Blimey! Brits leading the charge again on crypto developers’ duty of care

12 October 2022
Matthew Bode, Partner, Brisbane

It is no secret that the world’s regulators continue to develop laws and regulations relating to cryptocurrency. A recent decision of the English Court of Appeal (Court of Appeal) considered the duty of care of developers of an open-source bitcoin software system. The outcome has the potential to help integrate crypto into our society or alter the fabric of crypto altogether.

Background

On 25 March 2022, Justice Falk of the High Court provided her judgement on the case of Tulip Trading Ltd v Bitcoin Association for BSV & others. The judgement dismissed a claim that 16 developers of open-source bitcoin software (collectively, the defendants), owed any duty of care to users of their open-source system.

Dr Craig Wright of Tulip Trading Ltd (TTL), sought to force the defendants to write software ‘patches’ which would enable the recovery of a stolen ‘fortune’. While unrelated hacks on Tulip’s crypto wallets caused the assets to be stolen, Wright argued that as the defendants chose the software, they ‘controlled’ the bitcoin network and were therefore liable. In opposition, the defendants highlighted that Wright’s claim ‘goes against the core values of bitcoin as a concept’, which is anonymous and without localised control.

In finding against the existence of a fiduciary duty, Justice Falk found that:

  1. software developers are a fluctuating body of individuals. As such, it could not be argued that they owe continuing obligations to remain as developers and make updates whenever it is in the best interest of owners of crypto assets; and
  2. the developers were not in a breach of a duty of care for failing to provide the means to recover stolen private keys in their software.

The High Court’s finding was applauded within the crypto community. The judgement clarified how cryptocurrency and blockchain could operate in tandem with the traditional law, while promoting new law and innovation.

The Appeal

Lady Justice Andrews of the Court of Appeal granted TTL permission to appeal Justice Falk’s decision handed down in the High Court. The Court of Appeal will now examine the question of whether developers of cryptocurrencies and other blockchain-assets owe a duty of care to investors using their technology.

In granting the appeal, Lady Justice Andrews alluded to consideration of whether a duty of care should be imposed and if so, the nature and scope of such duties. A proper examination and determination by the Court of Appeal will provide necessary clarity as a landmark case altering the course of crypto-regulation across the globe. The Courts have the unenviable task of balancing the rights of users of open-source software, protecting society, and opening the doors to future technological revolutions, creativity, and business.

The Regulators

The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) touched on this issue, by imposing the first-ever smart contracts sanction. On 10 August 2022, following the OFAC’s sanctions, Dutch authorities arrested the alleged developer of Tornado Cash (a decentralised protocol). The protocol had been used to launder over $7 billion in cryptocurrency and $455 million in stolen cryptocurrency, making this the largest decentralised finance (DeFi) hack on the Ronin Network.

The sanctions are one of latest examples of the ongoing regulatory ‘crackdown’ in the cryptocurrency environment. Clearly, the U.S. government is willing to hold developers accountable for unlawful activity that occurs on platforms, irrespective of the decentralised nature. One may query the jurisdictional arguments behind this stance (an argument for another time).

If Justice Falk’s decision is repealed, the case will reinforce the growing trend of developers and founders of applications being held liable for any loss or harm suffered by users of their platforms. Such a position would conflict with the very foundations that crypto is built upon, as seen with Tornado Cash, where the sanction basically shut down the decentralised autonomous organisation (DAO).

The cryptocurrency industry is currently teetering on a knifes-edge, with participants waiting for certainty and clarity to the role of digital assets within society. While the industry is in limbo, on thing is for certain: developers, DAO’s and other crypto organisations must start considering the implementation of compliance and other regulatory frameworks.

Next Steps

Whether developers of crypto technology owe a duty of care is a hurdle for business, investors, and regulators. Currently, the term ‘developers’ with respect to anonymous technology is unclear, despite valid legal argument for the existence of a duty of care. However, if a duty exists, one must query how far should this duty extend before it encroaches on other ideals related to commerciality and dispute resolution.

Should creators of the software owe a continuous duty of care? Or should those who maintain the software bear the liability?

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Authored by:
Max Drummond, Paralegal

This update does not constitute legal advice and should not be relied upon as such. It is intended only to provide a summary and general overview on matters of interest and it is not intended to be comprehensive. You should seek legal or other professional advice before acting or relying on any of the content.

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