When Tulip Trading first took legal action against a group of blockchain developers, arguing that they owe legal duties to their users that compel them to restore access to lost or stolen coins, much of the initial industry reaction was disbelief or even anger. To a certain (now shrinking) group of digital asset enthusiasts who have all bought into the idea that their industry exists outside the ambit of the law, Tulip Trading’s suggestion could only be seen as a non-starter.
But times are changing. Not only did Tulip Trading’s lawsuit go on to get rubber-stamped by the U.K. Court of Appeal as having a real prospect of success, but regulators around the world are starting to catch up to Tulip’s line of thinking, which is that blockchain development—such as for BTC—is not decentralized, as in fact managed by a tightly controlled group of developers with the exclusive power to make changes to their networks. This centralized power has caught the attention of the Securities and Exchange Commission (SEC), which considers centralized power to be a crucial factor in determining whether a digital asset is a security. According to Tulip Trading and others, such centralization also makes those developers fiduciaries, meaning they owe long-standing legal duties to their users.
A demonstration of this changing narrative comes from a recent episode In Early – The Crypto Podcast, presented by law firm Shoosmiths and their Blockchain Litigation Lead Matt Green. Back in March, the podcast hosted Nick Smart, associate director for blockchain intelligence at Crystal Blockchain Analytics, to discuss the Tulip Trading case and its potential impact on the digital asset industry.
Green and Smart’s analysis of the case misses the mark in some respects, but far from the kind of spin you get from the Legal Defence Fund (which is supporting the defendants in Tulip), they provide an honest take on the case and why success for Tulip might be more likely than most have assumed.
A few early points of clarity
At the top of the conversation, Green frames his questioning about the case as a conversation about whether the claimant’s case should go ahead based on the facts. It should be mentioned up front that this case is inarguably going ahead: it has been reviewed by the U.K. High Court and approved by the Court of Appeal, and a three-judge panel decided that the claim had sufficient merit to proceed to trial.
Smart also gets a little careless with the parties’ names in the case: the claimant is not Dr. Craig Wright but a company he controls called Tulip Trading Limited. It was that company’s property that was stolen, and it is that company that is making the claim.
Nonetheless, the hosts recognize that there has been a lot of noise around this case by detractors of Dr. Wright. At one point, Smart remarks on the ‘vocal’ opposition to Dr. Wright
“Could he be one of the group that were Satoshi Nakamoto? If Satoshi was a group of coders that made this, could he be one of the group? I think possibly- he was around. Could he be an early adopter of the technology? He also could be an early adopter, which I think could be the case.”
“Lots of accusations get put around him by his detractors that he’s not intelligent. He’s a very clever man, and we can’t take that away from him.”
Claim: You can’t own Bitcoin. FALSE
Another point of confusion on the part of Smart is ownership of Bitcoin. When explaining that it was Dr. Wright’s private keys that were destroyed in the hack, he mentions that the key doesn’t ‘give’ you the Bitcoins because ‘no one really owns them.’
In fact, this is one of the points that the Tulip Trading case was praised in the U.K. Law Commission’s 2023 report on digital asset law. There, it was said that one of the certainties the case had brought to the law even at this early stage was that 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.”
It’s an elementary point for those outside the industry (and many inside of it, too). All the legal rights that apply in any other context—like property rights—apply to digital assets. Legal precedent may need to be set to tease out precisely how preexisting law should apply. Tulip Trading has demonstrated this as far as property rights in digital assets go, but this principle should be kept in mind any time somebody tries to argue that the industry somehow exists outside the law.
Claim: The case is an attack on open-source. FALSE
The hosts make another critical mistake by saying that the Tulip Trading case is about open-source software. It isn’t: the term ‘open source’ doesn’t appear anywhere in Tulip Trading’s initial lawsuit or in the High Court and Court of Appeal judgments.
The case is solely focused on the legal duties owed by blockchain developers to their users. If any open source project is affected by this lawsuit, it’s because that project happens to fit the description of the Tulip Trading defendants.
There’s no need to guess where the hosts got this idea. Jack Dorsey’s Bitcoin Legal Defense Fund has been pushing this narrative for months. For instance, LDF lawyer Jessica Jonas appeared at the Bitcoin 2023 event in Miami and said the case was “about whether open source developers should owe a fiduciary duty to people who use their code.”
This is a lie. The case explicitly concerns blockchain developers, irrespective of whether their development is open source or not. Compare Jonas’ language to that used by the court of appeal to describe the case:
“The question in this appeal is whether the developers who look after bitcoin may arguably owe fiduciary duties or duties in tort to an owner of that cryptocurrency,” wrote Lord Justice Birss in delivering the unanimous opinion of the court.”
