Cryptocurrency – extreme volatility prevents attempt to post as security
In an interesting judgment in late January (Tulip Trading Ltd v Bitcoin Association for BSV & Ors (Rev 1)  EWHC 141), the High Court rejected the Claimant’s novel proposal to post security by transferring cryptoassets to his solicitors, who were in turn to provide written confirmation of the transfer to the other side. This rejection was on the basis that cryptoassets are highly volatile, such that they do not meet the test for security.
In 2021, Tulip Trading Limited (Tulip), a company registered in the Seychelles issued proceedings against more than a dozen cryptocurrency developers. Tulip serves as the holding company of Dr Craig Wright, who claims that he created Bitcoin under the pseudonym ‘Satoshi Nakamoto’. In the proceedings, Tulip seeks access to a Bitcoin wallet following an alleged hack that resulted in the private keys to the wallet being lost, thereby preventing access to the wallet.
In an earlier judgment handed down by the High Court at the beginning of January, it was determined that there was no evidence of Tulip’s assets, such that it was necessary for Tulip to post security for costs. Tulip subsequently proposed to provide security by way of Bitcoin.
The specifics of the proposal were that Bitcoin to the value of the security ordered plus a 10% ‘buffer’ would be transferred to Tulip’s solicitors, following which written confirmation of the transfer would be provided to the Defendants’ solicitors. Tulip proposed the ‘buffer’ in an attempt to address market volatility in the value of Bitcoin. In addition, the draft order prepared by Tulip’s legal representatives provided for a mechanism to top up the amount of Bitcoin in the event significant market volatility required additional Bitcoin to be posted to meet the required value of security.
The judgment includes a helpful summary of the legal principles applicable to posting security. In the case of Infinity Distribution Ltd (in administration) v Khan Partnership LLP  EWCA Civ 565, the Court of Appeal held that consideration should be given to all the relevant circumstances. The task of the court is to consider the respective pros and cons of the various options available in posting security. If two different forms of security would provide equal protection to the defendant, the court should order the form which is least onerous to the claimant.
In this case, Dr Wright had served a witness statement on behalf of the Claimant, but there were questions as to its admissibility. In any event, the judgment notes that the witness statement included evidence as to Tulip’s lack of access to a bank account, such that it was “impractical” for Tulip to obtain a guarantee from an English bank to serve as security. The statement also included evidence that in order to provide security Tulip would need to exchange cryptoassets for pounds sterling, thereby giving rise to a Capital Gains Tax liability. The judgment notes, however, that the Claimant did not provide any evidence as to its overall financial position, whether it could obtain funds to post security from alternative sources (such as from backers of Dr Wright), whether it could raise the necessary funds by using the Bitcoin as security, or how Tulip is funding its own legal costs.
Crucially, the judgment notes that Tulip accepted during the course of the proceedings the high level of volatility in the value of Bitcoin. That was perhaps an inevitable concession, given that the extreme volatility of Bitcoin and all cryptoassets is plain to see. In any event, as a result of this admitted volatility, the Court declined to permit security to be posted in the suggested manner, on the basis that Bitcoin does not meet the legal test for security.
The High Court relied on the earlier judgment of the High Court in Monde Petroleum SA v Westernzagros Ltd  EWHC 67 (Comm) in which it was held that:
“…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.” (emphasis added)
Applying those principles, the Court declined to accept security in the form proposed by Tulip, which was described in the judgment as “not result[ing] in protection for the defendants equal to a payment into court, or first class guarantee. It would expose them to a risk to which they would not be exposed with the usual forms of security: namely of a fall in value of Bitcoin, which could result in their security being effectively valueless”.
Finally, the judgment notes that the top-up provisions proposed by Tulip did not fully meet the risk of market volatility. This was because there was no guarantee that Tulip would comply with the terms of the order, thereby giving rise to a risk that enforcement of the obligation could not be achieved.
This decision is novel, given it concerns what is understood to be the first attempt by a party to post security in the form of cryptoassets. It is also highly topical, as Bitcoin has continued to demonstrate its extreme volatility over the course of the last few months (dropping from approximately US$60,000 in October 2021 to approximately US$37,000 on the date the judgment was handed down on 26 January 2022).
Despite the failure to post security in Bitcoin in this case, there is nothing to say that Bitcoin and other cryptoassets will fail to meet the required test at some point in the future. It is important to remember that cryptoassets are still in their infancy and will need to become less volatile over time if they are to replace traditional currency. To the extent that happens in years to come, cryptoassets might be able to meet the legal test for security at that time. It is also conceivable that a proposal structured in some other way (for example, with a significantly increased buffer) could meet the test now, although that will be heavily fact dependent.