On July 11, attorneys defending 12 Bitcoin Core developers in a lawsuit brought by Tulip Trading filed a preliminary issue application with the UK High Court. The application argues the claim brought by Tulip Trading is fraudulent and that the issue of whether Tulip Trading in fact owns the bitcoin it has sued on should be resolved before any further steps are taken. If the English High Court agrees, Tulip Trading will be required to prove that it owned the bitcoins it alleges were stolen before the lawsuit can proceed. 

Background

Tulip Trading is a Seychelles-based holding company created by Craig S. Wright that alleges it lost 111,000 BTC during a hack of Wright’s home computer network in 2020. The following year Tulip Trading brought a suit against 12 Bitcoin developers alleging that they have a fiduciary duty to introduce a backdoor into the Bitcoin Core client to allow Tulip Trading to take control of billions of dollars worth of Bitcoin that it claims to have owned and lost. 

The 111,000 BTC in question were held in two addresses—12ib7 and 1FeeX—and there is no evidence that Tulip Trading or Wright ever controlled these addresses. The 1FeeX address contains millions of dollars worth of bitcoins associated with the 2014 hack of the Mt. Gox exchange. 

The Preliminary Issue Application

The preliminary issue application is a mechanism for bifurcating the case against the Bitcoin Developers such that Tulip Trading must prove that it once owned the 111,000 bitcoins it claims to have lost before a judge considers the question of whether Bitcoin Core developers owe a fiduciary duty to users of the Bitcoin network. The preliminary issue application argues that Tulip Trading cannot prove this basic fact and as a result the case against the Bitcoin Core developers should be dismissed. As noted in the application:

“Tulip Trading Ltd accepts that it must establish that it owns the Digital Assets in order to obtain the relief it seek. It cannot do so because it never owned the Digital Assets and has commenced this claim fraudulently and in reliance on fabricated documents. This is of a piece with the historical conduct of the individual behind Tulip Trading Ltd, Dr. Craig Wright. Dr. Wright has a long history of fraud, forgery, and dishonesty (including in court proceedings in this jurisdiction and internationally). He has been shown to be a thoroughly dishonest individual and it is the position of the [defendants] that these proceedings are an attempt by Dr. Wright, through Tulip Trading Ltd, to use the English courts as an instrument of fraud. These are plainly serious allegations and they are not made lightly.”

The basic request from the developer defendants in the preliminary application is that Tulip Trading should be required to prove that it owned the bitcoins in the 12ib7 and 1FeeX addresses since this was its justification for bringing the lawsuit in the first place. The application makes the case that spending “seven to ten days” of court time to settle the issue of whether Tulip Trading ever owned the bitcoins in question would save the courts “eight to ten weeks” of time and costs proceeding to a full trial that was brought on fraudulent evidence. If the court grants the preliminary application and still decides to proceed to a full trial, it wouldn’t result in any increase in time or costs because the court would have had to consider this issue during the trial anyway. 

The evidence in support of the 35-page preliminary issue application provides a wealth of detail about why the defendants believe that Tulip Trading’s claim is fraudulent. The primary arguments are quoted directly from the evidence: 

A History of Fraud

As noted in the application, “Dr. Wright has a long and documented history of fraud, forgery and reliance on deliberately false evidence in legal and regulatory proceedings in this jurisdiction, Australia, the United States and Norway.” The application quotes several judges overseeing lawsuits previously brought by Wright acknowledging that he “lied and cheated in his attempt to prove that he is Satoshi Nakamoto,” “has given deliberately false evidence,” “wilfully created the fraudulent documents,” and more.

Tulip Trading Can’t Account for When or How it Acquired the Bitcoins

“Tulip Trading Ltd. alleges Dr Wright acquired the Bitcoin in the 1Feex address in late February 2011 from a Russian based exchange called WMIRK.  Notably, Tulip Trading Ltd. is not even able to state when or how it or Dr Wright acquired the Bitcoin in the 12ib7 address or the reason for any of the transactions that took place on it. Tulip Trading Ltd. accepts that no one has dealt with the Digital Assets in the 12ib7 address since July 2010, nor has anyone dealt with the 1Feex address since March 2011.”

