Bitcoin fails to satisfy test for security for costs

Last week, the High Court rejected a claimant's proposal that it should be permitted to post security for costs by transferring Bitcoin to its solicitors. Master Clark, handing down a judgment on consequential matters in the case of Tulip Trading v Bitcoin Association, found that the proposal failed to meet the test for adequate security due to the inherent volatility of cryptoassets.  

Background

In 2021, Tulip Trading Limited, a Seychelles-registered company, issued proceedings against more than a dozen cryptocurrency developers. Tulip is the holding company of Dr Craig Wright, the self-proclaimed creator of Bitcoin, who claims the defendants have a duty to rewrite software to enable him to recover encryption keys to over $4 billion worth of Bitcoin. The keys were allegedly deleted when Craig's computer was hacked in February 2020. 

The defendants are challenging an order granting permission for the claims to be served on them out of the jurisdiction and applied for security for costs in respect of the upcoming hearing. The High Court awarded security on the basis of Tulip's impecuniosity. The recent judgment addressed the amount of security to be provided and the manner in which it was to be paid. 

Bitcoin as security

Tulip proposed to transfer to its solicitors Bitcoin to the value of the security ordered, plus a 10% "buffer" to protect against market volatility. The solicitors would then provide written confirmation that they held the Bitcoin on the claimant's behalf for the payment of any adverse costs order. The claimant's proposal also included a further top-up mechanism.

Master Clark applied the test set out in Monde Petroleum. Security is ordinarily to be given either by payment of monies into court or the provision of a guarantee from a first class bank. Where an alternative form of security is ordered it must be at least equal to the usual methods in terms of swiftness and reliability of enforcement. 

In the more recent case of Infinity Distribution, the Court of Appeal set out the principles to be applied when considering an alternative form of security. The court must: 

• have regard to all relevant circumstances;
• endeavour to ensure equality between the parties;
• weigh up the respective pros and cons; and
• where two different forms would provide equal protection to the defendant, order the form which is least onerous to the claimant (all else being equal).

The court rejected the claimant's Bitcoin proposal on the basis that it would expose the defendants to a level of risk which they would not face with the usual methods: a (potentially total) fall in the value of Bitcoin. Master Clark found that the 10% buffer and top-up provisions envisioned by Tulip did not go far enough to mitigate this volatility risk.

Interestingly, the court considered arguments contained in an improperly-filed witness statement as to why the usual order for security was not suitable for the claimant in this case. Specifically, it remarked on the difficulties that Tulip would face in securing a guarantee from a first class bank due to the fact it had no bank account, and the capital gains tax liability it would face as a result of converting cryptoassets to pounds sterling. Master Clark disregarded these considerations, however, noting that while Tulip had evidence to show the usual form of security would impose a burden on it, this was not a case where all other things were equal.

Significance 

This case is understood to be the first time a party has attempted to post security in the form of cryptoassets. While the proposal was rejected on this occasion, the emphasis on the inadequacy of the protections against volatility suggests that an order with greater risk mitigation provisions may be accepted in the future. 

Authors: Lynn Dunne, Partner, and Catherine Lillycrop, Associate

Case references:

Tulip Trading Ltd v Bitcoin Association for BSV and others [2022] EWHC 141 (Ch)

Monde Petroleum SA v Westernzagros Ltd [2015] EWHC 67 (Comm)

Infinity Distribution Ltd (in administration) v Khan Partnership LLP [2021] EWCA Civ 565