Cryptocurrency Insufficient To Satisfy Test For Security For Costs

• Published date: 18 February 2022
• Subject Matter: Corporate/Commercial Law, Technology, Corporate and Company Law, Fin Tech
• Law Firm: Herbert Smith Freehills
• Author: Mr Philip Lis and Olivia Odubanjo

In granting security for costs against a claimant company owned by Dr Craig Wright (who claims to be the creator of the Bitcoin system) and his family, the High Court has refused to allow the security to be paid in Bitcoin as that would not result in protection equal to a payment into court or first class guarantee: Tulip Trading Limited v Bitcoin Association for BSV [2022] EWHC 2 (Ch) and [2022] EWHC 141 (Ch).

This judgment marks an important step in a case that could be of vital interest to cryptocurrency holders and developers. At the centre of the substantive claim lies the question of whether an owner of cryptocurrency has any recourse against the developers of the cryptocurrency systems if they lose control of cryptocurrency, either accidentally or due to a hacking incident. It brings to the fore the question of the nature and scope of any fiduciary duty on the part of developers either to restore access, or at least take all the necessary steps to do so.

One of the defendants in this case, the BSV Bitcoin Association, released a statement that the "digital currency and blockchain industry should strive to develop technical mechanisms and industry best practices to provide remedies, upon valid proof of ownership and with judicial due process, to restore control of lost or stolen coins to their rightful owner - just as there are remedies available for any asset or property (physical, digital, intangible or otherwise)."

The statement further mused that the introduction of such solutions would only build trust in Bitcoin and may lead to its wider adoption. It could be seen as a stepping stone towards building an honest and transparent "lawful digital currency ecosystem". The Association does not, however, accept that the defendants owed the claimant company the duties alleged in this case.

This is, to our knowledge, the first time a party to litigation has sought to offer Bitcoin as security for costs. The court's principal focus in refusing to allow the use of cryptocurrency was on Bitcoin's volatility, rather than the principle of using non-fiat currencies as security for costs. It would be interesting to see what the court would do if a claimant offered security in the form of a more substantial deposit of cryptocurrency, or a stablecoin (a non-fiat currency specifically designed to have a relatively stable price, typically backed by a reserve asset like a government issued currency).

Background

The applications were filed by the defendants to seek security for the costs of their jurisdiction applications, where they challenged a court order permitting that they be served the claim documents despite being domiciled outside the court's jurisdiction.

Dr Wright (through the claimant Seychelles company) claimed to own Bitcoin worth in the region of US$4.5 billion, which he...