The High Court considers whether security for costs can be provided in cryptocurrency
In Tulip Trading Ltd v Bitcoin Association for BSV & Ors (Rev 1) [2022] EWHC 141 (Ch), the High Court considered whether security for costs could be satisfied by a party providing cryptocurrency.
The High Court’s decision, that the bitcoin offered did not meet the required standards for security, is likely to be subject of significant interest. Despite the headline being one of rejection, the decision leaves the door open for more sophisticated cryptocurrencies to be accepted at a later date.
Background
Tulip Trading Ltd (Tulip) is a Seychelles-incorporated company, the ultimate beneficial owners of which are Dr Craig Wright and his family. Dr Wright is an academic who claims to be Satoshi Nakamoto, the pseudonymous inventor of bitcoin and implementer of the first blockchain.
Tulip brought a claim before the High Court, in which it stated that it was the owner of approximately USD 4.5 billion of cryptoassets, the encryption keys for which it alleged were deleted in 2020 when Dr Wright’s computer was hacked. Tulip claimed that the Defendants (the open-source software developers who have developed certain bitcoin protocols) owed fiduciary and tortious duties to amend the underlying code to allow Tulip to access these cryptoassets.
Various Defendants, domiciled out of the jurisdiction, had applied to set aside an order granting permission to serve the claim upon them. These Defendants had sought an order for security for costs in this jurisdiction application. In an earlier decision, Master Clark had granted security for costs (Tulip Trading Ltd v Bitcoin Association for BSV & Ors [2022] EWHC 2 (Ch)).
Cryptoassets as security
The Defendants sought for security to be provided in a traditional manner:
- payment into court;
- money held by Tulip’s solicitors to be held to the order of the Court; or
- bank guarantee from a first-class London bank.
Tulip proposed that it provided security using cryptocurrency (Bitcoin Satoshi Vision, or in the alternative Bitcoin Core) (Bitcoin). The Bitcoin would cover the value of any security ordered, plus a 10% buffer, and be transferred to Tulip’s solicitors. Tulip’s solicitors would be instructed to provide written confirmation that the Bitcoin was held to satisfy the potential adverse costs order, as well as the public keys.
Principles
The Court has discretion to determine the manner in which security must be given (CPR 25.12(3)(b)(i)). Where a claimant proposes an alternative form of security, that is not payment into court, the principles to be applied were set out by the Court of Appeal in Infinity Distribution Ltd (in administration) v Khan Partnership LLP [2021] EWCA Civ 565. These are that the Court should:
- “…have regard to all the relevant circumstances” when exercising its discretion;
- seek to give effect to the overriding objective, including “so far as practicable, ensuring that the parties are on an equal footing and ensuring that the matter is dealt with fairly”;
- strike a fair balance between the interests of the parties; and
- where two forms of security would provide equal protection, all else being equal, order the form that is least onerous to the claimant.
In Monde Petroleum SA v Westernzagros Ltd [2015] EWHC 67 (Comm), Popplewell J (as he then was) found that “Although security may be ordered in an alternative form, that form should be such as to fulfil the same function, so as to allow simple and swift enforcement of a costs order from a creditworthy source. In practice any such alternative form of security must be such as can properly be regarded in these respects as at least equal to, if not better than, security by payment into Court or provision of a first class London bank guarantee.”
Decision
Master Clark found due to the high volatility of the Bitcoin it did not meet the criteria set out in Monde Petroleum.
Tulip had attempted to counteract any risk to the Defendants by including both the 10% buffer and a mechanism for the amount of the Bitcoin to be topped up. Master Clark found that regardless of these additional mechanisms, the Defendant’s protection would not be equal to that of a first-class bank guarantee or payment into court, as a fall in the value of Bitcoin “could result in any security being effectively valueless”.
A further issue was that Tulip’s proposal was not only for the Bitcoin to be used purely as security, but that any liability for costs would be satisfied by transferring the Bitcoin to the Defendants, effectively allocating them further risk of any subsequent fall of value.
Takeaways
The headline that the High Court declined to order security provided in Bitcoin belies the apparent acceptance of the principle that non-volatile cryptocurrencies can constitute a suitable alternative form of security. The volatility of Bitcoin, which was the concern in this case, is not an inherent characteristic of cryptocurrencies. It remains to be seen whether Master Clark’s decision will act as in invitation for future applications, based around less volatile cryptocurrencies (such as stablecoins) or central bank digital currencies.
The English court’s decision adds to a growing body of case law on cryptocurrency as security for costs. An earlier article noted a decision in another common law jurisdiction, New South Wales, which similarly had no issue in principle, but where the court was satisfied that volatility of bitcoin could be addressed by the mechanisms proposed by the plaintiff.
The author would like to thank Ben Doble for his assistance in preparing this post.