That is what the case is about: nothing more, nothing less.
Bold as the LDF’s lies are, it’s easy to see why the LDF and the developer defendants try so hard to reframe the case in this way. As shown by the Early In Crypto discussion, the proposition at the core of Tulip Trading’s case isn’t outlandish or unreasonable. Who could disagree that owners of digital assets need some avenue for redress if those assets get stolen? So the Legal Defense Fund cynically tries to engage the sympathies of the much larger open source community, hoping they can be convinced that open source development is under attack and needs defending—and by the way, won’t you donate to the Legal Defense Fund to help?
Should blockchain developers owe legal duties?
The open-source issue is, therefore, a convenient distraction for the developers and their backers.
In reality, Tulip Trading is set to determine a legal issue that is key to the development of digital asset law: Are blockchain developers fiduciaries with respect to those using and relying on them?
Smart recognizes that this might seem like an enormous departure from the status quo within the digital asset industry. But as Smart indicates, the law of fiduciaries is the status quo—and the suggestion that it should apply to blockchain developers is not an outrageous one.
“I sometimes feel that cryptocurrency or cryptoassets generally have this idea of financial Dawinism, [which is] ‘If you lose your money to a hack or a scam, well you weren’t cut out for this life in the first place.’ Which is lovely, but what if it’s your fund manager with your pension? I think you might have a different opinion.”
And to Smart, the case for what Tulip Trading advocates is clear. It’s also necessary for the continued survival of the industry:
“Deep down, if anyone is a victim of crime, they want a policeman. They want to have justice. I think for the industry as it rapidly matures in the wake of ongoing scandals, it’s important that we do think about consumer protection… If you want your product to be taken seriously and you want it to be the future of currency and everything else, you do need to think about these things.”
Claim: The case is about the centralization of blockchain development. TRUE
At its core, the Tulip Trading case is about the myth of decentralization in digital asset projects such as BTC. Fiduciary duties exist in situations where a person has undertaken to act on behalf of another in circumstances that give rise to a relationship of trust and confidence—often as a result of somebody entrusting property to them. One of the most prominent objections to applying these duties to blockchain developers is to say that they are an unfixed, fluctuating group of volunteers who act more as passive stewards of their blockchains than active managers and developers. In that vein, they are often referred to as ‘decentralized.’ As a result, blockchain users can’t be said to have ‘entrusted’ anything to the developers, nor are of sufficient proximity to them, to qualify for either duty.
Right in time, this illusion is beginning to lift, despite what BTC’s supporters would say. The SEC is closely examining the centralization of digital asset projects and has made that question the central part of its Howey analysis to determine which assets are securities offerings and which are not. Earlier this year, The New York Attorney General took action against an ETH-based digital asset on the same basis.
Both Green and Smart recognized the existence of this myth. Green read from a February Wall Street Journal article titled “Bitcoin’s Future Depends on a Handful of Mysterious Coders“:
“Known as maintainers, coders serve as stewards of Bitcoin Core, an open program that keeps the cryptocurrency’s digital ledger up to date with thousands of computers that make its network. Bitcoins current worth and future potential rest partly in the hands of Bitcoin Core maintainers: a group who are chosen by their peers and often vague about their whereabouts.”
“A loose network of donors pay most maintainers salaries. At least once, the maintainers secretly patched a bug that crypto proponents say could have destroyed the cryptocurrency’s value.”
Smart says he doesn’t know how much that description fits with Tulip Trading’s argument. The truth is it fits perfectly. Tulip Trading’s lawsuit has identified these factors as clear demonstrations of the centralized control sitting atop all things to do with BTC, namely, that BTC’s success depends on the work of a small number of identifiable individuals (which, incidentally, sounds a lot like a Howey test factor, doesn’t it?); that these individuals are paid for their work; and that these individuals regularly exercise their power to make changes to the network, even surreptitiously (which should destroy any argument that these individuals are merely effecting the democratic will of the community).
In other words, BTC blockchain development is highly centralized. How else can the continuous, drastic, and even covert tinkering with the underlying protocol be explained?
Claim: Tulip Trading’s requests are impossible. FALSE
Tulip Trading is ultimately asking that the court order the developers to restore access to the private keys, such as via a patch.
The crucial point missed by the hosts is that Tulip Trading is not asking for the blockchain to be rewritten in any way. All that is proposed is that a new transaction is added to the blockchain, which appends the previous illicit transaction: the earlier transactions remain transparent and auditable, as do the steps taken to undo them. The integrity of the blockchain, therefore, is unaffected.
