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Expert Insights

17 February 2022

Claimant ordered to pay security for costs in cryptocurrency dispute and digital assets rejected as form of security - Tulip Trading Ltd v Bitcoin Association for BSV [2022] EWHC 2 (Ch) and [2022] EWHC 141 (Ch)

In proceedings that are sure to be 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 is seeking over USD $4.5 billion (£3.29bn) of Bitcoin and other cryptocurrencies. Dr Craig Wright, the ultimate beneficial owner of the claimant, claims that he suffered a computer hack in February 2020 that 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, all developers of various cryptocurrency systems, owe a tortious and/or fiduciary duty to re-write 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?

In granting their application for security on the ground of impecuniosity, the court noted that the claimant holding company had no customers nor bank account and does not file accounts or tax returns. The Seychelles, the country that the claimant is incorporated in, is a jurisdiction in which corporations are required to provide little or no information about their business activities and as such there was no publicly available financial information.

In contesting the application, the claimant had said that it would shortly have the ability to be able to access the Bitcoin. 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 the defendants writing new software. 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 claimant had also 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 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”, following Sarpd Oil v Addax [2016] EWCA Civ 120, gave the court reason to believe that it would be unable to pay costs if ordered to do so.

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 rejected this form of security. It noted that the value of Bitcoin was volatile and, as such, found that 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.

The question of whether access to, and provision of, cryptocurrency can defeat 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 this 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.

The jurisdiction hearing is presently listed for March 2022.

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