Third class stamp: Bitcoin may be protected against misappropriation, but cannot be converted

To the best of our knowledge, this is the first High Court judgment that we have discussed that has also been covered in publications as disparate as The Sun, The Independent, and CoinDesk. This is because aspects of it are inherently newsworthy (not to say juicy), including an ultra-high-net-worth estranged couple, allegations of secret recordings by both parties of the other, family intrigue, an alleged high-tech hack, a conviction for violence, and a claim potentially worth up to £180 million.

Putting all of that to one side, all readers need to know is that this is the first reported case, relevant to the personal property taxonomy of digital assets, to come before an English court after the enactment of the Act, in which the claimant accuses the defendant of stealing over 2,000 Bitcoin by wrongly transferring them to other Bitcoin addresses. There were several questions before Cotter J in this interim application (including the defendant's application for security for costs), but we will concern ourselves primarily with the question as to whether the claimant could bring an action for conversion of the Bitcoin.      

Claimants in earlier cases that were seeking to vindicate their proprietary rights over Bitcoin (or other digital assets) had often needed to convince courts of their ability to use proprietary remedies (that is, to persuade the judge that Bitcoin is a form of personal property). Even before the enactment of the Act, a long list of decisions (albeit the majority at an interim stage) put beyond any real doubt that Bitcoin and other digital assets were, or could be, a form of personal property and, therefore, proprietary claims (such as restitution) and remedies (such as proprietary injunctions) could be available in respect of them.  

However, it is curious to note that the claimant's claim as originally pleaded rested solely on the torts of conversion and trespass to goods (and a conspiracy in relation to those torts). It was only following the defendant's strike-out/summary judgment application that the claimant sought (and obtained) permission to amend his claim to include the proprietary claims and remedies.

One rationale for this might have been the attraction of conversion insofar as it is a strict liability tort, best put by Lord Hoffman in OBG v Allan [2007] UKHL 21, and quoted in this decision:

The challenge the claimant faced, however, was that OBG v Allan (as can be told from the reference to "chattel" and "goods" in the box above) is binding authority (of the House of Lords, as the predecessor court to the English Supreme Court) that conversion is not available for contractual rights/things in action or other intangible property.

The claimant therefore argued that the recognition of a "third category" of personal property by the Act opened the opportunity for the English courts to consider whether conversion is now available for "third category" things. In particular, support was notionally found for that argument in cases from the US and Canada, as well as consultation papers and reports from the Law Commission.  

The defendant, in contrast, argued that such a claim failed as a matter of law and should be struck out. Similar considerations applied to the claim for trespass to goods.  

In short, and notwithstanding the "attractively and forcefully put" arguments on behalf of the claimant, the judge concluded that "the decision of the Supreme Court in OBG v Allan is a clear block to the extension of the law of conversion for this purpose." The Law Commission itself, as the judge had noted, had proceeded on the basis "that the third category of things are currently incapable of being converted under the existing law"; in other words, the key point is that conversion is only available in respect of tangible property as items of property capable of being possessed.

Intangible property cannot, in principle, be converted – and even the dissenting minority of the House of Lords in OBG v Allan accepted that the historical basis of conversion was a physical interference with a tangible good. Bitcoin, even as a "third category" property, was determined by Cotter J to be "intangible property" falling squarely within the scope of the principle confirmed by the House of Lords in OBG v Allan that the tort of conversion does not apply to intangible property. The judge reached this view, even though Bitcoin (and other cryptoassets), and their classification as a "third category" property, separate from a contractual right/thing in action, could not have been in contemplation of the House back in 2007.

The judge also noted that, even if he were to agree with the principle that the Supreme Court might in the future want to develop the law on conversion as it applies to a "third category" and so overrule or distinguish OBG v Allan in its application to digital assets, he was bound by the "crystal clear" precedent authority of the decision; that is, such a development could not happen at first instance (and the Law Commission had previously indicated that it thought that legislation would be needed). The Act itself did not overrule that decision. Further, there was no "lacuna" in the proprietary or other causes of action or remedies available to the claimant that, as a matter of policy, would make it appropriate to extend the tort of conversion to the theft of the Bitcoin.       

As regards the claim for trespass to goods, the same reasoning applied. However, the claimant was given a reprieve, given some uncertainty and apparent confusion around digital asset wallet technology. The judge was prepared to consider the possibility of an arguable claim, if centred around interference with electronic data (as opposed to the Bitcoin themselves), given the uncertainty in the law in this regard. Given, however, that the pleadings did not clearly articulate such a case, the judge gave the claimant 7 days to remedy this, failing which the claim based on trespass to goods would also be struck out. 

The decision leaves us with a marginally clearer picture than before, albeit with some degree of mixed signals.

On the one hand, the Act, previous common law developments, or some combination of the two, have (for all practical purposes) ended the debate as to whether digital assets can be the subject of personal property rights. This is a welcome result.

A second welcome point is that there appears to be no immediate rush by the courts to develop new possession-based causes of action or remedies for digital assets as "third category" things.

An English court is still likely to consider whether there is a binding precedent preventing it from extending a possession-based rule, principle, right or remedy under English law (and by analogy with the control-based right, title or interest of the holder of a digital asset) to the digital asset as a "third category" property. Further, even in the absence of binding precedent, a court may be reluctant to make such an extension unless it can identify some "lacuna" in the rights, remedies and other protections available under English law to the holder of the digital asset or otherwise that, as a matter of legal policy and looking at all things in the round, makes the extension a necessary, appropriate or desirable (incremental) development of the common law.     

However, taking a step back, it is equally clear that the Act has emphatically added to the law of England and Wales a "third category" of personal property, and that covers Bitcoin (at least). As the judge said:

The phrase "third category" appears 27 times in the judgment (in fairness, this is partly due to lengthy quotations from Law Commission publications). Our earlier conclusion that the creation of a "third category" would also require a slow and incremental (and not necessarily linear) development of the relevant legal regime appears to have been vindicated, at least on the basis of this early evidence.

Moreover, while this case will be classified as authority that "third category" things cannot be converted, had Bitcoin been recognised as being a thing in action, the result would never have been in doubt. In addition, the prospect that an appellate English court might subsequently overrule or distinguish OBG v Allan, in its application to digital assets as "third category" property, would never have arisen. Finally, conversion is not the end of the story; other legal principles, rights and remedies applicable to personal property are likely to be litigated over in the coming years to determine whether or not they apply to this new "third category". 

There is therefore a question about exactly what the Act has achieved in the context of our clear and well-established law of personal property predicated on two exhaustive categories of personal property, which was well capable of being applied to digital assets, as falling within a broad category of things in action.

As financial institutions gear up either to apply to the FCA for authorisation to carry on the new set of cryptoasset regulated activities (the application window runs from 30 September 2026 to 28 February 2027), or to seek advice on how to structure their businesses so as to avoid the need to apply, understanding the fundamental proprietary underpinnings of this asset class will be of critical importance when devising use cases, business models, or wind-down plans.

Please get in touch with the Travers Smith Fintech, Market Infrastructure & Payments practice (contacts below) to discuss how the Act could affect your business plan.