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01 June 2022

Cryptocurrency: a novel option for security for costs?

Is cryptocurrency a help or a hindrance in security for costs applications? Sonia Kenawy examines the court's approach thus far

In Brief

• The High Court has rejected a claimant's offer to provide security for costs by way of transfer of Bitcoin, as the volatility of the cryptocurrency's value meant that the security ran the risk of being rendered meaningless.

 • It will nonetheless be interesting to note whether there may be scope for cryptocurrency to meet the test for security in future applicationss.

In Tulip Trading Ltd v Bitcoin Association for BSV [2022] EWHC 2 (Ch) and [2022] EWHC 141 (Ch)—proceedings that have been watched closely by the cryptocurrency community as well as legal practitioners—the High Court has provided novel guidance on the interaction between cryptocurrency and security for costs.

The claimant, a Seychelles-incorporated company, was seeking over USD$4.5bn (£3.29bn) of Bitcoin and other cryptocurrencies.

Dr Craig Wright is an Australian computer scientist who claims to be the inventor of Bitcoin under the pseudonym Satoshi Nakamoto. He, together with his family, are the ultimate beneficial owner of the claimant. The defendants are all open-source software developers of various cryptocurrency systems. Dr Craig Wright claims that he suffered a computer hack in February 2020. He maintains that this incident has resulted in him being unable to access the various cryptocurrencies—the private keys to access the cryptocurrencies were deleted, presumably after they were copied during the hack. Dr Craig Wright claims that the 16 defendants, being the software developers of the cryptocurrency systems, owe a tortious and/or fiduciary duty to rewrite the software to enable him to recover private encryption keys and accordingly access the cryptocurrencies. Alternatively, he is entitled to the value of the cryptocurrencies from the developers themselves.

All but one of the defendants challenged a court order granting permission for the claims to be served outside of the jurisdiction and applied for security for costs up to the hearing of that challenge.

Should the claimant provide security?

Under CPR 25.13, the court may make an order for security for costs if (a) it is satisfied, having regard to all the circumstances of the case, that it is just to make such an order and (b) one or more of the specified conditions in CPR 25.13(2) applies.

Here, the defendants relied on a number of the conditions, including what the court summarised as 'the impecuniosity condition' contained in CPR 25.13(2)(c): that is, the claimant is a company or other body and there is reason to believe that it will be unable to pay the defendant's costs if ordered to do so. On this point, the court noted that the claimant was the holding company for the Bitcoin; the Bitcoin (whose ownership was a key issue in the case) was its main asset; it had no customers nor bank account; and did not file accounts or tax returns. The Seychelles, the country in which the claimant was incorporated, was a jurisdiction in which corporations were required to provide little or no information about their business activities and as such there was no publicly available financial information.

The claimant argued that the defendants had not provided evidence of the claimant's impecuniosity. However, the court held that the claimant had been provided with the opportunity to adduce evidence in respect of its financial condition and demonstrate to the court that it could pay the defendant's costs if ordered to do so. In spite of this, it had 'failed to take up that opportunity', and this 'deliberate reticence' gave the court reason to believe that it would be unable to pay costs if ordered to do so. The claimant's position fell squarely within the principle established in Sarpd Oil International Ltd v Addax Energy SA and another [2016] EWCA Civ 120, [2016] All ER (D) 56 (Mar): that, where a foreign company is reticent in revealing, or declines to reveal its financial position, it is sound practice to grant security against it.

In contesting the application, the claimant also argued that it had strong prospects of being able to access some of the Bitcoin (worth £13.7m) in the near future, thereby having ample assets to satisfy a costs order. However, this was unsatisfactory to the court given that the security was required now; the claimant's ownership of the Bitcoin was in issue; and it would involve one of the defendants writing new software. No evidence had been provided on how this would be done or whether the defendant would agree to this burden. As the court observed: 'there is no legal basis... for requiring a defendant to expend his own time and money in order himself to produce his costs security.'

The court also considered its discretion pursuant to CPR 25.13(2)(a) and whether in the circumstances of the case it was just to make an order. It confirmed that where the impecuniosity condition applies, 'it will ordinarily be just to order security unless the claimant can show that [to] do so will stifle the claim', noting White Book, para 25.13.1 citing Premier Motorauctions Ltd (in liquidation) v Pricewaterhousecoopers LLP [2017] EWCA Civ 1872, [2017] All ER (D) 197 (Nov)).

What form should the security take?

The claimant offered to provide security for costs by way of transfer of Bitcoin to the value of the security ordered, plus a 10% 'buffer' to reflect potential fluctuations in the value of Bitcoin.

The court noted the principles set out by the Court of Appeal in Infinity Distribution Ltd (in administration) v The Khan Partnership LLP [2021] EWCA Civ 565, [2021] All ER (D) 64 (Apr) when the claimant proposes an alternative form of security that is not the usual payment into court. In particular, if two different forms of security would provide equal protection to the defendant, the court should, all else being equal, order the form which is least onerous to the claimant.

The court rejected the form of security proposed by the claimant. Even though the claimant claimed that providing the usual form of security would impose a burden on it, this was not a case where all other things were equal. The value of Bitcoin was volatile and the security offered would not provide the same level of protection as a payment into court or first-class guarantee. Indeed, there was a risk that a fall in value of Bitcoin could render this security effectively valueless.

Comment

The question of whether access to, and provision of, cryptocurrency can defeat— or be the answer to—security for costs applications is a novel one. While the judgments of the court in the present case came down firmly in the negative, it will be interesting to see how the law develops in what is a fast-evolving area and whether there may be scope for cryptocurrency to meet the test for security: for example as it matures and potentially becomes less volatile, or else through the use of greater safeguards such as a larger 'buffer' than the one offered in this case.


This article was first published in the New Law Journal in May 2022.

 

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