The Tulip Trading Timebomb: The Quest for $4bn in Lost Bitcoin that Could Destroy Crypto

The UK Court of Appeal’s recent decision in Tulip Trading Limited v Van Der Laan & Ors [2023] EWCA Civ 83 is a first, dangerous step towards answering one of the major unresolved legal problems facing blockchain ecosystems: what is a blockchain and what legal rights and obligations exist between its various participants?

To participate in a blockchain, I download and run open-sourced code on a server synced with many other servers run by complete strangers around the globe to maintain a canonical, shared database that anyone with a valid key pair can use. But what legal relationships have I created? What is the nature of my relationship with the other server owners? With the users of that database? With the people who code the software I have chosen to run? 

Well, thanks to Dr Craig Wright and his Tulip Trading Limited (Tulip) we may soon have some answers to some of these questions.

The Case In Summary

This decision involved an appeal from a summary judgement that denied the UK was the right forum for the Tulip’s dispute. In short: 

  • Tulip Claims it Owns Bitcoin it Can’t Access: Tulip Trading Limited claims to be the owner of around $4 billion worth of bitcoin that it claims it cannot access because it claims it lost the private keys to the two addresses containing the coins, allegedly in a hack.
  • Tulip Claims Bitcoin Devs Must Grant it Access: Tulip contends the floating team of developers who have code commit access to a one of the GitHub repositories for the open-source bitcoin code are Tulip’s legal fiduciaries, and so have a fiduciary duty to write and deploy a software patch that sends the allegedly lost bitcoin to new addresses that Tulip does control.
  • The Defendants Claimed UK Should Not Hear Dispute & Trial Judge Agreed: All defendants deny they have such a duty and, since all the defendants live outside the UK, the issue before the Court was whether the UK was the right forum for the dispute. The initial trial judge determined the UK was not the right forum because, while the dispute involved a UK plaintiff and UK property, there was no merit to the dispute and jurisdiction should therefore be refused.
  • The Court of Appeal Thinks UK Should Hear Dispute: The Court of Appeal reversed this finding, holding that the claim was not without merit and should not summarily be denied on jurisdictional grounds. 

This finding – that the dispute is not merely fanciful and should be heard – has alarmed many in the blockchain space, but it is unsurprising whilst potentially catastrophic.

An Unsurprising Decision

The decision is unsurprising because the narrow issue before the Court was whether there was a “more than fanciful claim” such that the case should not be dismissed on summary judgement, and the issue of what duties coders have to other blockchain participants is clear a real issue. Blockchains create a new form of property solely comprised of software inside machines. The rules of this new species of property remains unclear and must be clarified. While many might think it clear that blockchain coders owe no duties to blockchain users, that issue is “live” deserves a formal decision.

A Potentially Catastrophic Decision

The decision is potentially catastrophic because it means the case will almost certainly proceed through to a determination with two principal outcomes possible, neither positive for crypto generally.

Outcome 1: Tulip Wins and Everyone Else Loses

First, Tulip might win and this would induce a series of centralising forces that would ultimately destroy the logic of crypto. If coders owe duties to users, then the whole chain will eventually become managed by a single entity to minimise liability and manage risk. Distributed blockchains will become centralised databases, and crypto no more innovative than “Frequent Flyer Points” or “SkyMiles”.

Outcome 2: Tulip Loses But Nobody Else Wins

Second, even if Tulip loses it might do so for reasons that imperil chains other than bitcoin or ecosystem participants other than developers, principally miners/validators.

  • Impact on Chains Other Than Bitcoin: Bitcoin is the most decentralised chain in terms of development. Most other chains have a foundation that manages software development. It is highly likely that, in exonerating bitcoin developers, the judges make comments that implicate coders engaged in less decentralised chains, including Ethereum with its roadmap and scheduled release of named upgrades. The case is likely to only fuel a whack-a-mole-fest of further cases as plaintiffs search for chains where the level of centralisation is somehow sufficient to enliven fiduciary duties. It is almost certainly the start of the inquiry into fiduciary duties on coders, not the final word.
  • Participants Other Than Coders: The principal defence against coders being fiduciaries is that miners make all the most important choices and have the closest relationship with the end users. The miners choose what code to run and what transactions to include in their block and earn the fees that users have agreed to pay for their transactions being added to a block and included in the database. But this defence only shifts the debate from coders to… miners. A proper, rigorous analysis of why coders do not owe duties to users could well result in a firm view that coders do not owe duties because those duties are owed by miners. Of course, there are plenty of legal and practical reasons why miners do not owe duties either. The point is that by shooting at, and missing, coders, Tulip may expose miners with the added wrinkle that miners are not party to the case and cannot defend themselves.

Next Steps

With the decision of the Court of Appeal, this case returns to the trial judge for hearing. It seems unlikely to settle given the diametrically opposed interests at play. The principal behind Tulip, Dr Craig Wright, not only has an obvious incentive to fight this $4bn claim to the death but has a demonstrated appetite for legal proceedings. It should be watched closely, and the crypto industry should hope that the various coder defendants are well-resourced, well-represented and present a cohesive defence. It is a very important case.

This is a summary of a more comprehensive paper that can be found here.

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