On June 27, the UK Law Commission, a statutory independent body created to review and recommend reforms to UK laws, published its landmark report on digital assets. The 300 page report is a comprehensive analysis of laws related to cryptocurrencies and other digital assets, with a special focus on laws related to personal property rights.
Chapter 7 of the report details laws and recommendations related to ”Intermediated Holding Arrangements,” which includes a subsection on when a fiduciary duty may exist in digital asset ecosystems. This analysis is particularly timely given the lawsuit in the UK brought against a dozen Bitcoin Core developers by Tulip Trading, which alleges that these developers owe Tulip a fiduciary duty and should be legally compelled to introduce a backdoor into the Bitcoin Core client to allow Tulip to recover allegedly stolen bitcoins.
The Bitcoin Legal Defense Fund has consistently argued that the Bitcoin developers named in the Tulip Trading lawsuit cannot owe a fiduciary duty to the users of an open source decentralized network. Based on the discussion of fiduciary duty in the report (sections 7.123 – 7.129), the UK Law Commission appears to agree.
In the report, the UK Law Commission cited the Tulip Trading case and its “classic definition” of fiduciary duty, noting:
“A fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence. The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his fiduciary. This core liability has several facets. A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal.”
Next, the report goes on to note that there are several well-established categories of fiduciary that are recognized by the law: agents, trustees, partners, company directors, and solicitors. The report cites Al Nehayan v Kent, a 2018 lawsuit between two individuals who partnered to develop luxury hotels in Greece, to underscore the point that fiduciary duty rarely exists outside of these legal categories:
“His Lordship noted that it was possible — albeit exceptional — for fiduciary duties to be recognised outside of these established categories. He said that ‘fiduciary duties typically arise where one person undertakes and is entrusted with authority to manage the property or affairs of another and to make discretionary decisions on behalf of that person.’” [Emphasis added]
The Bitcoin Core developers named in the Tulip Trading case do not fit any of the criteria for fiduciary duty outlined by the UK Law 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.” Not only would treating the developers as fiduciaries be an “exceptional” departure from established law, it would run counter to the entire raison d’être of the Bitcoin network.
Bitcoin was created to facilitate transactions between individuals without the need to entrust any authority to a third party. The conclusion of the Bitcoin whitepaper couldn’t be more clear on this point:
“We have proposed a system for electronic transactions without relying on trust. We started with the usual framework of coins made from digital signatures, which provides strong control of ownership…”
The UK Law Commission plays an important role in ensuring that the legal system in the UK is as fair, modern, simple and cost-effective as possible. We are pleased that it has used well-established legal precedent in its analysis of when fiduciary duties apply to cryptocurrencies and other digital assets.
Its report undermines the central claims of Tulip Trading against a dozen Bitcoin Core developers and further increases our confidence that the resolution of this lawsuit will uphold the rights of developers to build open source software without exposing themselves to undue legal risk.
You can read the full UK Law Commission report here or find the complete and unedited sections pertaining to fiduciary duty below.
Fiduciary Duty
7.123 Depending on the use-case, intermediated holding arrangements could also rely on supplementary legal frameworks such as those involving fiduciary duties, which may arise on the basis of agency principles and/or other relationships outside of trusts.
7.124 Agency, in this strict legal sense, is a relationship that gives rise to fiduciary duties. In Bristol and West Building Society v Mothew, Lord Justice Millett (as he then was), defined a fiduciary in the following terms*:
A fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence. The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his fiduciary. This core liability has several facets. A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal.
7.125 In Al Nehayan v Kent Lord Justice Leggatt (as he then was) referred to agents as one of the “settled categories of fiduciary”, alongside trustees, partners, company directors and solicitors. His Lordship noted that it was possible — albeit exceptional — for fiduciary duties to be recognised outside of these established categories. He said that “fiduciary duties typically arise where one person undertakes and is entrusted with authority to manage the property or affairs of another and to make discretionary decisions on behalf of that person.”
7.126 A non-custodial holding intermediary ordinarily owes users contractual duties in relation to the services provided. However, additional fiduciary duties may also arise on the basis of an agency relationship. Even in the absence of agency, fiduciary duties may be implied as a result of the activities undertaken by the holding intermediary. Examples of the types of activities that could give rise to fiduciary duties include the provision of services relating to investment advice, investment management, brokering trades on a discretionary (as opposed to “execution only”) basis and arranging loans of crypto-tokens with third parties.
7.127 The existence of fiduciary duties in addition to the contractual obligations that ordinarily define a non-custodial intermediated holding relationship can be beneficial to users. The breach of such fiduciary duties may give rise to proprietary remedies. In the event of a holding intermediary entering insolvency proceedings, these remedies could enable users to achieve enhanced recoveries relative to what would be possible on the basis of unsecured contractual claims alone.
7.128 For example, where a holding intermediary obtains secret profits, illegitimate commissions, or bribes in breach of fiduciary duty, users may be able to take advantage of a constructive trust imposed on the intermediary to prevent them from profiting from their position. The subject matter of that constructive trust would not form part of the holding intermediary’s estate. However, to the extent a constructive trust is found in this context at all, it would likely only apply to the gains obtained in breach of fiduciary duty or their traceable substitutes (including further gains). It would not operate to alter the characterisation of a user’s primary entitlement to the redelivery of held assets, which would remain in the form of unsecured contractual claims.
7.129 As we noted in our consultation paper, is common practice for holding intermediaries operating in conventional securities markets to include in their services contracts provisions designed to modify implied fiduciary duties. These are intended to disclose, and thereby obtain informed consent to, conflicts of interest and to the generation and retention of profits, and to obtain permission for the relaxation of confidentiality obligations to permit the sharing of client information with affiliates and other third parties. Particularly in a commercial context, the courts have recognised the validity of, and given effect to, a broad range of arrangements, seen as consistent with the law of England and Wales. We anticipate that a similar approach to controlling and defining the scope of fiduciary duties could also be effectively deployed in the context of non-custodial intermediated holding relationships.
* [1998] Ch 1 at 18A-C, referred to by Birss LJ in Tulip Trading v Van Der Laan [2023] EWCA Civ 83, [2023] 4 WLR 16 at [42] as “The classic definition of a fiduciary”. His Lordship went on to explain that the role of a fiduciary has certain key characteristics which involve “acting for or on behalf of another person in a particular matter and also that there is a relationship of trust and confidence between the putative fiduciary and the other person”: at [70]
