Developments In The Law On Digital Assets

Companies exploring the deployment of digital asset infrastructure should keep abreast of developments in the burgeoning law of digital assets and consider whether these developments have any implications for their business models under consideration.

Three questions have arisen in cases this year that may be of relevance in Bermuda:

1. Is there any intellectual property in the foundational technologies underpinning digital asset infrastructure?
2. How will courts approach cross border issues in digital assets litigation?
3. Do the developers of digital assets platforms owe fiduciary duties to users of those platforms?

INTELLECTUAL PROPERTY IN DIGITAL ASSET INFRASTRUCTURE

The UK Courts have recently given a preliminary decision in the February 2023 case Wright v BTC Core that has found that there is at least an arguable case that copyright can attach to blockchains. The Claimant, Dr Craig Wright, claimed in the litigation that he is Satoshi Nakamoto: the pseudonymous author of a white paper entitled ‘Bitcoin: A Peer-to-Peer Electronic Cash System’ and the inventor of the decentralised blockchain.

The white paper was reproduced in the Bitcoin blockchain, which (on the Claimant’s case) was a means by which to ensure that all Bitcoin transactions would include a republication of the Claimant’s copyrighted work. The English Courts found that there is a serious issue to be tried in this regard and gave the Claimant permission to serve his claim on a number of entities and individuals involved in the maintenance and operation of Bitcoin in its current form.

This is a reminder that, even where a technology’s use is so widespread as to give the appearance that it is open for use by all, there may be intellectual property, or at least claims to intellectual property, at levels lower down the technology stack than might be expected. An entity should fully understand the provenance and licensing of software and related technologies underpinning digital asset infrastructure before it is deployed.

CROSS BORDER ISSUES

In a number of recent cases involving digital assets, courts have been forced to consider whether they have jurisdiction over the assets in question. For example, in the 2023 decisions in Osbourne v Persons Unknown, the English Court had to consider whether it had jurisdiction in respect of NFTs that the Claimant said had been stolen from her. The Court held that a digital asset was located within the country where its owner was domiciled. It followed therefore that, because the Claimant lived in England at the time that the NFTs were stolen, the English Courts would have jurisdiction in respect of their theft. Subsequent transferees of the digital assets might also be subject to the jurisdiction of the English courts.

This case demonstrates that a dispute relating to the ownership of a digital asset may take place in courts where the beneficial owner was located, notwithstanding the content of agreements to the contrary. This should be borne in mind when developing agreements underpinning digital assets. Consideration should be given as to how agreements involving digital asset infrastructure can be structured to limit the jurisdictional reach of foreign courts.

DUTIES OF CARE

The final question recently considered is whether the developers of digital assets infrastructure owe fiduciary duties to end-users. In the February 2023 case Tulip Trading Ltd v Bitcoin Association, this issue was addressed. Tulip Trading Ltd (the Claimant) is a company owned by the aforementioned Dr Wright. The Claimant claimed around $4 billion of Bitcoin was stolen from it as a result of the failure of Bitcoin’s developers to patch bugs in the software. The English Court hearing the case at first instance rejected his claim, finding that the developers did not owe fiduciary duties to owners of relevant digital assets.

The UK Court of Appeal overturned that the developers had undertaken a role that involved making discretionary decisions and exercising power for and on behalf of owners of digital assets and in relation to property entrusted to their care. In those circumstances, the Court of Appeal found there was at least a realistic argument that the developers of Bitcoin owe fiduciary duties to owners of Bitcoin.

The Court of Appeal recognised that, if such duties were established, it would be a significant development of the law on fiduciary duties.

If such a duty of care is ultimately found to exist, it could have profound implications for the development and maintenance of software that underpins decentralised digital asset infrastructure, e.g. blockchains. Companies using digital assets should be aware that fiduciary duties may exist between the developers of underlying technologies and users of these technologies, even in the absence of any direct contractual relationship between the parties.

The developers who maintain decentralised blockchains may decide not to continue to work on these projects, if they are exposed to (potentially) unlimited liability for bugs in their software. Such a finding could also have implications for developers of open-source software.

CONCLUSION

The law of digital assets remains uncertain in many fundamental ways. This does not mean that secure and useful products cannot be built using digital asset infrastructure and technologies. Products involving digital assets should however be subject to close scrutiny and analysis to ensure that there is no such exposure to unforeseen risks. Given the sophistication of the financial and digital assets sectors in Bermuda (and their professional advisors), we expect that Bermuda entities are well-placed to conduct such an analysis.

First Published In the Bermuda Business Review 2023-2024 – June 2023