Summary

On December 13 2019, in the case of AA v Persons Unknown [2019] EWHC 3556 (Comm), the UK Commercial Court granted an interim proprietary injunction over Bitcoin, thereby confirming its status as property.

Background

In October 2019, cyber-attackers hacked into the computer system of a Canadian insurance company and installed malware which encrypted those systems, preventing anyone but the hackers from accessing them. The hackers then offered decryption software to the insurance company in exchange for a ransom of USD 950,000 (payable via Bitcoin).

The insurance company paid the ransom through an intermediary, but was able to trace the Bitcoins using specialist software. Some Bitcoins had been exchanged into a fiat currency, but others had been transferred to a cryptocurrency exchange account linked to one of the defendants.

The Canadian insurance company was itself insured by an English insurance company, (the “Applicant”). The Applicant applied for an interim proprietary injunction over the Bitcoins held in the relevant cryptocurrency exchange account.

Decision

In determining whether to grant an interim proprietary injunction, Bryan J was asked to consider whether Bitcoin constitutes a form of “property” that could be the subject of a proprietary injunction.

English law traditionally recognises two classes of property:

  • a thing in possession (i.e., anything tangible that can be possessed); and
  • a thing in action (i.e., a right that can be legally enforced, such as a debt).

Bryan J noted that, prima facie this created a difficulty for Bitcoin and other cryptocurrencies in that they are not tangible, nor may ownership of Bitcoins create legally enforceable rights.

In reaching his conclusion on this point, Bryan J accepted the analysis offered by the UK Jurisdictional Taskforce (“UKJT”) in its Legal Statement on Cryptoassets and Smart Contracts. Essentially, the UKJT concluded that cryptocurrencies, including Bitcoin, can be treated as property because cryptocurrencies:

  • are capable of ownership;
  • are capable of definition and their owners can be identified;
  • are as permanent as other financial assets and only exist until they are cancelled, redeemed, repaid or exercised;
  • have stability, as ordinary assets are subject to deterioration, corruption and loss; and
  • are not disqualified from being property due to their distinctive features, in that they are intangible, require cryptographic authentication, require the use of a distributed ledger, decentralised, ruled by consensus and so forth.

You can see our earlier blog post on the UKJT’s guidance here.

Drawing on the UKJT’s guidance, Bryan J noted that in some circumstances English law recognises personal property which does not strictly qualify as a thing in possession or a thing in action (e.g., the Patents Act 1977 provides that a patent is a type of intangible property which does not qualify as a “thing in action”). On this basis, Bryan J concluded that cryptoassets such as Bitcoin can qualify as property.

Potential Impact

The uncertainty surrounding the legal status of cryptocurrencies, particularly Bitcoin, has been regarded as a hurdle to their wider adoption. The Commercial Court’s decision therefore represents a significant step forward in surmounting this hurdle. Whilst other barriers to wider adoption of cryptocurrencies still remain (e.g., suitability for a specific use cases, price volatility, investor confidence in cryptocurrencies as an asset class, etc.) the decision will be welcome news to cryptocurrency enthusiasts. You can read the full judgement here.

Author

Sue McLean is a partner in the IT/Commercial Practice Group in Baker McKenzie's London office. Sue advises clients on technology, sourcing and digital media business models and deals, as well as the legal issues relating to the implementation of new technologies. Sue advises clients (both customers and suppliers) on a wide range of technology matters including outsourcing, digital transformation, technology procurement, development and licensing, m/e-commerce, cloud computing, AI, FinTech, blockchain/DLT, social media, data privacy and cybersecurity. Sue also advises on commercial agreements and the commercial, technology and intellectual property aspects of M&A transactions and joint ventures. Sue has experience across various business sectors, including the financial services, consumer, TMT, travel and life sciences industries. She regularly speaks and writes about the impact of disruptive technologies and has a regular blog for Computerworld.

Author