Following the decision of Master Clark in the case of Tulip Trading Limited v Bitcoin Association for BSV [2022] EWHC 141 (Ch) the High Court has confirmed that crypto-currency is not adequate 'security' to satisfy an order that a party provide providing security for costs. 

Whilst this was the first occasion in which a claimant has sought to post crypto currency as security for costs in the English Courts, this is likely to be increasingly considered as a desirable option for claimants given the growing prevalence of, and support for, crypto currencies. Whilst in this instance the Court rejected the use of crypto currency, on the basis that the terms put forward by Tulip did not fully meet the risk of the volatility of Bitcoin, it does not rule out the possibility of crypto assets being posted as security if sufficient provision could be made to mitigate against the volatility of these assets. This is likely to be an area in which there will be significant developments in the law over the coming years.

Background

The Claimant in this case, Tulip Trading Limited ("Tulip"), is registered in the Seychelles and is controlled by Dr Craig Wright, the self-professed investor of Bitcoin. Tulip has commenced proceedings against 16 crypto-currency developers on the basis that Dr Wright claims that they have a duty to rewrite software to enable him to recover encryption keys to Bitcoin, which he lost as a result of hacking, worth in the region of $4.5billion.

Following an application by the Defendant developers, the High Court ordered Tulip to post security for costs on the basis that there was reason to believe it would not be able to pay the Defendants' costs if ordered to do so due to its impecuniosity.

Tulip sought to post security by transferring Bitcoin to its solicitors. It sought to rely on an alternative form of security for two key reasons (i) it did not have a bank account and it would be impractical for it to obtain a guarantee from an English bank and (ii) in order to provide security, it would have to exchange its digital assets for Pounds sterling and this would give rise to a liability for capital gains tax. It proposed to transfer an additional 10% buffer, above the value of the security ordered, to account for market volatility. It also made various proposals to 'top up' the value of the Bitcoin if required.

The Decision

The Court referred to the decision of Popplewell J in Monde Petroleum SA v Westernzagros Ltd [2015] EWHC 67 (Comm) which establishes that:-  

"It is conventional to order security to be given either by payment into Court or by the provision of a guarantee from a first class London bank. That practice recognises that the security should be in a form which enables the defendant to recover a costs award made in its favour at the trial from funds which are readily available, such that there is little risk of delay or default in enforcement. Although security may be ordered in an alternative form, that form should be such as to fulfil the same function, so as to allow simple and swift enforcement of a costs order from a creditworthy source. In practice any such alternative form of security must be such as can properly be regarded in these respects as at least equal to, if not better than, security by payment into Court or provision of a first class London bank guarantee."

Master Clarke went on to consider the recent decision of Infinity distribution Ltd (in administration) v Khan Partnership LLP [2021] EWCA Civ 565 and the principles to be applied in considering an alternative form of security. The Court should (i) have regard to all the relevant circumstances (ii) seek to give effect to the overriding objective which includes ensuring the parties are on an equal footing and the matter is dealt with fairly (iii) weigh up the respective pros and cons and strike a fair balance between the interests of the parties and (iv) where two different forms of security would provide equal protection to a defendant, the Court should, all else being equal, order the form of security least onerous to the claimant.

Whilst Tulip claimed that providing the usual form of security would impose a burden on it, this was not a case where all other things were equal. The Court found that the high level of volatility in the value of Bitcoin meant that it does not meet the requirements of Monde Petroleum to be used as security for costs. It would expose the defendants to a risk that they would not be exposed to with the usual forms of security and potentially result in their security being rendered valueless. The Court found that the 10% buffer and the 'top-up' provisions did not "fully meet this risk".

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