Shame about the boat race
The 168th Oxford and Cambridge boat race was held on Sunday 26 March 2023. For the first time in its history this ancient event was sponsored by a crypto-exchange, Gemini, whose American owners the Winklevoss twins, both rowed at Oxford in their university days.
The contrast between this old-school English cultural event, and the relatively understated and unreported involvement of Gemini, with the frenzied and hyperbolic reportage of the 2022 Superbowl (dubbed the Crypto-bowl) which featured four cryptocurrency advertisers, including the now infamous FTX, is amusingly stark.
The English patience
The contrast continues when a comparison is made between American and English approaches to the cryptosphere and its regulation. Our government was much criticised (including by the author) for its slow approach to the regulation of the cryptosphere. However, that approach would seem to be vindicated when compared to recent events in America. In England, the government has taken the “first law, then regulation” approach, whereas the American authorities appear to have taken an approach which is known as “regulation by enforcement”, whereby government agencies launch crackdowns without (so their critics say) having issued clear guidance on how to stay within the law.
To date, America has been the dominant country in crypto. Its use was pioneered there and accordingly, many of the giants of the sector grew up and live there. However, they have done so in a relative legislative vacuum on the assumption that the authorities were well-disposed to them, would welcome a new innovative sector that created jobs and wealth and would regulate sensibly in due course – how else could they have stayed? Recent years have exploded the idea that America is a place in which established crypto firms can continue to do business with any certainty. As at today, the American securities regulator, the SEC, is trying to enforce its institutional view that most cryptocurrencies are shares/securities through use of its regulatory powers, with its most recent target being industry giant Coinbase. Not wishing to be left out, the American commodities regulator, the CTFC, has gotten in on the act, and is now trying to enforce its institutional view that most cryptocurrencies are commodities, by taking aim at another industry giant, Binance. Against this backdrop of regulators trying to dictate the law on the hoof, household-name crypto bro Sam Bankman-Fried’s Icarus-like fall from grace appears to have utterly spoiled any attempt to get sensible legislation through the American Congress, a process that his involvement seems to have irretrievably tainted. The American dominoes continue to fall, with the two of the most crypto-enabling American banks having gone out of business in recent months, thereby restricting the ability of crypto firms to access ordinary banking services. As at today, it would appear that crypto has out-stayed its welcome in America – it’s time for the industry to leave home.
At the risk of over-using the word stark, there is no other way to compare the American situation with its equivalent in the United Kingdom, which can be summarised as follows:
- Our Prime Minister (back when he was Chancellor of the Exchequer) has stated that it is his personal ambition to make this country a global hub for crypto technology;
- The stated intention of a draft law that is presently going through the legislative process (the Financial Services and Markets Bill) is to enable the crypto industry to invest, innovate and scale up in this country;
- Senior Judges and legal practitioners published the Legal Statement on cryptoassets and smart contracts, providing a basis for judges to recognise cryptoassets as legally recognisable property, that has been referred to in Court judgments;
- Our leading Law Commissioner on the subject has been the co-author of an authoritative legal textbook on the law of cryptoassets, that has also been referred to in Court judgments;
- Our judiciary are crypto-savvy and have shown on every occasion that they have a good understanding when deciding disputes relating to cryptoassets;
- The Law Commission is presently in the process of developing proposals to government for the drafting of legislation that recognises crypto within a new and distinct kind of property; and
- The Treasury is in the process of not only consulting on a regulatory regime for cryptoassets, but is also enthusiastically pursuing the issuance of a British Central Bank Digital Currency.
To continue the analogy, crypto’s wild youth would appear to be well and truly over in London. Industry events are now filled with former bankers, now steeped in the crypto sector, who are trying their best not to look like they are wearing suits.
Tulip mania
The differing start points of America and England in their crypto journeys has meant that to date the majority of significant cases in this sector (in particular the SEC proceedings against Ripple, through which Ripple has sought to question the legitimacy of the “regulation by enforcement” approach) have happened on the wrong side of the Atlantic, but that has recently changed. I am of course referring to the continuing adventures in litigation of the other household name of Dr Craig Wright.
As will be well-known to Craig Wright-followers, Dr Wright’s claim arises from the fact that persons unknown illegally hacked his personal computer and deleted the private keys that he needed in order to control tokens on the Bitcoin Satoshi Vision blockchain (“BSV”) with a value of several billion American Dollars. Dr Wright was left in the unfortunate position of having effectively lost the entire value of these significant BSV assets because he had lost the ability to send them. With his private key having been deleted, his only possible recourse was to the authors of the BSV blockchain, who alone would have the ability to alter the software to return his ability to spend his assets.
Dr Wright therefore issued a claim seeking declarations from the Court that he owns the relevant BSV and that, in the circumstances, the developers have a duty to assist him in regaining access to his property. Dr Wright’s alternative case is that the developers should compensate him for the significant value of the property that he has lost. In resisting the claim, the developers of BSV argued that Dr Wright’s claim ran counter to the premise of blockchain-based cryptocurrency assets, which are decentralised in nature and are operated by a shifting group of contributors in an open-source environment.
The High Court found in favour of the developers and summarily dismissed the case on 25 March 2022, however, in February 2023, the Court of Appeal unanimously disagreed. In doing so the Lord Justices of the Court of Appeal held that the claim made by Dr Wright’s company Tulip Trading had a real prospect of success in establishing the duty of care that it argued it was owed by the developers and that there was a serious issue to be tried. Dr Wright’s arguments are far from baseless; he refers to the fact that developers routinely patch, upgrade and maintain the blockchain as evidence of their ultimate collective control of the same. In particular, the power that developers have in relation to the users of a blockchain would appear to be both discretionary and even almost parental in nature. They certainly relate to governance and importantly the key ingredient of a fiduciary duty would appear to be present in this context, namely the users trust and confidence in the developers to maintain the blockchain to a sufficient standard. This of course does not mean that the outcome of the claim is a foregone conclusion, only that the arguments will be fully heard by a Judge in the High Court in due course.
Whatever the outcome of the trial in this case, which is likely to occur at the end of this year or in early 2024, it will have a significant impact. For developers who have created and launched blockchains, they will find themselves subject to obligations in relation to the users of that blockchain in a way that they probably (almost certainly!) hadn’t prepared for, and perhaps didn’t envisage. This of course in addition to the unwelcome and unexpected attention of the American regulators referred to above. However, the impact of these proceedings is likely to be further reaching than that and will expand duties of care owed to third parties by creators of open-source software, and even more generally than that due to the flexible nature of English law, which is often applied to different sets of facts by analogy.
Where does that leave us?
In light of the above, there is every reason to be hopeful for the future of the crypto industry in this country. There appears to be a broad consensus that the cryptosphere is welcome here, certainly when compared to the equivalent regulatory environment in America, and of course our penal codes compare quite favourably to both America and other alternatives.
Also, the continued development of English law Court decisions, and the developing regulatory backdrop, will provide certainty to an industry which badly needs it.
How we can help
Rosenblatt advises on all aspects of crypto assets and regulatory law. For enquiries, please contact Dispute Resolution Legal Director Tom Spiller OBE at tom.spiller@rosenblatt.co.uk
Disclaimer: We at Rosenblatt (and our parent company RBG Holdings plc) support and encourage free/independent thinking in relation to issues which are sometimes considered to be controversial subject matters. However, the views and opinions of the authors do not necessarily reflect the opinions, views, practices and policies of either Rosenblatt or RBG Holdings plc.
