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‘Passing-off’ fake Bitcoin: How screwed are Kraken and Coinbase?

With the launch of Dr. Craig Wright’s colossal lawsuit accusing exchanges Coinbase (NASDAQ: COIN) and Kraken of passing-off digital assets (such as BTC) as Bitcoin, the term is likely to become a popular topic of discussion among digital asset circles. What is passing-off and how does it relate to Bitcoin?

Despite the inevitable flush of attention that Dr. Wright’s lawsuit will bring to this form of rights enforcement, passing-off is an essential civil action which is a well-established tool for protecting intellectual property rights and business interests—so much so that it has been described by the U.K. House of Lords as the ‘most protean’ among the legal protections against unfair trading.

In essence, passing-off protects people and businesses from attempts to ‘hi-jack’ the reputation of their products in order to sell competing ones.

According to the House of Lords in Reckitt & Colman Products Ltd v Borden, Inc., a successful passing off claim must show:

  • The claimant’s product has acquired ‘goodwill’ or reputation in the marketplace such that it distinguishes the product from competitors;
  • The defendant has misrepresented another product (not necessarily intentionally) in a way that the public is likely to believe that the offered product is the original; and
  • There must be a likelihood of damage to the claimant’s goodwill as a result of the misrepresentation

The specifics of Dr. Wright’s case have yet to be released, but it’s easy to see how his claim to the Bitcoin name would fit into a passing-off action.

  • Goodwill: Bitcoin is the system described by Satoshi Nakamoto in the White Paper: the Satoshi Nakamoto name is inextricably linked to the White Paper and the Bitcoin described therein, and the English courts have already recognized Dr. Wright’s authorship of it. Dr. Wright, via the Satoshi Nakamoto name, has an enormous amount of goodwill in connection with Bitcoin.
  • Misrepresentation: Currently, Dr. Wright’s BSV is the only system which reflects that system (this is true from a plain reading of the original white paper, but was also recently independently verified by consultancy MNP). Yet the name ‘Bitcoin’ is used by exchanges and blockchain engineers to describe systems which bear little or no relation to Bitcoin as described by the white paper and as implemented in BSV. Oftentimes these products are represented as being linked to the white paper itself; for example, Coinbase and Kraken both reference the white paper throughout their websites alongside offers to sell ‘Bitcoin.’ The argument being made by Dr. Wright is that these exchanges are passing-off these products—like BTC—as Bitcoin when in reality those products are most certainly not Bitcoin. Given the reverence with which much of the ‘crypto’ sphere holds the white paper, any product using the name ‘Bitcoin’ is likely to mislead the public into believing that it is connected to that paper and the system described therein
  • Damage: These unrelated companies and individuals using the Bitcoin name are doing so undoubtedly at the expense of Dr. Wright—the imitators being complained of in Dr. Wright’s suit are listed on exchanges like Coinbase and Kraken while BSV is not.

The digital asset industry might feel new, but passing-off actions have been successfully brought in comparable situations. To illustrate, the Reckitt case involved lemon juice being sold in a lemon-shaped plastic container. The claimant successfully brought a passing off claim against an American company which began selling lemon juice in similarly shaped containers. The court found that a purchaser presented with a display of these products “would by likely to pick up [the competing product] in the belief that what she was buying was the respondent’s Jif lemon juice.”

Reckitt was straightforward, but the tort of passing off is a versatile one.

For example, superstar singer Rihanna successfully brought a passing-off claim against high street fashion retailer Topshop over a shirt it was selling bearing her image. Despite having no copyright in the image itself the singer was able to argue that the sale of the shirt amounted to passing off, which damaged Rihanna’s goodwill (including loss of merchandise sales and loss of control over her reputation in the fashion industry). The court there also noted that there are many similar fashion items available on the market which also contain unauthorized images of Rihanna, but found that this was not a barrier to a successful claim. This factor is particularly relevant to Dr. Wright’s claim given the scale of the deception in the case of Bitcoin.

The goodwill doesn’t need to be owned solely by one business, either. In 2009, a group of champagne producers successfully secured an injunction preventing drinksmaker Elderflower from using the term ‘champagne’ to refer to its new non-alcoholic sparkling fruit drink. The court agreed with the claimants that use of the word ‘champagne’ eroded the goodwill in the term, even its impact would not be demonstrable in terms of lost sales.

Some other examples of successful passing-off claims:

  • The 90s band Liberty successfully claimed passing off against a later band, Liberty X, preventing the latter from using the name. The court found that despite the relative obscurity of the earlier band, their goodwill was such that their fanbase could confuse the two. (Kevin Floyd Sutherland & Others v V2 Music & Others (Liberty X)).
  • U.K. radio station Talksport sent out material promoting their programme using a (legally obtained) image of a well-known racing driver edited to look like he was holding a Talksport branded radio. The driver successfully argued a passing-off claim on the basis that Talksport had produced a false message which would be understood by their market to mean that they had been endorsed by the driver. (Irvine v Talksport Ltd)
  • The court accepted a claim for passing off in a situation where the defendant had been declined a license to use Teenage Mutant Ninja Turtles characters on their fashion products. The defendant then used an artist to draw his own version of humanoid turtles for use on their products. The court said that this was passing off: a substantial number of the buying public would believe that where a cartoon character has been reproduced, it has been done so as the result of a license. This amounted to a misrepresentation which led to the loss of the rightsholder’s chance to obtain royalties, both via the erosion of exclusivity in the characters and the loss of money from the defendant’s failure to obtain a license.

The law on passing-off is so well developed that it means Dr. Wright’s claim can be relatively straightforward. One can notice this by taking a look at the marketing materials of Coinbase, Kraken or anyone else purporting to sell products such as ‘Bitcoin Core’ (BTC). It is most often accompanied by references to Satoshi Nakamoto and the White Paper, and it is easy to imagine anybody unfamiliar with the original document being misled into thinking that Bitcoin Core is in fact the Bitcoin for which Nakamoto has become so celebrated. Under the law of passing-off, it does not matter whether this misrepresentation was intentional on behalf of the exchanges (although it seems likely).

The more interesting proposition is: if Coinbase and Kraken are passing-off Bitcoin imitators as the real thing, then so too are countless other cryptocurrency exchanges. As shown by the Rihanna case, this does not affect Dr. Wright’s ability to recover off any individual or business committing the passing-off – but it does make the number of exchanges and other businesses in the digital asset sphere who are at risk of exactly the same lawsuit remarkably high.

Follow CoinGeek’s Crypto Crime Cartel series, which delves into the stream of groups—a from BitMEX to BinanceBitcoin.comBlockstreamShapeShiftCoinbaseRipple,
EthereumFTX and Tether—who have co-opted the digital asset revolution and turned the industry into a minefield for naïve (and even experienced) players in the market.

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