““The design of crypto assets may create some practical obstacles to legal intervention, but that does not mean that crypto assets are outside the law.”
The legal status of blockchain-linked digital assets, such as Bitcoin, continues to be an important question as more investors (both individual and institutional) have entered the market. In recent years we have seen several updates regarding the legal status of digital assets.
November 2021, El Salvador became the first country to adopt a digital asset, Bitcoin Core ('BTC'), as a legal tender, recognizing it as a currency alongside the US dollar. This move has been controversial and has faced significant criticism from experts who warn about the risks of such a move.
January 2022, the US Office of the Comptroller of the Currency (OCC) issued a letter clarifying that - banks are allowed to use stablecoins, which are digital assets pegged to the value of a traditional currency, for payment activities. This move is seen as a significant step towards mainstream adoption of digital assets in the financial industry.
Legal status of digital assets: the US Securities and Exchange Commission (SEC) has filed several lawsuits against companies offering unregistered digital asset securities. In October 2021, the SEC settled with BitClave, a California-based company that raised $25.5 million through an initial coin offering (ICO) in 2017, for selling unregistered securities.
December 2021, the UK Financial Conduct Authority (FCA) announced that it would regulate certain types of stablecoins as e-money, subjecting them to the same regulations as other electronic payment methods. This move is seen as an attempt to provide more clarity and protection for consumers in the digital asset market.
Blockchain-linked digital assets have been recognized as property, that can be subject to proprietary injunctions, proprietary freezing orders, worldwide freezing orders, and trusts by courts in common law jurisdictions such as England and Wales, Singapore, New Zealand, and Canada. However, the question of recovering lost, stolen, or misappropriated digital assets has remained unresolved - until now.
In a ground-breaking move, Tulip Trading Limited ("TTL"), a Seychelles company ultimately beneficially owned by computer scientist Dr Craig Wright, has taken legal action against the developers of Bitcoin Satoshi Vision ("BSV"), BTC, Bitcoin Cash ("BCH"), and Bitcoin Cash ABC ("BCH ABC") in a bid to regain control of its stolen Bitcoin. TTL argues that the Bitcoin developers have both tortious and fiduciary duties under English law to restore lost coins to their legal owners, provided they can prove ownership to the required standard.
This legal claim by TTL could have positive implications for law enforcement agencies and investors alike. If successful, it could pave the way for a new approach to recovering lost or stolen digital assets and set a precedent for the legal obligations of developers in the blockchain ecosystem. It would also have positive implications for law enforcement agencies and investors.
Law enforcement
Historically, digital assets have been widely used by criminals and criminal organisations, and law enforcement agencies have successfully seized such assets. However, the seizure of these assets requires possession of the private key or recovery phrase. If TTL's claim is successful, law enforcement agencies could access illegally acquired Bitcoin without needing associated private keys or recovery phrases. An example of this;
In April 2017, Surrey Police, whilst searching the home of Sergejs Teresko, found and seized a recovery phrase for Mr Teresko’s Bitcoin private key which they used to seize the 295 Bitcoin held at the associated address. The seizure of Mr Teresko’s Bitcoin was sought and authorised pursuant to sections 47A – 47S of the Proceeds of Crime Act 2002. The Crown Prosecution Service subsequently obtained an order pursuant to section 41(7) POCA, permitting the Police to convert those Bitcoin into sterling (then totaling £1.2 million). Although in this case the police were only able to convert the seized Bitcoin because they were in possession of Mr Teresko’s recovery phase.
Investors
On the other end of the spectrum investors, who have lost or may lose their private keys could benefit from TTL's claim. If successful, legal owners could recover potentially valuable assets, even if access to them has been lost, stolen, or transferred by fraud..
Consider a scenario which involves an individual, A, who, purchased enough Bitcoin to make 3 BTC , currently valued at over £72,000. A kept the private keys to their BTC in a hard copy printout, which they did not disclose the location of or even its existence. A passes, leaving away, leaving their estate to B, who becomes the legal and beneficial owner of the 3 BTC. However, B does not know the location of the private keys and cannot access the BTC. The success of TTL would allow B, and others in a similar situation to recover and access their inherited assets.
The courts have consistently recognised digital assets as property capable of being the subject matter of various judicial and equitable remedies. TTL is essentially asking the High Court to recognise that proprietary rights in digital assets also extend to enabling legal owners to recover lost or stolen assets.
Many with legitimate and nefarious interests in the technology and development of blockchain-linked digital assets will be following the case closely, as it could be a game-changer.
Note - a version of this article first appeared in Fraud Intelligence and was published 16/3/2021.