Nonetheless, the developers have focused much of their defense on arguing that the relief asked for by Tulip Trading is impossible.
However, history shows that such a patch is feasible or even trivial: Bitcoin originally even had such functionality natively before BTC developers stripped it out. Bitcoin Association for BSV, which was one of the initial defendants targeted by Tulip Trading, has already demonstrated this: they settled the case early on, agreeing to make the changes requested by Tulip Trading. As such, a preview of how Tulip Trading’s proposal might work is already available.
But as Smart points out, there is precedent even beyond that.
“In 2016, the Ethereum DAO was hacked. And lots of Ethereum was stolen, and basically the developers of Ethereum united and said ‘we’re going to apply a patch which reverses the change that the money was stolen.
“So, generally speaking, what he’s asking for isn’t beyond the realms of the possible.”
Smart points out that a potential difference is that such a patch depends on consensus, but that’s more or less Tulip Trading’s core point. Changes to Ethereum were supposedly based on consensus, and yet the developers in charge designed and forced through their own solution (to fork the network) anyway.
As legal academic Angela Walch wrote in her widely-cited paper “In Code(rs) we trust: Software Developers as Fiduciaries in Public Blockchains”:
“The passion, drama, and anger surrounding the Ethereum hard fork show how much was at stake for the Ethereum community, investors in ether, and those who built applications and companies atop the Ethereum blockchain. Yet only a small number of developers and miners in this “decentralized” system decided what the resolution of the DAO hack would be, in effect determining the financial fortunes of all those relying on the Ethereum blockchain, whether or not they had invested in the DAO.”
Smart also observes that this drastic network change supposedly brought about by the ‘decentralized’ exercise of power remains a highly controversial chapter in Ethereum’s history to this day. Because, of course, it wasn’t decentralized at all. It was the identifiable core Ethereum developers exercising their exclusive power over the network.
Even looking beyond blockchain projects, there is an established track record of courts intervening in cases where peer-to-peer networks are breaking the law. In those cases, the fact that the networks were ‘peer-to-peer’ did not save them.
Take MGM Studios, Inc. v Grokster as an example. There, the U.S. Supreme Court ruled that the distributors of peer-to-peer software (in an analogous position to the ever-tinkering BTC developers) were directly liable for the infringements that they enabled. In that case, there was no patch that could have made the Grokster software compliant, so they were forced to shut operations entirely. The blockchain developers facing Tulip’s lawsuit are luckier. A patch can be created to make their services compliant, and if they don’t want their networks to end up like Grokster, they must implement it.
Tulip Trading’s demands are not just reasonable—they’re desirable
In any case, Smart acknowledges that the concerns at the core of Tulip Trading’s case—which Dr. Wright has talked about at length—are important.
“Like him or not, it doesn’t really matter…. When he talks about this idea that cryptocurrency is not anonymous, and what kind of cryptocurrency do you really want, this idea that as you said the description of these people as shadowy, elusive, people behind the scenes… [Dr. Wright] says ‘who do you really want running your money? Do you want a group of people who you never know and have no claim against and can do nothing to them if they wrong you?'”
After which, the host appears to get the point: “Is what he’s proposing really that radical?”
Smart reluctantly admits that no, it’s not radical at all. But he then perfectly encapsulates how critics of Tulip Trading’s lawsuit descend into non-sequitur and emotional arguments when confronted with legal reality. He laments that the BTC developers are ‘feeling the heat of the law’ (which is what one tends to feel when operating outside the bounds of the law) and says that if you got someone to fix your plumbing and then found out weeks later it had flooded your house, you wouldn’t take them to court (you certainly would). Instead, says Smart, you’d ‘resolve it between you.’
One has to think that given more time to think of a response, Smart would never have said this last point. All you need to do to illustrate why the legal system really is the only option is to ask why the scores of people who have had their digital assets stolen haven’t simply gone to the developers to ‘resolve it between them’—it’s because those developers would tell their users to take a hike.
Which is precisely why the law has the power to step in.
All of the other concerns expressed by Green and Smart focus on the impact that legal intervention would have on the price of these coins: this is irrelevant. The value of BTC is not important to the law. If by finally enforcing long-established legal rights in the digital asset context causes certain coin values to drop, such bloated valuations were on borrowed time.
What’s more, if any digital asset is ever to realize its true value, lawsuits like the one brought by Tulip Trading are necessary growing pains. Maybe it’s true that success for Tulip Trading would lead to price crashes in the short term, but that would only be true because it’s necessary to unlock growth in the long term. The industry cannot prosper outside the ambit of the law.
Watch: Digital Asset Recovery on Bitcoin Explained
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