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Crypto Digest #4 Crypto Disputes

This is the fourth of our Crypto Digest blogs brought to you by Mezzle Law’s resident crypto lawyers. Subscribe to stay up to date with our short and informative blogs on all things law and crypto (lex cryptographia).

There are a number of crypto-related disputes being heard throughout courts across the world, and we discuss a few of these in our latest crypto digest. It’s an area which is increasing at such a pace that it’s becoming quite a challenge to keep up with the number of cases, and not all of the actions will be publicised if an out of court settlement is reached early on.

In a key English case, which will be welcomed by developers, the High Court ruled that blockchain developers had no legal obligation to crypto investors in the recovery of lost or stolen BTC. The Claimant, TTL, lost private keys to BTC worth in excess of £3billion in 2020 as a result of a hack. TTL brought a claim against the developers arguing that there was a fiduciary duty and common law duty and that the developers should have programmed a patch to the blockchain, which would have enabled TTL to recover lost or stolen BTC.

The Court found that the developers did not owe a fiduciary duty or a common law duty of care. They deemed that it would not be practical for the Court to impose a duty on developers given the nature of bitcoin, given anonymity is a key feature, and the fact it is open source software[1]. The outcome is probably not that surprising, but it does at least provide some clarity and reiterates that the key-holder alone is responsible for accessing its crypto wallet(s). A further interesting outcome to this particular case was that the court did not allow BTC to be used as security for costs.

In another High Court case (in England), a number of remedies were used by the court, including a worldwide freezing injunction, when an individual (Sally Danisz) fell victim to a crypto investment scam. The applicant transferred over £26,000 to Matic Markets, a London and Swiss cryptocurrency investment platform.

When she tried to withdraw her investment and profits, her request was denied. She commissioned an expert to trace what had happened to her BTC, and found that shortly after she had acquired BTC, it was misappropriated by an unknown individual, and transferred to an unknown wallet without her consent. The expert evidence concluded that Matic Markets was likely a sham operation set up by organised criminals.

Whilst useful remedies were applied, such as service by alternative means outside the jurisdiction, injunctions, and a disclosure order, ultimately it’s unlikely the applicant will ever see her investment or profits in full[2]. This is another important decision which could be said to be another hollow victory for investors, and as the litigation continues, given the number of investors that have fallen victim to the scam, it’s likely that other proceedings will follow, or may become conjoined as a class action.

Luxury fashion heavyweight, Hermes International, recently sued Mason Rothschild in a Manhattan Federal Court alleging trademark infringement based on Rothschild creating 100 Metabirkin NFTs, and trading them, which Hermes says infringed on their Birkin bag trademark[3]. Rothschild is defending the action by asserting the fair use defence, citing Andy Warhol’s Campbell Soup Cans series as justification, that he is simply selling his expression of the Birkin design, rather than passing off the artwork as the real thing. This is one of a number of key actions which is likely to shape the legal landscape for IP law in crypto.

In Singapore, a court issued a freezing injunction preventing the sale of a Bored Ape NFT, which we understand is the first time an injunction has been applied to a digital asset. The NFT cannot be sold until the issue of an ownership dispute has been resolved.

Probably one of the more surprising decisions we have come across comes in the ruling from Shanghai High People’s Court in China. This case concerned a dispute between two parties regarding the recovery of a loan of 1 BTC. The Court recognised Bitcoin as having economic value, scarcity and disposability and therefore confirmed it was subject to property rights and could be defined under Chinese law as virtual property.

When the Defendant failed to return the BTC to the Claimant, the parties reconvened at Court and following mediation it was agreed that the Defendant would pay compensation to the Claimant at a discounted value of the BTC as it was valued at the time of the loan. This is all the more surprising because whilst the Court ruled that BTC is indeed a virtual asset, and therefore subject to Chinese law as it has economic value. The Court’s decision may offer some solace to crypto investors and enthusiasts alike, as it opens the door for crypto activities perhaps resuming in China in due course.

Whilst full-blown trials involving crypto disputes are unlikely, there will be hotly contested preliminary and interlocutory hearings. The contentious landscape in the crypto arena will leave firms scrambling to hire talent, and the larger crypto companies are likely to recruit in-house counsel, which can already be seen by the raft of vacancies advertised in multiple jurisdictions.

We shall keep an eye on the crypto disputes area and provide updates in subsequent blogs. Lawyers will need to navigate this evolving landscape using existing law and applying it to a developing area, thereby shaping the future of the crypto legal landscape.

Meanwhile, should you be seeking dispute resolution advice in crypto, then please speak to our lawyers to see how Mezzle Law can help you. In any dispute, but particularly those involving crypto, you need to act fast. By instructing Mezzle’s dispute lawyers, you can rest assured that we will take steps to protect your position and mitigate any losses.

[1] https://www.twobirds.com/en/news-and-deals/2022/global/bird-successfully-advises-on-tulip-trading-ltd-v-bitcoin-association-for-bsv-and-others-judgment

[2] https://36group.co.uk/content/files/1393693_sally-danisz-v-persons-unknown-huobi-global-ltd_rcj_qb_-amended-second-approved-judgment_05.01.22.pdf

[3] https://nftnow.com/guides/how-the-hermes-lawsuit-could-determine-the-future-of-trademark-rights-in-nfts/

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