would in the words of Lord Justice Birss "involve a significant development of the common law on fiduciary duties".

At the heart of the judgment is a debate about the true nature of decentralisation in the context of the blockchain and, particularly, how the role of software developers fits into that. The Court of Appeal identified the key factual question of whether software developers should be considered a large and shifting class who cannot impose changes to the software, because those could be rejected by miners who would refuse to run them, potentially leading to a fork in the blockchain. In its obiter comments, the court suggested that, if the decentralised governance of Bitcoin really is a myth, then there is much to be said for the argument that Bitcoin developers, while acting as developers, owe fiduciary duties to the true owners of that property.

Background

The background to the case is described in more detail in our previous posts linked here and here.

The claimant, TIL (a Seychelles company owned by Dr Wright), claimed to own Bitcoin worth in the region of US$4 billion, which Dr Wright accessed and controlled from his computer and network in England. This access was facilitated by secure private keys, which were lost (and likely stolen) when hackers accessed Dr Wright’s computer in February 2020 and caused him to lose access to the Bitcoin.

TIL claimed that the defendants, open-source software developers who developed the Bitcoin Core and Bitcoin Cash ABC software on a non-commercial basis, owed a fiduciary or (in the alternative) tortious duty to TIL to enable it to re-access the Bitcoin.

TIL sought a declaration that it owned the relevant assets, and orders requiring the defendants to take reasonable steps to ensure that it had access to them, or for equitable compensation or damages. It obtained permission to serve the claim on the defendants out of the jurisdiction on a “without notice” application, in the usual way. Following service, one defendant accepted the court’s jurisdiction over the claims, but the other defendants challenged jurisdiction.

In her judgment at first instance, Falk J (as she then was) held that TIL had not established a serious issue to be tried on the merits of the claim and set aside the order permitting service out of the jurisdiction, and the service itself.

Falk J held that, assuming in TIL's favour that it would be able to establish at a trial the facts on which it relies, nevertheless TIL had no realistic prospect of establishing that it was owed a fiduciary duty of the kind alleged. Falk J also noted that whether the law should be developed in a way that would address all or part of TIL's case is something that could be considered by the Law Commission and, if appropriate, by Parliament.

Decision

The Court of Appeal (Lord Justice Birss, with Lord Justice Lewison and Lord Justice Popplewell agreeing) held that the case advanced by TIL raised a serious issue to be tried, and that therefore Falk J was in error in setting aside service on the relevant foreign defendants.

Approach to the merits test

Birss LJ noted that the merits test in jurisdiction applications (ie whether there is a serious issue to be tried) is the same as the test for summary judgment (ie whether there is a real as opposed to fanciful prospect of success). Referencing Altimo Holdings and Investment Ltd v Kyrgyz Mobile Tel Ltd [2012] WLR 1804, Birss LJ held that where a point of law arises on a jurisdiction application, the same approach applies whether the point of law relates to the merits test aspect or whether there is an applicable "gateway" for service out under the CPR. In either case, the court may decide any legal question arising, though it is not bound in law to do so and it is important to bear in mind the frequent warnings in the authorities against deciding controversial points of law in a developing area on assumed or hypothetical facts.

Grounds of appeal

Permission was given to appeal on six grounds, of which four were considered relevant:

1. this is a developing, complex and uncertain area of law and therefore the point ought to go to trial;
2. the conclusions at first instance were in error because they were based on findings impermissibly assumed against TIL;
3. taking into account the Law Commission project was an error; and
4. Falk J was wrong to hold that TIL had no real prospect of establishing that the claimed fiduciary duties exist.

The Court of Appeal said that ground 1 was best considered as a theme of TIL’s overall submissions rather than a free-standing submission. It rejected ground 3 as the judge had not deployed the Law Commission project as a reason for denying a duty, but rather had accurately observed that if the law should be developed beyond the point the judgment had identified then that was something the Law Commission could consider.

However, the Court of Appeal upheld grounds 2 and 4.

It accepted as a starting point that, per Bristol and West Building Society v Mothew [1998] Ch 1, a fiduciary is someone who has undertaken a role with certain characteristics, such as acting for or on behalf of another in a particular matter and that there is a relationship of trust and confidence. Birss LJ held that the developers had arguably undertaken a role which at least bears some relationship to the interests of others, being the owners of Bitcoin. That was not sufficient to fix the developers with fiduciary duties, but it was an important feature of the circumstances.

