Are cryptocurrencies a valid form of security? Tulip Trading Ltd v. Bitcoin Association for BSV & Ors considers this issue – Lexology

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What were the key issues in this case?
This case is worthy of attention for two main reasons. First, it provides a useful reminder of the legal principles applicable to posting security. The second, controversial aspect of this case concerns the proposed form of security – a cryptocurrency. Was the court prepared to accept this?
What were the facts?
In 2021, Tulip Trading Limited, a Seychelles registered company, issued proceedings against multiple software developers. The court ordered Tulip to provide security for costs in respect of the claim against the defendants.
Tulip serves as a holding company, beneficially owned by Dr Craig Wright, who claims to be the creator of Bitcoin under the pseudonym of "Satoshi Nakamoto".
Tulip is seeking access to a Bitcoin wallet claimed to be owned by Dr Wright. Dr Wright lost access to the wallet following an alleged computer hack on his computer and network in England that resulted in the private keys to the wallet being lost. Tulip is seeking access to more than US$4.5 billion worth of Bitcoin and other cryptocurrencies.
What is the basis of the claim?
The claim centres on Tulip asserting that the defendants owe certain fiduciary (and/or tortious) duties to rewrite the relevant cryptocurrency software and systems to enable Tulip access to the relevant cryptocurrencies. The defendants argue that they had no such duties.
Why was security for costs required?
The defendants have applied for security of costs, noting that in January 2022 the court determined that there was no evidence of Tulips assets and therefore it was necessary for Tulip to post security for costs. The court also noted that Tulip was a holding company, setting out that Tulip had no bank accounts and had no customers and noted that Tulip had not filed tax returns or trading accounts in the past.
The judgment therefore focused on lack of evidence from Tulip of its ability to pay security for costs (including that it was "impractical" for Tulip to obtain a guarantee from an English bank to serve as security and that, in order to provide security, Tulip would have to exchange digital assets for pounds sterling; and this would give rise to a certain tax liability). Therefore, it did not help Tulip that it failed to provide evidence as to its overall financial position, with the court noting that the claimant had not suggested that its claim would be stifled if security of the usual type was ordered.
This case cited Sarpd Oil v. Addax [2016] EWCA Civ 120 (Sarpd), noting that this case falls within the requirements set out in Sarpd. This is because Tulip had been given the opportunity to show that it could pay the defendants’ costs but that it had failed to do so. The court decided that Tulip had failed to demonstrate the ability to pay and ruled therefore, in such circumstances, Tulip could be said to have been deliberately reticent. Security was therefore ordered on the basis that there was reason to believe Tulip would be unable to pay costs if ordered to do so.
What are the principles for posting security?
What did the court say about cryptocurrencies?
The case also points us to something very new: a first in an English court.
Tulip subsequently proposed to provide the security by way of Bitcoin cryptocurrency. In particular, the proposal included that the Bitcoin amount to be put forward as security was to the value of the security required by the court, plus a 10% "buffer", all to be transferred to Tulip's solicitors. This would then be followed by written confirmation of the transfer being provided.
The reason for the "buffer" proposed by Tulip was an attempt to address that Bitcoin experiences high market volatility. In addition, the draft order prepared by Tulip's legal representatives provided a mechanism to "top up" the value of Bitcoin to meet the required value of security.
The court rejected Tulip’s novel proposal to post cryptoassets as security. This rejection was on the basis that cryptoassets are highly volatile, such that they do not meet the test for security. In fact, the judgment noted that Tulip accepted during the course of the proceedings the high level of volatility in the value of Bitcoin. The court relied on the judgment in Monde Petroleum SA v. Westernzagos Ltd (HC, 2015) (Monde Petroleum) in which it was held that:
"It is conventional to order security to be given either by payment into Court or by the provision of a guarantee from a first class London bank. That practice recognises that the security should be in a form which enables the defendant to recover a costs award made in its favour at the trial from funds which are readily available, such that there is little risk of delay or default in enforcement. 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."
Applying the principles from Monde Petroleum, the court did not accept security in the form of cryptoassets as proposed by Tulip. The judgment described that Tulip's proposal "would not result in protection for the defendants equal to a payment into court, or first class guarantee". The court went on to note that the proposal from Tulip would expose the defendants to a risk to which they would not be exposed with the usual forms of security, being a reduction in the value of Bitcoin, "which could result in their security being effectively valueless".
What are the implications of this decision?
This decision is understood to be the first attempt to post security in the form of cryptoassets.
Bitcoin first emerged in 2009, and with its growth came the emergence of other cryptocurrencies which, although widely derided by many, and still complex for investors, have been gaining some traction and recognition by governments. Investing in cryptocurrencies comes with many challenges, including technical difficulties, and there has been high volatility and fluctuation in valuations. The case itself cites "the high level of volatility in the value of Bitcoin".
The judgment notes that the top-up provisions proposed by Tulip did not fully meet the risk of market volatility. This was because there was no guarantee that Tulip would comply with the terms of the order, and there would therefore be "a substantial risk that enforcement of the obligation could not be achieved before judgment in the jurisdiction applications".
Cryptoassets might in the future be able to meet the legal test for security. For example, there may be a proposal for a significantly larger buffer or use of AI or other IT technology relating to reducing volatility and providing a top-up mechanism which provides better security.
In the meantime, the bigger question raised by this case is not just whether cryptocurrency is a valid form of security but, in light of the decision, whether it is in fact a valid form of currency.
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