Bitcoin Association for BSV will release software to facilitate court orders to freeze stolen or lost coins, while some courts recently authorised service proceedings by tokenised airdrop.
By Christian F. McDermott, Andrew C. Moyle, and Nara Yoo
Earlier this year, in Tulip Trading Ltd (TTL) v. Bitcoin Association for BSV (Bitcoin Association) and others, the UK High Court held that bitcoin software developers do not owe a duty of care to bitcoin owners who have lost their private keys, and are not obliged to take steps to safeguard or to recover such keys or bitcoin. For more information on this case, see Latham’s blog post, UK High Court Rules on Liability of Bitcoin Software Developers.
In June 2022, Bitcoin Association announced that it had agreed to a settlement with TTL in proceedings following the High Court decision, and will: (1) release an updated version of the Bitcoin SV Node software that allows bitcoin SV miners to freeze transaction outputs and act on court orders (the Software Update); and (2) seek to procure a notary service provider to execute the notary aspects of the process as an independent entity (the Notary Service Provider).
The Software Update will effectively allow court orders to freeze bitcoin SV to be enforced on the bitcoin SV network itself (rather than the less direct route of seeking enforcement via crypto exchanges). In essence, when a court issues an order to freeze stolen or lost coins:
- The plaintiff/claimant will pass on the court order to the Notary Service Provider to verify the court order, translate the order into machine readable language, and broadcast the court order to bitcoin SV miners using a “notary tool”.
- Bitcoin SV miners will decide if they trust the information received from the Notary Service Provider and, if the order applies to them, take action to respect the court order to freeze coins. If bitcoin SV miners decide not to take action, they will be in breach of the network rules, their blocks may be orphaned, and they may risk being held in contempt of court for not complying with a court order.
Bitcoin Association has clarified in its press release that the bitcoin SV miners decide whether to install the Software Update and whether to take action to respect the court order. Accordingly, Bitcoin Association will have no role in implementing the Software Update itself or in enforcing relevant court orders on the bitcoin SV network.
Court Service by Tokenised Airdrop
In a further development in the digital assets space, also in June 2022, the Supreme Court of the State of New York authorised the first-ever service of court documents on an anonymous defendant using tokenised airdrop. The case concerned a cryptocurrency exchange and fintech company based in Lichtenstein that was hacked and lost almost £6.5 million. The majority of the stolen funds were traced to two cryptocurrency wallet addresses, and the plaintiff was authorised to serve legal documents via tokenised airdrop to these addresses. The tokenised airdrop took the form of a non-fungible token (NFT) that contained a hyperlink to the relevant court documents, and a mechanism that tracks when a person clicks the hyperlink. The airdrop was a success as lawyers for defendants filed notices of appearance in the case.
More recently, in July 2022, the UK High Court also granted permission to serve proceedings by an NFT over the blockchain to “persons unknown”. The case concerned persons unknown that imitated an online brokerage and encouraged the claimant to transfer funds from his crypto wallets to trade on the platform. The claimant was granted permission to serve proceedings on the persons unknown by way of an NFT airdrop to the two wallets into which the claimant had deposited his cryptocurrency. Further, the court found that the cryptocurrency exchange (also a defendant in the claim) held the claimant’s cryptocurrency on trust for the claimant, meaning that the exchange could be held liable for breach of trust if the exchange failed to ringfence misappropriated funds held on its platform, if required to do so by the courts.
Bitcoin Association is rolling out the Software Update against a backdrop of an increasing willingness in the English courts to recognise and protect digital assets. The UK High Court recently demonstrated this willingness when it ruled that NFTs are legal property and can be protected as such, in that particular case by a proprietary freezing injunction.
Whether other blockchain networks and their users will adopt similar tools to allow effective enforcement of court orders, and whether courts in key markets outside the UK and more widely in the US will start to allow the service of court documents by NFT remains to be seen. The current trend towards greater protection for victims of digital asset theft and fraud may also increase consumer confidence and trust in digital asset markets.