Lack of Any Documents Showing Ownership of the 111,000 Bitcoins

“The absence of documentary records that one would expect to exist in relation to the acquisition of Bitcoin in the sums the subject of this claim” and argues that the “limited documents relied upon are fabrications.”

Tulip Trading Appears to be Admitting to Stealing Bitcoin from Mt. Gox

“It is widely accepted in the cryptocurrency community that the Bitcoin in the 1Feex address originated from a well-publicized hack on a Japanese crypto currency exchange that occurred in March 2011….essentially it appears that if Dr. Wright is the owner of the Bitcoin in the 1Feex address (which is denied), he has effectively admitted to being the person who stole 80,000 BTC from Mt. Gox.”

There is No Evidence that Craig Wright Lost These Assets in a Hack

“Dr Wright claims to have wiped his hard drive shortly after the Alleged Hack. He claims that he did so as he “did not know how the hackers obtained access” and “to ensure all malware and other threats were removed.”  This explanation is not credible. It cannot be the case that a ‘renowned’ computer security expert, as Dr Wright claims to be, would take such action following a hack as to do so would result in the loss of all information that might be used to identify the Alleged Hackers and recover the stolen material.” Furthermore, “Dr Wright has stated that backups of the private keys were held on Keepass, his One Drive, and Google cloud drives. It is well known that Microsoft and Google retain records of information held on their servers and that this information can be recovered if requests are made. Dr Wright made no attempt to contact Microsoft or Google to recover the information he says was deleted during the Alleged Hack. It is not credible that, in the context of an alleged loss as substantial as this one, Dr Wright did not consider (or retain others to consider) all possible avenues for the recovery of the allegedly deleted private keys.”

For these reasons and several others listed in the applications, the developer defendants argue that Tulip Trading’s “claim is doomed to fail.” The application lists the evidence that Tulip Trading must present in a preliminary trial to demonstrate it owned the bitcoins in question and also requests that Tulip Trading provide a security payment of $1.63 million to cover the cost of the case in the event that it is dismissed. 

Read the full preliminary issue application here

The Bitcoin Legal Defense Fund was pleased to see a thoughtful article about the Tulip Trading case in the current issue of the highly regarded Butterworths Journal of International Banking and Financial Law.

The article was written by an attorney not involved in the case who argues that regardless of whether Tulip Trading’s factual claims are taken at face value or are investigated at trial, “the ultimate conclusion is the same: Bitcoin developers do not owe a fiduciary duty to grant [Tulip Trading Ltd] access to its Bitcoin.”

The article does an artful job of explaining and dismantling the various legal tactics deployed by Craig Wright’s firm Tulip Trading in its ongoing lawsuit against 12 Bitcoin Core developers on the grounds that they “control the relevant networks and therefore owe [Tulip Trading] fiduciary and/or tortious duties to assist it in regaining access” to billions of dollars worth of Bitcoin it claims were stolen.

The article is well worth reading in its entirety, but we’ve highlighted some important points below:

The UK Court of Appeal’s analysis of an alleged duty of Bitcoin developers to implement Tulip’s requested change to Bitcoin Core is flawed

“This analysis is problematic because it relies on a flawed analogy between software bugs and the inability to transfer Bitcoin without a private key….First, the nature of the activity required to fulfill the duty alleged by Tulip Trading (i.e., change how the system is intended to work by transferring Bitcoin without a private key) is fundamentally different to fixing a software bug. Describing both as a mere ‘code update’ is a gross oversimplification…Nothing has gone wrong with the system. It is operating as intended. The inability to transfer Bitcoin without a private key is a fundamental security feature of the system. So on what basis can consent to a change which undermines that security feature be inferred? Even if consent can be inferred…it does not follow that there is a duty to implement that patch. It is completely unrealistic to say that Bitcoin owners (let alone the person who created Bitcoin who Dr. Wright ironically claims to be) have a legitimate expectation that developers will change how the system was intended to operate. This is a system which owners have voluntarily entered into and the consequences of losing a private key are well known.”

