SECURITY FOR COSTS CANNOT BE GIVEN BY BITCOIN: HARD CASH RULES THE DAY

In  Tulip Trading Ltd v Bitcoin Association for BSV & Ors (Rev 1) [2022] EWHC 141 (Ch) Master Clark rejected an application that security for costs be given by Bitcoin.  The fluctuating values of Bitcoin would not provide the defendants with adequate security.

The security offered by the claimant would not result 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”

THE CASE

The defendants had obtained an order for security costs against the claimant company. The claimant proposed that security be given by way of bitcoin.

THE JUDGMENT
Manner of security
The parties’ proposals
    1. D2-12 seek security by way of payment into court or money held by the claimant’s solicitors to the order of the Court.
    1. D15/16 seek security by way of payment into court, or bank guarantee given by a
reputable first-class bank in London on reasonably acceptable terms.
    1. The claimant has proposed in its written submissions, and in a proposed draft order, that it provide security by way of digital assets, namely either Bitcoin Satoshi Vision or (if considered more acceptable) Bitcoin Core, by
(1) transferring to its solicitors Bitcoin to the value of the security ordered plus a 10% “buffer” (“the Bitcoin”);

 

(2) instructing its solicitors to provide to the defendants’ solicitors

(i) written confirmation that it holds the Bitcoin on an undertaking that it be used on behalf of the claimant in satisfying any adverse costs order against it in the jurisdiction applications;

(ii) the public addresses of the Bitcoin.

    1. The 10% “buffer” is directed towards addressing the volatility in the value of the Bitcoin. In addition, the draft order includes a mechanism for topping up the value of the Bitcoin to the value of the security ordered plus the 10% buffer.
    1. Importantly, the draft order provides for the enforcement of any costs order in favour of the defendants by transfer of the Bitcoin from the claimant’s solicitors to the defendants.
Legal principles
    1. The principles applicable to the court’s discretion as the manner of security are set out by Popplewell J (as he was) in Monde Petroleum SA v Westernzagros Ltd [2015] EWHC 67 (Comm); [2015] 1 Lloyd’s Rep. 330 at [61]:
“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. See Belco Trading Co. v Condo [2008] EWCA Civ 205 at paragraphs [6] to [9] and Versloot Dredging BV v HDI Gerling Industrie Versicherung AG [2013] EWHC 658 (Comm) at paragraph [10].”
    1. More recently, in Infinity Distribution Ltd (in administration) v Khan Partnership LLP [2021] EWCA Civ 565, the Court of Appeal set out the principles to be applied in determining the form of security to order when the claimant proposes an alternative form of security that is not the usual payment into court:
(1) In exercising its discretion to make an order for security under CPR 25.12 and 25.13(1)(a), a court should have regard to all the relevant circumstances: [32].

 

(2) When exercising any power given to it under the rules, including under CPR 25.12 and 25.13(1), a court is obliged by CPR 1.2(a) to seek to give effect to the overriding objective, which, by CPR 1.1(2), includes, so far as practicable, ensuring that the parties are on an equal footing and ensuring that the matter is dealt with fairly: [33].

(3) The task of the court is to “weigh up the respective pros and cons and strike a fair balance between the interests of the parties”, and this balancing of pros and cons “is likely to be the primary consideration”: [34] – see also [35].

(4) If, on an application for security, two different forms of security would provide equal protection to the defendant, the court should, all else being equal, order the form which is least onerous to the claimant (emphasis added): [45].

Discussion and conclusion
    1. In addition to its written submissions, the claimant filed, on 18 January 2022, a further witness statement dated 18 January 2022 of Dr Wright, which I have read de bene esse. In it, Dr Wright proposes and sets out factual matters and arguments in support of the court ordering security to be provided in the form of digital assets, namely either Bitcoin Satoshi Vision or so-called Bitcoin Core. The defendants object to the admission of the statement.
    1. This evidence not having been filed or served before judgment on the security applications was handed down, the claimant requires the court’s permission to rely upon it. No application for permission has been made. It is evidence that could have been put before the court at the hearing, and no explanation is put forward to explain why it was not. Insofar as it advances arguments, I have considered those arguments (which effectively duplicate those found in its counsel’s written submissions). Insofar as it raises factual matters to which the defendants have not had an opportunity to respond, it would be unfair in my judgment to permit the claimant to rely upon those matters, and I disregard them.
    1. I note however that the statement includes evidence that:
(1) since (as previously evidenced) the claimant does not have a bank account, it is “impractical” for it to obtain a guarantee from a reputable first-class English bank;

(2) in order to provide security, the claimant would have to exchange digital assets for pounds sterling; and this would give rise to a CGT liability.

    1. Moreover, even in this new evidence, the claimant has not given evidence as to
(1) its overall financial position;

 

(2) whether it could raise the necessary funds from (or obtain a bank guarantee with the assistance of) outside sources e.g. Dr Wright, or other backers or interested sources;

(3) whether it could raise the necessary funds by using the Bitcoin as security;

(4) how it is funding its own legal costs.

There also remains no suggestion that the claim will be stifled if security of the usual type is ordered.
    1. The claimant accepts, and I can take judicial notice of, the high level of volatility in the value of Bitcoin. It does not, as security, meet the criteria in Monde Petroleum. Thus, even though the claimant claims that providing the usual form of security would impose a burden on it, this is not a case where all other things are equal.
    1. The security offered by the claimant would not result 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. The top-up provisions proposed by the claimant do not fully meet this risk, because if the claimant did not comply with the order, there would be a substantial risk that enforcement of the obligation could not be achieved before judgment in the jurisdiction applications. Furthermore, the draft order envisages any liability for costs to be satisfied by the transfer of the Bitcoin, which would be an additional occasion when the defendants would be subjected to the risk of a fall in value.
  1. I decline therefore to order security in the manner proposed by the claimant.