I’ll start with a short confession (this won’t be a surprise to those who know me). In addition to not being very tech-savvy, I know little about how cryptocurrencies emerged and how they are mined or traded. I’ve read that there are brokers, cryptocurrency exchanges, hot and cold wallets and many thousands of different cryptocurrencies, the better ones being Bitcoin (obviously), Ethereum, Litecoin, and Ripple (who?). Indeed, talking to me about cryptocurrency is like walking into a bottle shop with a beer drinker and asking which red wine they would like for dinner!
Recently, I asked a friend who is interested in securing some crypto to explain the fundaments to me. I didn’t really get it and was left less than confident of either the process or the value of any potential investment (for him, not me). I didn’t think much more of it until the recent spamming of articles by all of the usual suspects reporting on a decision of the High Court of England (High Court decision) where the apparent founder of Bitcoin (claimant) proposed to provide security by way of digital assets for its opponents’ costs by the claimant:
- transferring to its solicitors Bitcoin to the value of the security ordered, plus a 10% “buffer”;
- instructing its solicitors to provide to its opponents’ solicitors:
- written confirmation that they hold the Bitcoin on an undertaking that it be used to satisfy any adverse costs order; and
- the public addresses of the Bitcoin.
The claimant’s proposal failed. The court relied on long-standing authority recognising that the security should be in a form which enables any defendant to recover a costs order made in its favour from funds which are readily available, such that there is little risk of delay or default in enforcement.
Before I move on – what is security for costs and when is it ordered? In appropriate cases, a Court may (note the discretion) order a party (usually a plaintiff i.e. the party suing) to give security for another party’s (usually the defendant i.e. the party being sued) costs. The most common situation when a Court orders a party to give security is where the plaintiff is a company and there is reason to believe that the plaintiff will not be able to pay the defendant’s costs if ordered to pay them.
Why is this High Court decision relevant to us here in Australia? Some observers and commentators have suggested that this might be the first foray of a Court accepting cryptocurrency as an appropriate alternate method of giving security for costs, noting the usual methods are cash or bank guarantee or, in certain circumstances, undertakings or indemnities given by parties and non-parties to the litigation.
I pondered the prospect of a digital asset supporting a party’s obligation to provide security for costs and did some mining (no pun intended) for authority. It seems that fairly recently, a District Court Judge in New South Wales considered whether cryptocurrency was a reliable security for the purposes of giving security for costs. Even though the Judge recognised that cryptocurrencies were a highly unstable form of investment, he accepted a digital asset as security by bundling it with undertakings given by the Plaintiff to the Court including:
- that there were no limitations on an ability to withdraw, either now or at any time in the future, all or any part of the funds to the credit of the cryptocurrency account;
- that the plaintiff would not dispose of, deal with or diminish the value of the account below the relevant amount and if that occurred, to notify the other party’s solicitor within 24 hours;
- the delivery of monthly statements to monitor the balance.
With all respect to that District Court Judge, I think he got the balance wrong, at least in part, because undertakings are notoriously difficult to enforce. It wouldn’t be the first time that a party to litigation lied or failed to comply with an undertaking; and in those circumstances, the unknowing defendant is left without access to (all or part of) the security and moreover with the additional costs of proving (which isn’t easy) a breach of the undertaking.
Further, in reaching his decision the District Court Judge did not consider the usual authorities and did not weigh up the usual considerations when assessing whether this proposed method of security:
- would impose an unacceptable disadvantage on the defendant; and
- was adequate to protect the defendant.
I support the line of authorities which prefer security being in a form which can be accessed with minimum risk or further litigation to enforce the security – usually cash or a bank guarantee. The main point of difference between those traditional forms of security and digital assets is control. When a party deposits money into Court or gives a bank guarantee as a form of security, the asset comprising that security is controlled by another (i.e. a Court or bank). With a digital asset, control remains with the party who has the private key (i.e. the owner). There are, of course other material differences which tend to weigh against a digital asset being a suitable alternate form of security for costs.
Indeed, as the law in England on this point is similar, I anticipate a superior Court in Australia to draw on the recent England decision and adopt a similarly cautious approach when considering cryptocurrency as a form of security. Time will tell.
Troy Hawthorn leads the Commercial Litigation and Dispute Resolution team and can be contacted at email@example.com or call (07) 3226 3944.