The Bitcoin Core developers are not a sufficiently well-defined group to warrant the imposition of fiduciary duties

“Bitcoin Core is the most popular software option in the Bitcoin ecosystem. It is open source and anyone can contribute. Therefore, the group of Bitcoin Core developers is necessarily not well-defined…Tulip Trading targets its claim at certain Bitcoin Core developers. It says those developers hold the passwords and are therefore able to introduce changes to the source code repository on GitHub. Developers with this access are referred to as repository maintainers. But not all of the defendant developers are maintainers. Some of them have never been maintainers and others are no longer maintainers. So Tulip Trading’s claim extends beyond maintainers, but to whom? That is unclear. Perhaps as the High Court observed, it extends to developers who Tulip Trading says exert a ‘significant influence’ over the Bitcoin network. What do ‘influence’ and ‘significant’ mean? When does influence cease to exist? What about other non-developer constituencies who might have significant influence? Therefore, even on Tulip Trading’s case, the class of developers is not well-defined.”

The Bitcoin developers do not control the Bitcoin Core software

“Tulip Trading asserts that the maintainers have unbounded discretion in deciding whether a proposal should be merged into the repository. However, that ignores two things: (1) the expectation of the wider development community is that maintainers should be mere facilitators or performing a ‘janitorial role’; and (2) all GitHub proposals are publicly available and the peer review is public. This transparency creates accountability.”

Bitcoin Core developers do not control the Bitcoin network

“The Court of Appeal considered that because software is all there is (and the developers control the software), the developers control the networks. There are a few problems with this. First, there are multiple software options within the Bitcoin ecosystem. Bitcoin Core is currently the most popular, but that is only because other nodes choose to run it. Second, there are other components of the Bitcoin system including the network of participants. The participants are just one part of a wider set of constituencies which…can and do exert influence on the system. If maintainers introduced a controversial change into Bitcoin Core, participants are free to not upgrade to the new version or to run an alternative software option. (Bitcoin Core is released under the open source MIT License, so the alternative software could even be a copied or modified version of Bitcoin Core.)…There are numerous incidents that demonstrate that no constituency (including developers) can unilaterally impose its will on the others.”

Even if Bitcoin Core developers were legally compelled to implement Tulip Trading’s patch, they can’t force other network participants to use the new software

“If maintainers were to merge Tulip Trading’s software patch into the Bitcoin Core repository, participants may refuse to upgrade to the new software or opt for another software option. Tulip Trading argues that would not happen because it is not in the participants’ commercial interests. However this assumes (without any justification) that a majority of participants and wider constituencies would upgrade to the new software with the result that participants who do not upgrade are left on a minority chain. Given the controversial nature of Tulip Trading’s software patch (including the potential for it to undermine security), it is very likely that the majority would not upgrade. All Tulip Trading’s patch would achieve is the creation of a minority chain with a likely worthless coin.”

For this reason, the article concludes, “fiduciary duties are not required” of Bitcoin developers.” Instead, “responsibility is placed on owners to safeguard their Bitcoin (or to go after the hackers) and not on developers to recover it for them.”

Read the Full Article Here

“The U.K. report sheds light on the definition of fiduciary duty, claiming that categories of fiduciary recognized by the law include “agents, trustees, partners, company directors, and solicitors.” The report said fiduciary duty rarely exists outside these categories. According to the BLDF, the developers’ legal representative, the defendants do not fit any criteria mentioned by the Commission.

“They are not agents, trustees, partners, company directors, or solicitors, and they never ‘undertook or were entrusted with authority to manage the property or make discretionary decisions on behalf of another person,’” BLDF stated in a recent blog post, adding that “Bitcoin was created to facilitate transactions between individuals without the need to entrust any authority to a third party.””

Read the full article at Cointelegraph

Jessica Jonas, chief legal officer of the nonprofit Bitcoin Legal Defense Fund, discussed the potential legal ramifications of a high profile lawsuit against Bitcoin core developers during the Bitcoin 2023 event in Miami on May 18. The case in question is a U.K. legal action filed by Craig Wright, the owner/operator of Tulip Trading. Wright’s perhaps most well-known for his assertion that he is Bitcoin creator Satoshi Nakamoto — a claim driving another unrelated lawsuit….

Read the full story on Cointelegraph

Jess Jonas, Chief Legal Officer of the Bitcoin Legal Defense Fund joins Stephan Livera to give an overview of the Bitcoin Legal Defense Fund, unpack the threats from the Tulip Trading Case, discuss the implications of the case for open source developers, outline a second case covering Bitcoin copyright claims, and more.

