The United Kingdom Law Commission’s long awaited report on digital assets arrived last week, and it included high praise for Dr. Craig Wright’s Tulip Trading case arguing that blockchain developers owe legal duties to those relying on them.
Referencing the ‘persuasive’ Court of Appeal judgment confirming that the suit had enough merit to proceed to trial, the Law Commission’s report says:
“That case has brought a high degree of certainty to the law of England and Wales: it recognizes that crypto-tokens can be things to which personal property rights can relate, that they can be rivalrous and that their characteristics are manifested by the active operation of software.”
If something is rivalrous, it means that the holding or consuming of it by one person necessarily prevents anybody else from consuming it—a key factor in determining if something is ‘property’ under the law. In the case of Bitcoin, the Court of Appeal recognized that “because the holder cannot double spend their bitcoin, such that it is rivalrous, the cryptoasset can be said to be capable of [physical] assumption by a third party… A cryptoasset such as bitcoin is property.”
In one paragraph, the Law Commission cuts through an extraordinary amount of water-muddying and mudslinging in the digital asset industry, where many have tried to argue (and continue to argue) that digital assets such as Bitcoin somehow exist outside the ambit of the same laws that apply to everything else. There may be nuances that come with new technology—as acknowledged in the quote above by referencing the consequences of the ‘active operation of software’—but the underlying law remains the same: property rights are an essential cornerstone of a functional legal system, and digital assets are property. What other way could it be?
The recognition of the value that ‘novel’ cases such as Tulip Trading (and others) brings to the development of the law also undermines the popular narrative that lawsuits involving digital assets are somehow ‘cynical’ or ‘opportunistic.’ The Law Commission report emphasizes this repeatedly and unreservedly endorses the argument made by Tulip Trading before the Court of Appeal that the courts are an appropriate venue for incrementally developing the law on digital assets:
“One of the principal conclusions in this report is that recognizing the idiosyncrasies of distinct digital assets and digital asset systems will allow the law of England and Wales to develop legal principles and rules best suited to those particular digital assets. It can do so without being fettered by the wholesale application of imperfect analogies with other things with which the law has been long familiar.”
It cites the Tulip Trading case specifically as a demonstration of this, with the Law Commission applauding the Court of Appeal’s ability to navigate and understand the nuances of digital assets and their protocols.
“In short, the judgment demonstrates the practical advantages of our conclusion that the common law of England and Wales remains the appropriate forum for development and resolution of the legal issues discussed [in the report].”
In attempting to get the Tulip Trading case thrown out, the defendant developers had tried to argue that the issues raised are in a nascent area of the law and should be decided by Parliament. A more definitive statement may eventually come via legislation, but’s it’s clear that the Law Commission and the judges of the Court of Appeal feel that not only is this a question that the courts are capable of answering, but it’s desirable for them to do so.
You wouldn’t know it listening to the Bitcoin Legal Defense Fund, who posted an article to their website gloating that the Law Commission report undermines a ‘key claim’ in the Tulip Trading case. They point to the Law Commission’s restatement of the law on fiduciaries, which is that the most recognizable examples of fiduciaries are ‘agents, trustees, partners, company directors, and solicitors’ and that fiduciaries which do not fall into those categories are ‘possible – albeit exceptional.’
What the Legal Defense Fund doesn’t say is that the Court of Appeal considered this exact argument in Tulip Trading and still found that the case had a reasonable prospect of success. The judgment says (emphasis added):
“The categories in which fiduciary relationships can be identified are not closed; albeit that it is exceptional for fiduciary duties to arise other than in certain settled categories…Nevertheless the common law often works incrementally and by analogy with existing cases, and rightly so; but if the facts change in a way which is more than incremental then I do not believe the right response of the common law is simply to stop and say that incremental development cannot reach that far.”
The Law Commission report makes this precise point in applauding the role of the courts in developing the law, as discussed above. In fact, it’s entirely disingenuous for the Defense Fund to use the Law Commission’s statements on fiduciary duties as somehow undermining Tulip’s argument: the law on fiduciaries has been developed entirely by the courts, so any statement the Law Commission makes on the law on fiduciaries is merely an expression of that development. Considering the second-highest court in the country has already determined that Tulip’s argument for fiduciary duties has merit, the Legal Defense Fund is merely clutching at straws.
The Bitcoin Legal Defense Fund’s analysis also misses the core concept of fiduciaries law by some margin. As the Court of Appeal cited in granting Tulip Trading’s case, the ‘definitive test’ for classifying a relationship as a fiduciary one has always been that set out in Bristol and West Building Society v Mothew:
“A fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence. The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his fiduciary. This core liability has several facets. A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal. This is not intended to be an exhaustive list, but it is sufficient to indicate the nature of fiduciary obligations. They are the defining characteristics of the fiduciary.”
Note that the focus is and has always been on the specific relationship between the parties: what matters is that there is a relationship of trust and corresponding loyalty. The Court of Appeal in delivering the Tulip judgment cited Mothew and said that “in my judgment, the developers are people who it is clearly arguable have undertaken a role which at least bears some relationship to the interests of other people, that is to the owners of bitcoins.”
The Legal Defense Fund’s spin gives that harsh fact a wide berth and goes straight to a laughable interpretation of the plain words of the Law Commission’s report.
It’s obvious why the Legal Defense Fund would cling to the already established categories of fiduciaries to undermine Tulip Trading’s case, but the reality is that courts have already looked at Tulip Trading’s case and decided it has a real prospect of success – hence the successful appeal earlier this year.
Still, small details won’t stop the Legal Defense Fund’s PR machine, which appears to be working round the clock these days. The best anyone interested in the law as it really applies to digital assets can do is read the Law Commission’s report and the Court of Appeal judgment for themselves, sit back and enjoy as the last so-called legal grey areas are snuffed out.
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