Could Blockchain Developers Owe Fiduciary Duties to Their Users?
In the recent case of Tulip Trading v Wladimir van der Laan, the Court of Appeal considered it may be possible for blockchain developers to owe a fiduciary duty to their users.
What Has Happened?
Earlier this month, the Court of Appeal overturned a High Court judgment which had dismissed a case seeking to place legal duties on blockchain network developers for the benefit of blockchain users (Tulip Trading Limited v Bitcoin Association for BSV [2022] EWHC 667 (Ch)). The High Court had concluded that there was no serious case to be tried. Tulip Trading Limited had sought to oblige the developers to write and implement a software patch that would apply to all users of the Bitcoin network and also allow it access to $4 billion worth of cryptocurrencies, the private key to which had been lost in a hack. The claimant prevailed in its appeal.
Background
Tulip Trading Limited ('Tulip'), owned by Dr Craig Wright, is the asserted owner of Bitcoin cryptocurrencies worth approximately $4 billion. Dr Wright is a colourful figure, claiming to be part of the team that created Bitcoin under the pseudonym Satoshi Nakamoto. Access to Tulip's assets were lost as the result of a hack into Dr Wright's personal computer by an unknown party, who deleted the private keys but might not have yet transferred the Bitcoin governed by such keys.
Tulip brought a claim against a number of blockchain developers, being responsible for the software governing the relevant digital currency networks on which the assets are held. It sought to establish that a fiduciary or tortious duty is placed on the developers of the blockchain networks, compelling them to grant Tulip access to its assets by moving them to an alternative online address which Tulip could control. This would directly cut across a core concept of blockchain, that the only way to access or transfer a digital asset is by means of a private key.
Tulip's case is that the role which the developers have undertaken in relation to maintaining a blockchain, as well as the power this gives them to exercise control over the property of others, mean that the developers should be recognised as fiduciaries. If Tulip succeeds when its case is tried, developers would owe duties to the owners of assets on the blockchain. At first, this seems a dangerous precedent to set - why should a small number of developers owe duties to an indeterminable number of blockchain network users, especially when many developers apparently do not receive remuneration?
From evidence of Bitcoin network maintenance and updates, it is arguable that only a limited number of developers has the power to commit software updates for adoption; thus, de facto decision-making is centralised. On the other hand, the parties in charge of validating new items to be added to the blockchain (the miners) could decide not to accept the update and continue to run on the old system, creating a hard fork. Conflicts of interest are conceivable, particularly if developers happen to be in possession, or are short, of coins claimed to be stolen.
The relief sought by Tulip is reminiscent of the hard fork in the Ethereum blockchain in July 2016, initiated by the developers in order to reverse the theft of approximately $50 million of Ether.
The Court of Appeal has allowed Tulip's appeal, unanimously finding that there is indeed a serious issue, of the existence of a fiduciary duty, to be tried.
What Does This Mean?
This decision illustrates an openness to expanding long-established legal principles of fiduciary duty to the new commercial reality of digital assets. If it is later found that such duties do exist, the scope of obligations suffered by digital currency network providers will increase significantly. This could have the unintended effect of stifling innovation in the area, because developers would be worried about liability for changes they make. For example, if a large change is made (such as converting to a proof of stake from a proof of work consensus mechanism, like Ethereum did in 2022) there are bound to be winners and losers in the aftermath; and developers would be concerned about incurring real or asserted liability to those who have lost in the conversion (eg the miners).
Tulip's case will now proceed to trial in the High Court, which will examine the question of the extent to which blockchain developers owe fiduciary duties to their users. Fiduciary duties could be found to range from a negative duty (such as developers not exercising power to further their own self-interests), to positive ones (including fixing bugs in the network which are drawn to their attention - or, as argued by Tulip, to introduce code updates that would transfer stolen or inaccessible Bitcoin to a safe account controlled by the coin's legal owner). If it is successful, Tulip will establish a potential means of redress for those who have had their digital assets stolen or otherwise lost access to them.
Written by Harry Williams and Jonathan Bywater of VWV Blockbusters - VWV's Crypto-Asset Special Interest Group.