 

Listen to the full podcast

In February, the UK Court of Appeals overturned an earlier ruling against Craig Wright’s firm Tulip Trading in its lawsuit against 12 Bitcoin Core developers that seeks to compel them to introduce a backdoor into the Bitcoin Core software.

The UK High Court initially dismissed the case against the 12 Bitcoin Core developers for lack of jurisdiction finding that there was “not a serious issue to be tried,” but the appellate court overturned this decision to allow the case to proceed to trial.

An analysis of the appellate decision under theories of property and private international law published earlier this month in the Butterworths Journal of International Banking and Financial Law makes a strong case for why this appellate decision was misguided.

As the article notes, “the Court of Appeal’s decision to allow TTL’s appeal on this issue does not establish that the core software developers who maintain the bitcoin protocol owe fiduciary duties to an “owner” of that cryptocurrency. To the contrary, [the appellate judge] recognised that the facts of the case were “new and quite a long way from factual circumstances which the courts have had to examine before in the context of fiduciary duties”; and at that for TTL’s case thus to succeed would involve “a significant development of the common law on fiduciary duties.”

The author of the article, who is not involved in the Tulip Trading case, doesn’t attempt to predict the outcome of the lawsuit based on established fiduciary law or issues of fact in the case. Instead, she focuses on two core issues that motivated the appellate court’s decision, which she argues were “premised on assumptions as to the position in the law of property; which call into question whether, even if TTL is successful at trial, such victory will serve TTL’s ultimate aim of recovering access or control to the bitcoin in issue.”

The article is worth reading in full, but we have included a few key points here:

It is unclear whether English courts have jurisdiction over the Tulip Trading case

“It cannot be assumed that English law is indeed the appropriate governing law to be applied…is based on entirely circular reasoning. Cryptoassets, by their very nature, test the limits of a territorial approach to private international law as they do not simply exist “nowhere” but are deliberately designed to exist “everywhere and nowhere” at once…it has been necessary to ascribe to the bitcoin…the location of the “owner”. However, in property disputes, the identity of the “owner” is the very thing in issue between various competing claims to the asset; it is something that will not be determined until the conclusion of proceedings. How can this, then, be taken to decide the preliminary question of the appropriate forum and the place where proceedings should be issued? As noted above, TTL has not proven it is the “owner” of the bitcoin in dispute as a matter of law…. Until TTL establishes it is the “owner” of the bitcoin in dispute, it is highly doubtful that the English courts are of “competent jurisdiction” at all…It is strongly arguable that the question of jurisdiction in the present case has been decided on an erroneous application of the policies underpinning the property rules of private international law.”

Tulip Trading’s argument runs counter to the general understanding that the person who possesses the private keys to a cryptoasset is its owner

“Tulip Trading’s present position…runs counter to the prevailing trend, both in England and internationally, to consider that generally, the person who has lawfully acquired control over a cryptoasset, usually by knowledge of the private key, is its “owner”. Hence, even if TTL were unlawfully “dispossessed” of the bitcoin in dispute, it cannot be assumed that the rival claims alluded to in the court are being advanced by the person responsible for the hack; there is no reason to suggest that such claims are being advanced by anyone other than third parties to the fraud on the basis of a lawful acquisition.”

Even if Tulip Trading was in fact the owner of the Bitcoin it claims to have lost—a fact that is strongly disputed—that does not necessarily mean that it is still the true owner of those Bitcoins

“Tulip Trading’s case assumes what it is still required to prove: that Tulip Trading is, as a matter of law, the “true owner” of the bitcoin in issue and is, therefore, the person to whom this newly recognised species of fiduciary obligation is owed….Property rights are never truly absolute and indefeasible. Property rights, once acquired, may subsequently be lost…Even if, therefore, it may be assumed that TTL was the “true owner” of the relevant bitcoin before the alleged hack, it does not follow that TTL remains the “true owner” such that the defendants owe the alleged fiduciary duties to TTL, and not to some other participant in the bitcoin network.”

As the article author notes in conclusion, the question of whether the UK has jurisdiction over the case “runs a high risk that a judgment of the English courts in this matter will not be recognised or enforced in other jurisdictions, on the basis that jurisdiction was not properly founded. Hence, the risk to the defendants in the case of a rival claimant obtaining a contrary judgment in a foreign court… cannot be underestimated.”

Read the full article here