Birss LJ acknowledged that the facts of this case were novel and some distance from factual circumstances which the courts have previously examined in the context of fiduciary duties. But while the common law often works incrementally and by analogy with existing cases, if the facts change in a way which is more than incremental, the right response of the common law is not simply to stop and say that incremental development cannot reach that far.

The Court of Appeal's reasoning can be summarised as follows:

• The properties of Bitcoin exist only as defined by software, which (on TIL's case) is solely controlled by the developers. The allegations of control are heavily contested by the developers, who advance their case on decentralisation, but that could not be resolved on a pre-trial application.
• On TIL's case, the developers' role involves the exercise of authority, given to them by their control of access to the source code, and is a decision-making role, on behalf of all the participants in the relevant Bitcoin network, including miners and also including the owners of the Bitcoin. These features, of authority and of discretionary decision making, are common to fiduciary duties (Al Nehayan v Kent [2018] 1 CLC 216).
• It is conceivable that developers could have some kind of duty to Bitcoin owners other than the duty pleaded by TIL, for example a duty not to introduce a feature for their own advantage that compromised owners’ security. That would arguably be considered a fiduciary duty.
• Falk J was wrong, if inadvertently, to accept as a premise the contested fact that the developers are a fluctuating and unidentified body such that owners could not be said to have "entrusted" their property to the developers.
• It would be a significant step to find that the developers owe a positive duty to introduce code to fix bugs drawn to their attention, as well as a duty not to exercise their power in their own self-interest as referred to above, but since the developers have the practical ability to prevent anyone else from doing this, a duty to act in that way is properly arguable. It is arguable that the owners of Bitcoin, because they cannot avoid doing so, have placed their property into the care of the developers.
• It is realistic to say that Bitcoin owners have a legitimate expectation that the developers will not exercise their authority in their own self-interest to the detriment of owners, and that they will act in good faith to use their skills to fix bugs in the software drawn to their attention.
• While there may not be a consensus among Bitcoin owners that a given bug should be fixed in a particular way or at all, a potential lack of consensus amongst owners does not of itself undermine the conclusion that the duty of developers is fiduciary in nature. It rather emphasises the trust that the owners place in the developers to make good decisions on their behalf. Just as trustees occasionally have to make decisions that result in favouring the interests of one beneficiary over another, the differing interests of Bitcoin owners does not preclude the existence of a fiduciary duty owed by developers to the entire class.
• The duty alleged by TIL in this case, to grant access to a hacked Bitcoin wallet when it is established by a court of competent jurisdiction that the true owner is unable to access it because the private key has been stolen, goes even further than the arguable duties referred to above. While the defendants' concern that developers might be exposed to conflicting judgments brought by claimants in different jurisdictions could not be dismissed as fanciful, this could not be a reason why there was not a serious issued to be tried in what would otherwise be a properly arguable case within the court's jurisdiction. This problem would arise whichever court a claim of this kind came before and would (taken to its logical limit) lead to the view that there was no court which could adjudicate the claim. Birss LJ remarked that this argument is not right and "the internet is not a place where the law does not apply".
• The nature of the act required to fulfil the alleged duty is an act of the same kind as the actions the developers undertake to fulfil their ordinary role, i.e. a code update. The only real difference between the activity alleged to be required to fulfil this duty and the normal acts of the developers lies in the circumstances triggering it. The fact that updating software involves a positive step by the developers is not therefore a sound basis for saying there is no realistic prospect of success.

Birss LJ noted that for TIL's case to succeed would involve a significant development of the common law of fiduciary duty. However, he concluded that there was a realistic argument in favour of finding a fiduciary duty along the following lines (noting that not every step would be simple or easy):

• The developers of a given network are a sufficiently well-defined group to be capable of being subject to fiduciary duties.
• Viewed objectively the developers have undertaken a role which involves making discretionary decisions and exercising power for and on behalf of other people, in relation to property owned by those other people.
• That property has been entrusted into the care of the developers. The developers therefore are fiduciaries.
• The essence of that duty is single minded loyalty to the users of Bitcoin software.
• The content of the duties includes a duty not to act in their own self interest and also involves a duty to act in positive ways in certain circumstances.
• It may also, realistically, include a duty to act to introduce code so that an owner’s Bitcoin can be transferred to safety in the circumstances alleged by TIL.

TIL's case therefore raised a serious issue to be tried. Whether there was in fact a duty as alleged should be decided once the facts were established at trial.

See our Techquake series on developments in the world of cryptocurrency here.