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Bitcoin in the dock – Cryptocurrency too risky to cover winning party's court costs

21 February 2022 | Insight

High Court finds Bitcoin fails test for security for costs but door may be open with stronger safeguards

Are cryptocurrencies as trustworthy as traditional money? It's a question increasingly asked in business and policy circles given the boom in crypto assets over the last two years. But for the purposes of litigation – specifically payments or guarantees to cover the successful party's legal costs – the High Court has just found Bitcoin to fall short in what will be a closely watched ruling.

In the case, Tulip Trading Limited v Bitcoin Association for BSV, in granting security for costs against a claimant company, the High Court refused to allow security to be paid in Bitcoin as that would not result in protection equal to a payment into court or a first class bank guarantee.

The claimant is the holding company of Dr Craig Wright – who claims to be the creator of the Bitcoin system.  Wright is pursuing a group of developers to help regain access to $4.5 billion worth of Bitcoin he claims to own, maintaining that his access to the funds was compromised when secure private keys were deleted by hackers in 2020.

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 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 the assets, either accidentally or due to a hacking incident. It brings to the fore a fundamental question of the nature and scope of any fiduciary duty on the part of developers, either to restore access, or at least take all 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).

So fundamental are the issues at play, not to mention the considerable sums of money at stake, that the courts will doubtless soon be called on again.

Click here for an in-depth briefing on the case and its implications in our litigation blog.

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