THE UK CONTINUES TO PLAY A LEADING ROLE IN THE REGULATION OF
CRYPTOCURRENCY AND DIGITAL ASSETS
The UK Government’s consultation on what it calls a
“world first” new regime of cryptocurrency
regulations promises to bring the regulation of digital assets
closer in line with traditional financial instruments.
Similar developments in English law jurisprudence, most recently
in the Tulip Trading Ltd case, portend
greater regulation, scrutiny of and potential responsibility for
actors in the blockchain. The case, and others we have previously
reported on, show that, independent of current pending legislation,
the common law will step in where the facts require. They also
indicate a potential, incremental development of legal concepts
(such as fiduciary duties) to deal with this novel asset class.
Given recent market turbulence, there will be strong views about
these developments, and they are set to make 2023 another
interesting and fast-moving year for digital assets.
UK MOVES TOWARDS CRYPTO REGULATION
In the short time since our recent articles1 We
recently wrote on the following subjects: How to get your money back in a cryptocurrency
demise or cryptocurrency fraud?; and Locating stolen cryptocurrency: how disclosure
orders can help. about digital assets, a number of noteworthy
developments have emerged in the UK.
In February, the UK Government launched a 3-month consultation on its proposals for a new
regulatory regime for crypto assets in order to bring the sector in
line with its approach to traditional banking and finance
instruments (the Consultation). Some of the key
proposals in the Consultation include:
Expanding the scope of Financial Services and Markets Act 2000
to add “crypto assets” as a new type of
“specified investments” as defined in the
Financial Services and Markets Act 2000 (Regulated Activities)
Order 2001.
Implementing a definition of crypto asset which defines crypto
assets as “any cryptographically secured digital
representation of value or contractual rights that: (a) can be
transferred, stored or traded electronically, and (b) that uses
technology supporting the recording or storage of data (which may
include distributed ledger technology).”
Listing the tokens covered by the definition of crypto assets:
exchange; utility; security; non-fungible; (fiat-backed) stable
coins; asset-referenced tokens; commodity-linked; crypto-backed;
algorithmic; governance; and fan tokens.
Applying future financial services regulation of crypto assets
to a particular subset of crypto assets depending on the matter
being regulated, and accordingly use narrower definitions for
each.
Strengthening the rules for crypto trading platforms, financial
intermediaries and custodians, responsible for facilitating
transactions and storing customers’ assets.
Creating a robust top-world regime for crypto lending and
delivering a financial services roadmap by embracing technological
change and innovation to grow the economy.
Implementing more transparency and protections for consumers
and businesses and improving market integrity to limit market and
price volatility.
Placing responsibility on crypto trading platforms for defining
the detailed content requirements for admission and disclosure
documents to ensure fair standards.
The UK Treasury’s messaging on the proposals is that it
intends to lay down sensible, transparent rules on crypto assets,
enhance reporting and prevent market abuse such as so-called pump
and dump, where an individual artificially inflates the value of a
crypto asset before selling it.
We expect, nevertheless, that the Consultation will elicit
strong views both from:
those who will not view these changes as sensible and will
oppose stripping cryptocurrency of its unique independence,
and
those in favour of greater regulation.
The Consultation will close on 30 April, with
any responses then considered by ministers. We will keep you
updated as the proposals make their way through.
The courts are following suit – and greater scrutiny
looms following the Tulip Trading Bitcoin case
A similar movement towards greater scrutiny can be seen in the
UK courts, which have been increasingly willing to use the tools
they have at their disposal under English law to assist victims of
crypto scams and thefts to track their stolen assets, identify the
wrongdoers, and obtain appropriate remedies.
We previously wrote on Locating stolen cryptocurrency: how disclosure
orders can help (which discussed the LMN v Bitflyer Holdings Inc and others
case) and How to get your money back in a cryptocurrency
demise or cryptocurrency fraud?.
The latest development is a case involving Dr Wright, a
purported creator of the Bitcoin system, Tulip Trading Ltd v Wladimir Jasper van der
Laan & ors [2023] EWCA Civ 83 (3 February 2023), in
which the English courts have to deal with novel issues regarding
the role and obligations of crypto software developers and the
duties they owe to crypto assets owners.
Tulip Trading Ltd (TTL), the claimant in the
action, is a Seychelles registered company whose main beneficial
owner is Dr Wright. TTL claimed to own a considerable sum of
Bitcoin, as well as other crypto assets on 4 blockchain networks
(BSV, BTC, BCH, BCH ABC), but is unable to access these assets as
the keys to them have been locked in a hack, likely stolen.
The initial decision: dismissal for lack of jurisdiction
In a judgment in early 2022, High Court Justice Sarah Falk
denied jurisdiction over TTL’s claim against the 16 Bitcoin
developers alleged to be in charge of the 4 Bitcoin
blockchains.
TTL had commenced proceedings in the High Court, arguing that
the 16 developers owe fiduciaries and tortious duties to crypto
owners and should assist TTL in regaining control of its assets.
The defendants challenged the jurisdiction of the courts and in its
25 March 2022 judgment, the High Court accepted
the defendants’ objection and set aside the order granting
permission to serve the defendants out of jurisdiction, finding
that it lacked jurisdiction to hear the dispute because TTL did not
satisfy the first limb of the test for service out. That is, there
was no serious issue to be tried.
The Court of Appeal’s decision: sensationally overturning
the earlier decision
The Court of Appeal’s recent decision sensationally
overturned the lower court’s judgment, finding that the High
Court had jurisdiction to hear the claim because:
TTL had a real prospect of establishing that the developers
owed fiduciary duties to crypto owners, and therefore there was a
serious issue to be tried; and
dismissing TTL’s case as unarguable without a full trial on
the merits would mean assuming facts in the developers’ favour,
and ruling against TTL based on findings impermissibly assumed
against TTL.
