The flexibility of English common law has made it easy to establish the basic legal principles that apply to cryptocurrency as an asset. This blog post provides an overview of recent decisions that establish these principles, and considers what may be next for cryptocurrency and English law.
Cryptocurrency is property under English law
The courts have accepted that cryptocurrencies constitute property under English law. The key case in this regard is AA v Persons Unknown, which considered whether bitcoin was property in the context of a proprietary injunction. The High Court adopted the analysis in the UK Jurisdiction Task Force’s Legal statement on cryptoassets and smart contracts (the UKJTF statement) published in November 2019 in deciding that, even though cryptocurrencies are intangible, they constitute property under English law (see paragraphs 59 to 63). Bitcoin met the classic definition of property in National Provincial Bank v Ainsworth: namely it is definable, identifiable by third parties, capable in its nature of assumption by third parties, and having some degree of permanence (see AA v Persons Unknown, at paragraph 59). Prior to AA v Persons Unknown, the court had treated cryptocurrencies as property in Vorotyntseva v Money-4 Ltd, t/a Nebeus.com and Liam David Robertson v Persons Unknown, however, neither of these cases considered the basis on which cryptocurrency could be regarded as property under English law.
The precise type of (legal) property that a cryptocurrency constitutes remains somewhat unclear, however. Traditionally English law has recognised two kinds of property: ‘things in possession’ and ‘things in action’. Things in possession relate to tangible property, which a cryptocurrency is plainly not. A ‘thing in action’ traditionally covers types of intangible property like debts or contractual rights. The reasoning in the UKJTF statement referenced in AA v Persons Unknown concluded that a cryptocurrency might represent a new category of intangible property that was not a ‘thing in action’. However other cases, namely Fetch.ai Ltd and another v Persons Unknown Category A and others and Reyes v Persons Unknown, appear to have assumed that cryptocurrencies fell neatly into the existing and long-established category of ‘things in action’. This conceptual debate has not so far made any real difference in practice as far as cryptocurrency litigation is concerned, because cryptocurrency has simply been treated as “property”. But at some stage, it is apposite for clarification.
The persons unknown regime
A common theme running through the cases cited above is that they all involve claims against ‘persons unknown’ or classes thereof. This follows the precedent set in the (non-cryptocurrency) case of CMOC v Persons Unknown, which involved a business email compromise fraud in which the identity of the perpetrators and the recipients of stolen funds were not known so the court granted a worldwide freezing order against “persons unknown”.
In a cryptocurrency context, of particular interest is the case of Fetch.AI Ltd and another v Persons Unknown Category A and others, which involved various categories of persons unknown, referred to by the judge as (a) those involved in the fraud, (b) those who received assets without having paid a full price for them and (c) innocent receivers (that is, those who had no reasonable grounds for thinking that assets they had received did not belong to them but instead belonged to the claimants). The court was mindful that the order it made should make clear that innocent receivers would not find themselves in breach of the order. The relevant order therefore contained a caveat restricting the scope of proprietary relief available to assets not held by innocent receivers.
The lex situs of a cryptocurrency is where its owner is domiciled
It is generally somewhat artificial to refer to the location of a cryptocurrency given its decentralised nature that is, being recorded in separate ledger entries potentially spanning many jurisdictions with no “prime” or “master” ledger. However, for the purposes of English law the lex situs of cryptocurrency was held in Ion Science v Persons Unknown to be the place where the person or company who owns it is domiciled; that approach was also followed in Fetch.AI. Both cases cited the textbook Cryptocurrencies in Public and Private Law by Professor Andrew Dickinson, which considers the position at 5.109.
Can cryptocurrency be held on trust?
In Wang v Darby, the court indicated that digital assets could in principle be held on trust, although on the facts in Wang v Darby, no trust arose. This is consistent with the New Zealand Cryptopia case (which held that the Cryptopia cryptocurrency exchange held the digital assets of its customers under an express trust). However, the Wang v Darby decision must be read in light of the fact that this issue was common ground between the parties and not the subject of submissions. Still, the decision and the fact that the parties agreed upon the issue provides a helpful indication when the issue is contested in a future case.
Wang v Darby is also noteworthy as being the first time the court has considered personal fiduciary claims arising in relation to cryptocurrencies, in this case in respect of the profits generated through holding and staking the relevant cryptocurrency. Unlike bitcoin, which operates using a mining consensus mechanism, where ‘miners’ compete to solve a cryptographic problem so they can mint the next block in the bitcoin blockchain, cryptocurrencies that operate using a staking consensus mechanism select the minter of the next block based on other criteria linked to how much of the relevant cryptocurrency a holder has ‘staked’.
Can cryptocurrency be used as security for costs?
In Tulip Trading Ltd v Bitcoin Association for BSV and others, the court considered whether bitcoin could stand as security for the defendants’ costs. In that case, to address the volatile nature of the value of bitcoin, the claimant, in addition to proposing to transfer the security sum in bitcoin to his solicitors, had proposed a mechanism for topping up the bitcoin to the value of the security ordered plus a 10% buffer. The court applied the principles set out in Monde Petroleum SA v Westernzagros Ltd, which held that any form of security should be at least equal to, if not better than, security by payment into Court or provision of a first-class London bank guarantee. In Tulip Trading Ltd, the judge held that the bitcoin security proposal put forward would not meet this threshold because (a) of the volatility of bitcoin exposed the defendants to the risk that the value of bitcoin may fall below the level of security ordered, and (b) the ‘top-up’ mechanism proposed to address this was subject to the risk that the claimant may fail to comply with it by transferring the requisite top-up of Bitcoin to his solicitors when required.
On the volatility issue, it is noteworthy that, in Toma v Murray and another, the court refused to permit a claimant’s injunction to continue over a sum of bitcoin held by the defendants under a mechanism whereby the defendant would be able to sell it in certain circumstances subject to the consent of the claimant. The proposal did not find favour with the court because it considered that obtaining the claimant’s consent to any sale expeditiously might be difficult and the volatile nature of bitcoin meant that its value could theoretically fall very quickly, thereby potentially exposing the defendants to large losses.
It remains to be seen whether other cryptocurrency security proposals might find favour with the court, such as by providing a greater buffer amount of security or providing security in the form of stablecoins pegged to the value of a particular asset – for example Tether, which is pegged to the US dollar.
The future of cryptocurrency under English law
So far, basic legal principles under English law have proven remarkably flexible in dealing with cryptocurrency claims, although this is subject to a health warning that many of the judgments are in respect of interim relief and were uncontested.
While it remains to be seen how, for example, a substantive trust claim involving cryptocurrency will fare, English law has so far proven to be fit for purpose when it comes to dealing with this novel asset class. Nevertheless, there will be plenty of future developments in how cryptocurrency is treated in English law, and this is likely to remain an area of fast-paced development for the foreseeable future. For example, the Law Commission is currently considering whether certain aspects of English law need reform to ensure that digital assets are given consistent recognition and protection. However, while litigators wait for these future developments, they can rest assured in the meantime that established legal rules will provide (almost) everything they need to litigate cryptocurrency claims successfully before the English court.
