20 September 20223 minute read

Liability exposure of blockchain software developers may be expanded

The liability of software developers for writing blockchain software has been raised in two recent developments.

Craig Wright, who alleges that he is Satoshi Nakamoto (the developer of bitcoin), through his holding company Tulip Trading, Ltd., has sued 16 bitcoin developers to require the bitcoin developers to write software “patches” to enable the recovery of assets worth more than $1 billion that he claims was stolen in a 2020 hack on his computers.[1]  His suit claims that these developers owe him a fiduciary duty, which is an unprecedented new theory and would dramatically change software development both for blockchain and other projects.

The trial court in the UK rejected these duties in a summary proceeding, but an appeals court reversed this decision and returned the matter to the trial court, stating:

The issue as to whether developers owe duties of care and/or fiduciary duties to the owners of digital assets and if so, what is the nature and scope of those duties is one of considerable importance and is rightly characterized as a matter of some complexity and difficulty. Given that in addition to its complexity and difficulty the underlying facts will play a significant role in determining that issue, it is arguable with a real prospect of success that it is not susceptible of summary determination in the context of a challenge to the jurisdiction, and therefore that the judge fell into error in deciding that there was not even a serious issue to be tried and in the approach she adopted.[2]

Although this decision does not mean that the bitcoin developers would have a fiduciary duty to Mr. Wright or his company, it does raise the risk that such a decision could be imposed.

On August 10, the developer of Tornado Cash, the cryptocurrency mixer that was sanctioned by OFAC in the US, was arrested in the Netherlands by the FIOD, the Dutch financial police. The FIOD announced that “Tornado Cash is a mixing service for cryptocurrencies. The online service makes it possible to conceal the origin or destination of cryptocurrencies. The (criminal) origin of the cryptocurrencies is often not or hardly checked by such mixing services. Users of a mixing service mostly do this to increase their anonymity.”

This announcement does not make clear the basis of the arrest, although some reports indicate that it may be based on his participation in the development of Tornado Cash. The imposition of such liability on programmers raises many questions since programs like Tornado Cash have many users, only some of whom are criminals whose involvement may trigger liability.

[1] See Tulip Trading Limited v. Van Der Laan and others, High Court of Justice, Business and Property Courts of England and Wales, Case no: BL-2021-000313.

[2] Tulip Trading Ltd. v. Van Der Laan and others, claim number CA-2022-001050, in the Court of Appeal of England and Wales.