Ramifications for crypto companies
Although the Court of Appeal did not conclude on the merits
(this will be resolved in a further hearing), by considering that
there was a serious issue to be tried, it indicated that it was
open to hearing arguments on the potential duties owed to Bitcoin
owners.
This could have significant ramifications for the crypto sector
and all the basic principles on which it is based
(decentralization, anonymity…!). However, the Court of
Appeal’s decision is a long way from establishing the existence
of fiduciary duties as alleged, as it would involve a significant
development of the common law of fiduciary duty. We will report
further once the High Court decides on the merits of this key
dispute.
Is crypto ‘property’? A possible new category of
property
Although the Court of Appeal did not rule on this point, by
holding in obiter that digital assets such as Bitcoin are property,
its judgment appeared to endorse the Law Commission’s recommendations that none
of the categories of personal property are adapted to crypto assets
and that a third category of personal property known as “data
objects” might be properly created to cover digital
assets.
RECENT ARBITRATION CLAIMS IN THE CRYPTO SECTOR HAVE ALSO
ADDRESSED JURISDICTION
The issue of jurisdiction in relation to crypto asset claims has
also come up in the context of arbitration, with the arbitrability
of such claims being addressed by the English courts in two recent
cases: Soleymani v Nifty Gateway LLC (Nifty) (The
Competition and Markets Authority intervening) [2022] EWCA Civ
1297 (6 October 2022)2 On which we briefly commented
in our previous post: Using arbitration to resolve cryptocurrency
disputes, NFT disputes, and other digital asset disputes.
(Soleymani) and Chechetkin v Payward Ltd & Ors [2022]
EWHC 3057 (Ch) (25 Oct. 2022)
(Chechetkin).
1. Soleymani
In Soleymani, UK-based art and
non-fungible token (NFT) collector Amir Soleymani
participated in an online auction on the US-registered digital art
blockchain site Nifty. Despite having agreed to Nifty’s terms
and conditions, which contained a Judicial Arbitration and
Mediation Services (JAMS)3 JAMS is a
United States based alternative dispute resolution center.
arbitration clause, when a payment dispute arose, Soleymani sought
to avoid the arbitration clause by filing an English court claim
against Nifty.
Soleymani argued that as a consumer, the JAMS arbitration clause
was unfair and non-binding. Claiming that the dispute fell under
the ‘arbitration exception’ of the Regulation (EU) No
1215/2021 (Brussels Recast Regulation), Nifty challenged the
jurisdiction of the English courts under CPR Part 11, and applied
for an order to stay the proceedings in favour of the JAMS
arbitration pursuant to s. 9 of the Arbitration Act 1996
(AA).
The High Court considered that, although it had jurisdiction to
hear the gambling and governing law claims, it lacked jurisdiction
to decide on the validity of the arbitration claim and granted a
stay of proceedings. According to the High Court, it was not
necessary to investigate whether the claimant acted as a
“consumer”.
The Court of Appeal rejected the two first grounds of appeal,
(i) the ‘arbitration exception’, and (ii) the application
of s. 15D of the Civil Jurisdiction and Judgments Act 1982
(CJJA), but allowed the third ground (under s. 9
of the AA), and set aside the lower court’s direction ordering
a stay of the proceedings. The Court of Appeal considered that the
case should proceed to trial and that the English courts should
determine whether under s. 9(4) of the AA, the arbitration clause
was “null and void, inoperative, or incapable of being
performed”.
2. Chechetkin
In line with the Soleymani judgment, in Chechetkin, the High Court dismissed
an application challenging its jurisdiction to hear the dispute by
reason of an existing JAMS arbitration award on the same
issues.
Mr Chechetkin lost £600,000 whilst trading on Payward, a
cryptocurrency trading platform. Payward consequently brought
arbitration proceedings against Mr Chechetkin pursuant to a JAMS
arbitration clause in Payward’s terms and conditions.
Chechetkin similarly sought to evade these proceedings by filling
an English court action, arguing that, as a consumer, he fell
within the provisions of s. 15B of the CJJA and could commence a
claim in the English courts in that capacity.
In rejecting Payward’s jurisdictional objection, the Court
held that, although Mr Chechetkin was a banking lawyer with a pro
trading account, he was nevertheless a consumer dealing outside his
profession, and concluded that neither the arbitration clause, nor
the arbitral award, deprived the English courts of their
jurisdiction to hear the case.
CRYPTO ARBITRATION CLAUSES WILL NOT EVADE THE COURT’S
CONSUMER SCRUTINY
These two cases illustrate the complexities which may arise in
crypto consumer arbitration disputes where the consumer/crypto user
objects to the validity of the arbitration clause and/or the other
party challenges the jurisdiction of the English courts. Although
the merits of the case have not yet been heard by the English
courts, these two cases should be taken as a warning for crypto
businesses that merely including arbitration clauses in their terms
and conditions will not exempt them from court scrutiny if such
clauses are unfair to consumers.
Footnotes
1. We recently wrote on the following
subjects: How to get your money back in a cryptocurrency
demise or cryptocurrency fraud?; and Locating stolen cryptocurrency: how disclosure
orders can help.
2. On which we briefly commented in our
previous post: Using arbitration to resolve cryptocurrency
disputes, NFT disputes, and other digital asset disputes.
3. JAMS is a United States based
alternative dispute resolution center.
Originally published 20 March 2023
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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