Cryptocurrencies

Are cryptocurrencies a valid form of security? Tulip Trading Ltd c. Bitcoin Association for BSV & Ors examines this question | Denton

Are cryptocurrencies a valid form of security?  Tulip Trading Ltd c.  Bitcoin Association for BSV & Ors examines this question |  Denton

What were the main issues in this case?

This case deserves attention for two main reasons. First, it usefully recalls the legal principles applicable to the security deposit. The second controversial aspect of this case concerns the proposed form of security – a cryptocurrency. Was the court prepared to accept this?

What were the facts?

In 2021, Tulip Trading Limited, a Seychelles-registered company, filed lawsuits against several software developers. The court ordered Tulip to provide security for costs relating to the claim against the defendants.

Tulip serves as a holding company, beneficially owned by Dr. Craig Wright, who claims to be the creator of Bitcoin under the pseudonym “Satoshi Nakamoto”.

Tulip seeks access to a Bitcoin wallet allegedly owned by Dr. Wright. Dr. Wright lost access to the wallet following an alleged hack on his computer and network in England, which resulted in the loss of the wallet’s private keys. Tulip seeks access to over US$4.5 billion worth of Bitcoin and other cryptocurrencies.

What is the basis of the claim?

The claim centers on Tulip asserting that the defendants have certain fiduciary (and/or tort) obligations to rewrite the relevant cryptocurrency software and systems to enable Tulip to access the affected cryptocurrencies. The defendants argue that they had no such obligations.

Why was a fee deposit required?

Defendants requested security for costs, noting that in January 2022, the court determined that there was no evidence of Tulips’ assets and therefore it was necessary for Tulip to post security for costs. The court also noted that Tulip was a holding company, stating that Tulip had no bank accounts and had no clients and noted that Tulip had not filed tax returns or business accounts in the past. .

The judgment therefore focused on Tulip’s lack of evidence of its ability to post a guarantee for costs (including that it was “impracticable” for Tulip to obtain a guarantee from a bank as security and that in order to provide security, Tulip would have to exchange digital assets for British pounds; and this would give rise to a certain tax liability). Therefore, it did not help Tulip that it failed to provide evidence as to its overall financial situation, with the court noting that the plaintiff had not suggested that its claim would be stifled if a bond of the usual type was ordered.

This case cited Sarpd Oil vs. Addax [2016] EWCA Civil 120 (Sarpd), noting that this case falls within the requirements set out in the Sarpd judgment. Indeed, Tulip had had the opportunity to demonstrate that it could pay the costs of the defendants, but that it had not done so. The court decided that Tulip had failed to demonstrate its ability to pay and ruled that in such circumstances Tulip could be said to have been willfully reluctant. The guarantee was therefore ordered on the grounds that there was reason to believe that Tulip would not be able to pay the costs if ordered to do so.

What are the principles of security deposit?

  • This case is a good reminder for plaintiffs not to seek to rely on the defendant’s lack of evidence as to whether the plaintiff has sufficient assets. The judgment includes a helpful summary of the legal principles applicable to the security deposit. In particular, the court notes that there remains no suggestion by Tulip that the claim would be stifled if a bond of the usual type were ordered.
  • The court cited the case of Infinity Distribution Ltd (under administration) c. Khan Partnership LLP [2021] EWCA Civ 565 under which the Court of Appeal set out the principles to be applied in determining the form of security to be ordered where the plaintiff offers another form of security that is not the usual payment into court, including that the The tribunal’s task is to “weigh the respective pros and cons and strike a fair balance between the interests of the parties”, and this balance between pros and cons “is likely to be the paramount consideration”.

What did the court say about cryptocurrencies?

The case also tells us something very new: a first in an English court.

Tulip then offered to provide security using the Bitcoin cryptocurrency. In particular, the proposal provided that the amount of Bitcoin to be presented as collateral corresponded to the value of the security required by the court, plus a “buffer” of 10%, all to be transferred to Tulip’s lawyers. This would then be followed by written confirmation of the transfer provided.

The reason for the “buffer” offered by Tulip was an attempt to address the fact that Bitcoin is experiencing high market volatility. Additionally, the draft order prepared by Tulip’s legal representatives provided a mechanism to “top up” Bitcoin’s value to meet the required security value.

The court rejected Tulip’s new proposal to post crypto-assets as collateral. This rejection was based on the fact that crypto-assets are highly volatile, so they fail the security test. In fact, the judgment noted that Tulip had accepted during the proceedings the high level of volatility in the value of Bitcoin. The court relied on the judgment of World Petroleum SA c. Westernzagos Ltd (HC, 2015) (World Oil) in which it was held that:

“It is conventional to order that security be given either by payment into court or by the posting of a guarantee from a first class London bank. This practice recognizes that security must be in a form which enables the defendant to recover the costs awarded in his favor at trial out of readily available funds, so that there is little risk of delay or failure to enforce.Although bail may be ordered in an alternative form, that form should be such that it fulfills the same function, so as to allow the simple and rapid enforcement of an order for costs from a solvent source In practice, any alternative form of guarantee must be such that it can be considered rightly so in this respect as at least equal, if not superior, to security by consignment or provision of a first class bank guarantee in London.”

Applying the principles of Monde Petroleum, the court did not accept security in the form of crypto-assets as proposed by Tulip. The judgment described that Tulip’s proposal “would not result in protection for defendants equal to court payment or first-class warranty.” The court went on to note that Tulip’s proposal would expose the defendants to a risk that they would not be exposed to with the usual forms of security, namely a reduction in the value of Bitcoin, “which could result in their security is effectively worthless”.

What are the implications of this decision?

This decision is considered the first attempt to release security in the form of crypto-assets.

Bitcoin first appeared in 2009, and with its growth has come the emergence of other cryptocurrencies which, although widely derided by many, and still complex for investors, have gained popularity and recognition by Governments. Investing in cryptocurrencies comes with many challenges, including technical difficulties, and there has been high volatility and fluctuating valuations. The case itself cites “the high level of volatility in the value of Bitcoin”.

The judgment notes that the additional provisions proposed by Tulip did not fully address the risk of market volatility. Indeed, there was no guarantee that Tulip would comply with the terms of the order, and so there would be “a substantial risk that performance of the obligation could not be achieved before judgment in the claims for jurisdiction “.

Crypto-assets may in the future be able to pass the legal security test. For example, there may be a proposal for a significantly larger buffer or the use of AI or other computer technology related to reducing volatility and providing a reload mechanism that offers a better security.

In the meantime, the biggest question raised by this case is not just whether cryptocurrency is a valid form of security but, in light of the decision, whether it is in fact a form of valid currency.

Case: Tulip Trading Ltd c. Bitcoin Association for BSV & Ors (Rev 1) [2022] EWHC 141