South African courts have yet to deal with a case involving Bitcoin or other cryptocurrencies. But the fact that cryptocurrencies remain largely unregulated in most jurisdictions does not place cryptocurrency disputes beyond the reach of the courts.
Globally, most litigation has related to insolvency, fraud and breach of contract.
- In 2014, Japanese Bitcoin exchange MtGox filed for bankruptcy after 850 000 of its customers’ Bitcoins (currently worth almost ZAR 5.6 billion) disappeared or were stolen by hackers. An investigation into alleged market manipulation and embezzlement by the CEO remains underway.
- US Bitcoin mining company Butterfly Labs has recently settled a case brought by the Federal Trade Commission for USD 38.6 million. Butterfly Labs allegedly pre-sold specialised computer hardware which could be used to mine Bitcoin, but built and used the hardware to mine Bitcoin for itself. Many orders were never delivered, while other customers received used hardware. The settlement prohibits the company from making any misleading claims about its products, or taking upfront payments unless the products are available.
As cryptocurrencies gain traction, the litigation risks surrounding them will also increase. The rights and obligations between participants in cryptocurrency systems give rise to various potential civil causes of action.
- Contractual obligations are unlikely to exist between miners, or between miners and users, because of the automated, rule-based operation of the systems. Contractual liability requires an intentionally created legal relationship between the parties, which is typically absent here.
- The possibility of delictual liability could arise if a miner fails to follow protocols and this causes harm to other miners. South African courts would need to find that a duty of care exists between miners to operate according to the rules of the system.
- Transactions between individual users create direct contractual relationships. Instances of ‘double-spend’ (where the same cryptocurrency units are spent in more than one transaction) for example, should render the guilty user liable for breach of contract.
- The standard contractual rules for the sale of goods will apply to agreements between miners and the sellers of cryptocurrency mining technology (as in the Butterfly Labs case).
Our global cryptocurrency team has produced a guide to the legal and regulatory framework within which cryptocurrencies operate. The guide will be published in eight chapters.