ONTIER Senior Associate, Simon Cohen, discusses what Tulip Trading is seeking to achieve through ground-breaking legal proceedings and what it means for law enforcement and investors in blockchain digital assets.
““The design of crypto assets may create some practical obstacles to legal intervention, but that does not mean that crypto assets are outside the law.”
The legal status of so-called “cryptoassets”, such as Bitcoin, has become an increasingly important question as the number of investors (both individual and institutional) in these assets has risen in recent years.
Thankfully, various courts in common law jurisdictions3 around the world – including England and Wales, Singapore, New Zealand and Canada – have answered that question by consistently finding not only that blockchain-linked digital assets are property, but also that they are capable of being subject to proprietary injunctions, proprietary freezing orders, worldwide freezing orders and trusts.
Many of those cases have arisen from the theft of digital assets, either following hacks on online exchanges or following ransomware attacks. However, the courts have yet to consider whether – and, if so how – lost, stolen or misappropriated digital assets can be recovered. But now that may be about to change.
In February, letters before action were sent on behalf of Tulip Trading Limited (“TTL”) to the developers of Bitcoin Satoshi Vision (“BSV”), Bitcoin Core (“BTC”), Bitcoin Cash (“BCH”) and Bitcoin Cash ABC (“BCH ABC”) requesting that they enable TTL to regain access to and control of its Bitcoin (the private keys to which were stolen) on the grounds that they owe all Bitcoin owners both tortious and fiduciary duties under English law. TTL, a Seychelles company, is ultimately beneficially owned by Dr Craig Wright, the computer scientist many believe to be the person behind the pseudonym ‘Satoshi Nakamoto’, the inventor of Bitcoin.
Since Bitcoin was first launched in January 2009, it has been widely assumed that a person who loses their private keys also loses access to and control of the associated underlying digital asset. TTL contends that this assumption is incorrect because the Bitcoin developers (i.e. those individuals and entities who control the software code) have both the legal obligation and the practical and technical ability to restore those lost coins to their legal owners – provided, of course, that those legal owners can prove ownership to the required standard.
If successful, TTL’s action will have profound – and immensely positive – implications for those interested in blockchain-linked digital assets including, in particular, law enforcement agencies and investors.
Historically, Bitcoin and other digital currencies / assets have been widely used by criminals and criminal organisations, and various law enforcement agencies have successfully seized such Bitcoin. In April 2017, for instance, Surrey Police, whilst searching the home of Sergejs Teresko, found and seized a recovery phrase for Mr Teresko’s Bitcoin private key which they used to seize the 295 Bitcoin held at the associated address. The seizure of Mr Teresko’s Bitcoin was sought and authorised pursuant to sections 47A – 47S of the Proceeds of Crime Act 2002. The Crown Prosecution Service subsequently obtained an order pursuant to section 41(7) POCA, permitting the Police to convert those Bitcoin into sterling (then totalling £1.2 million). However, in that case the Police were only able to covert the seized Bitcoin because they were in possession of Mr Teresko’s recovery phrase.
If successful, TTL’s claim will enable law enforcement to access illegally acquired Bitcoin without needing the associated private key(s) or recovery phrase(s). The benefit to law enforcement – and the public purse – is obvious.
On the other end of the spectrum are investors, some of whom (and, if recent media reports are to be believed, an ever-growing number) have lost or may lose their private keys. If TTL’s claims are upheld, then this will be of profound importance to people who would otherwise lose access to their potentially very valuable assets.
Consider the example of an individual (A) who, through the years, has bought enough satoshi12 to make 3 BTC (currently valued at over £120,000). A has kept the private keys to their BTC in a hard copy printout which they have filed away at home. However, A has not told anyone where the printout is or even that it exists. A dies leaving their entire estate to B who is suddenly the legal and beneficial owner of a very valuable asset but with no knowledge of where A stored the private keys. While B knows they have been bequeathed 3 BTC, and they know the public addresses, they have no means to access their inheritance.
If TTL is correct and successful, then B – and all others in the same position – will have a path to recovering and realising their assets. As with law enforcement, the real-world implications and benefits are obvious and significant.
The courts have repeatedly recognised Bitcoin and other blockchain-linked digital assets to be a form of property capable of being the subject matter of various judicial and equitable remedies.
In bringing this action, TTL is essentially asking the High Court to recognise that the proprietary rights in such digital assets also extend to enabling their legal owners to recover those assets where and when access to them has been lost, stolen or transferred by fraud.
As a matter of equitable principle, that must be correct and those with legitimate (and no doubt many with nefarious) interests in the technology and in the development of blockchain-linked digital assets will be following the case closely. It could be a game-changer.
Note - this article first appeared in Fraud Intelligence and was published 16.3.2021.
This article is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document. If you have any queries regarding this article, please contact us.