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The day cryptocurrency came of age
The continued growth in cryptocurrencies has seen both legitimate investors and fraudsters attracted to the blockchain technology. And now a Court ruling that Bitcoin constitutes property under English law is set to have far-reaching implications for all users and make the UK an attractive jurisdiction for litigating disputes around cryptocurrency and smart contracts.
The effect of the ruling in AA v Persons Unknown, a case initiated after fraudsters held a Canadian company’s data hostage in return for a Bitcoin ransom, paid by its English insurer, is that cryptocurrency is capable of being the subject of interim proprietary injunctions. It also has implications for the legal rights of cryptocurrency investors and how such assets can be owned, used and transferred, including in situations such as bankruptcy and corporate insolvency, in the eyes of the English Courts.
Cryptocurrencies have been around for more than a decade and rely on blockchain technology, which is effectively a digital ledger shared and verified across multiple computers (nodes) worldwide, protected by complex cryptography to make it secure and resistant to fraud. By widening access to greater security for cyber transactions and the transfer of money in areas such as property transactions, blockchain technology can bring many benefits. However, the digital currencies that have emerged as a result of blockchain often make headlines for negative reasons. Reports have highlighted online scams to attract investors and exposed fraudulent use of the currencies as the payment path for ransom demands, assuming the holding to be inaccessible even if traceable.
This case arose following the hacking and encryption of a Canadian company’s customer systems. The company was insured for cyber-attacks, and its UK-based insurers agreed to pay US $950,000 in Bitcoin to get the data back. Once the system was recovered, the Bitcoin was traced, and the insurer applied for a proprietary injunction to recover the ransom payment.
The action rested on whether a cryptocurrency could be defined as property, as the relief sought could only be granted over “property” as defined by English law. Property assets can be traced, transferred, secured or charged, and can be seized or frozen for the purposes of law enforcement, as was the aim in this case.
Under English Law, “property” can either be possessed (works of art, jewellery, motor vehicles currency, etc.) or they can give rise to rights enforceable through the Courts, such as a right to receive goods or money under a contract or the funds deposited in a bank account, which are not in the possession of the account holder, but constitute a debt owed to the account holder by the bank. Whilst several cases have been considered persuasive authority on cryptocurrency being property, the question had not been subject to a direct ruling until now.
The AA v Persons Unknown judgement tackled the issue and ratified in English law the Legal Statement on Cryptoassets and Smart Contracts which was published by the UK Jurisdictional Taskforce in November 2019. The Judge accepted the Taskforce’s conclusion that cryptocurrencies, including Bitcoin, meet the four criteria set out in Lord Wilberforce’s definition of property in National Provincial Bank v Ainsworth that it be “… definable, identifiable by third parties, capable in its nature of assumption by third parties and have some degree of permanence or stability”.
This represents a significant step forward in how cryptocurrencies, such as Bitcoin, are treated. Since this technology emerged, regulators have been playing catch-up and this judgement provides some much-needed clarity. It will be welcomed by investors in the fight against fraud and provide certainty to users regarding their legal rights in owning, transferring and using cryptocurrency. Those concerned about cyber-attacks, including insurers, will breathe a sigh of relief at the prospect of obtaining an injunction when funds have been stolen or ransoms paid, although such an order is only the beginning of a longer battle for the claimant to obtain the cryptocurrency and bring the fraudsters to justice.
While the decision is seen as a significant development in the legal framework to underpin such assets, there is currently no legislation on the horizon to regulate cryptocurrencies, in the UK or internationally. However, the World Economic Forum which brings together governments, financial institutions and technical experts to help develop an integrated global digital currency system, recently launched a global consortium for digital currency governance.
We see this as another step on the journey to the general adoption of cryptocurrencies and smart contracts into mainstream use. Although this welcome judgment is likely to boost market confidence in cryptocurrencies in the UK and around the world, the issues surrounding it is important to take professional advice before investing in or using cryptocurrency.