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Crypto Arbitration – An In-Depth Review

Authors: Syedur Rahman, Rhys Evans  31 May 2024
7 min read

Syed Rahman and Rhys Evans look at the key factors that can determine how effective arbitration can be in crypto-related disputes.

Crypto-related disputes are increasingly being referred to alternative dispute resolution, specifically arbitration. This is no surprise, for reasons such as the wider adoption of crypto generally and arbitration being well-aligned to the ethos of crypto. 

Many investors dealing with crypto are attracted to it because it offers pseudonymity. This aligns with the confidentiality of arbitration (although anonymity in arbitration is not a given right) as well as the potential for limiting the involvement of the national courts which, in turn, can at times, remove the governmental regulator’s anti-crypto rhetoric.  

There are also some inherent practical advantages to utilising arbitration in crypto-related disputes. These include:

  • Greater flexibility in the process.
  • Neutrality.
  • The choice of arbitrators and tribunal being tailored to meet the parties’ specific needs.
  • Greater control over the disclosure process.
  • Choice of experts and the extent to which they are used.
  • Control over the use of oral and written evidence. 

Added to these factors, the format in which the hearings take place can be altered to implement greater use of developing technologies - to the point where ‘virtual court rooms’ may become commonplace, which may well be attractive to crypto investors.

The courts of England and Wales have been willing to be as flexible as they can to accommodate the fast-developing area of law relating to the crypto sphere. However, being realistic, there is a limit to how flexible they are able to be. Therefore, the ability to appoint expert arbitrators, control the disclosure process and tailor the use of expert evidence (which is not always feasible under the Civil Procedure Rules) can make the arbitration process more malleable in order to suit the specific needs of a given case. 

Types of Disputes

There is a wide range of disputes that may be resolved through arbitration. These can include disputes relating to breach of contract, initial coin offerings, misrepresentation/mis-selling claims (e.g., misrepresentations as to the reserve assets behind stablecoins or regarding the risk of an investment), outstanding debts by hedge funds and other investors, intellectual property (e.g., the use of artwork for NFTs) and enforcement claims of arbitral awards in national courts. 

It should be noted that typical fraud or scamming claims are not likely to be well-suited to the arbitration process. This is because in such claims the bad actors who perpetrate the fraud are usually unwilling to engage in arbitration. In such circumstances, typical proceedings in local courts will provide mechanisms for pursuing people or entities who refuse to engage in the claim process. 

There are clearly many circumstances in which arbitration may be an attractive alternative to issuing proceedings with national courts. However, this will often require a case-by-case analysis of the factual circumstances in order to assess the value of pursuing an arbitral award. Given the nature of crypto, it is critical to take into account the fact that the dissipation of assets can be especially acute and the combative remedies at a tribunal’s disposal may be less effective than those available to the national courts. 

Identifying the Respondent 

A preliminary point that must be determined at the outset of the arbitration process is who will be a respondent. As a starting point, one should consider the clauses within a given Terms of Use, as this will often identify the entity or entities to be party to the arbitration. This will at times be different to the entity that the investor normally deals with. 

Whilst pseudonymity has many positive features for crypto investors, this can be to the detriment of exchanges and crypto service providers. Those seeking to pursue crypto investors for whatever given reason may encounter difficulties when attempting to identify precisely who will be the respondent, rather than a virtual alias. From an exchange’s perspective, they should, in principle, hold adequate KYC documentation to adequately identify the investor for the purposes of naming them as a respondent in arbitration. Whether such exchanges do, in practice, actually hold such adequate KYC documentation is a whole different issue, and beyond the scope of this article. 

Furthermore, when dealing with decentralised autonomous organisations (DAOs), it may not be sufficient to name the DAO solely as the respondent, as this raises practical issues in terms of governance on behalf of the DAO. It may well be unclear who precisely will take control of dealing with the dispute on behalf of the DAO. Clarification and/or assurances may be required from the DAO as to who will be engaging in the process. 

Dissipation of Assets 

As noted above, dissipation of assets is an acute issue when dealing with crypto-related disputes. The global nature of crypto has great benefits but, in circumstances where a dispute has arisen, the ability to readily disperse one’s assets at great speed can have a grave impact on the ability to ultimately recover such assets. This can be exacerbated by the use of mixers, which will conceal the trail of funds on the blockchain and make it hard for those pursuing assets to precisely trace and locate the funds. 

In addition, the remedies at a tribunal’s disposal to alleviate these issues are far narrower than those afforded to national courts. Where there is a real risk of dissipation, thorough consideration must be given as to whether it is appropriate to obtain a freezing order - either through the tribunal or in the local courts - should the arbitration rules in play permit it. That said, some arbitrational institutions allow for emergency arbitrators to grant urgent preliminary orders, which may be of use to combat the possibility of any assets being dissipated. 

Establishing and Quantifying Losses 

The issues that arise when seeking to value and quantify assets and/or losses arise in both traditional litigation and arbitration. However, the value of the assets one is seeking to recover may have an impact on how the parties to the arbitration wish for it to be run. 

Valuing a more mainstream coin or stable coin can be a relatively straight forward exercise. However, when dealing with assets such as NFTs, valuing such assets may be more complicated. It will not be immediately obvious what the true value was, either at the time the dispute arose or when the matter proceeds to an arbitral hearing. There may also be further factors, such as personal or sentimental value, that one will need to contend with. Expert evidence can often be a necessity in disputes of this nature. An expert can assist by providing a face value for the asset but  can also give a clear indication as to the traceability of an asset and the sum one can expect to recover. 

Market volatility will also play a key role in valuing one’s claim. If a dispute arises at the peak of a bear market, one may wish to proceed with haste in order to avoid the possibility of a sharp and sudden downturn in the market, resulting in a potentially grave devaluation of the assets concerned. This  volatility also plays a role in disputes relating to a loss of chance to invest due to not having access to a set of assets or due to the failure of an exchange’s platform. Such disputes are notoriously difficult to quantify and parties will often be required to lean heavily on expert evidence in support of their claim. 

Recognition and Enforcement 

A wider issue that must be considered from the outset of the arbitration process (and throughout its entirety) is the necessity, or indeed ability, to enforce any ultimate award(s). Typically, arbitration awards can be enforced in different jurisdictions, owing to the New York Convention. This will depend on the award looking to be enforced in a jurisdiction that is a member of the New York Convention. But as there are currently 172 members of this Convention, most jurisdictions are subject to it.

That is not, however, the be all and end all of the matter. There are some jurisdictions which are unable to enforce crypto arbitration awards on the basis of it being contrary to public policy. China, Russia and Qatar are among those jurisdictions that have banned crypto altogether. Subsequently, there have been instances in China where enforcement of an arbitral award was refused as this would result in the payment of damages by means of cryptocurrency. Similarly, in Greece, an award was not enforced on the basis that the European Central Bank does not provide guarantees against the use of crypto as a means of payment. 

This should prompt those seeking an arbitration award to consider, at the very outset of the process, what the appropriate wording is for the request for relief. To refer back to the aforementioned examples in China, had an award that was being sought to be enforced been worded for the payment to be made in fiat currency (but for the same monetary value as the crypto) this may well have enabled the difficulties to have been overcome. 

Even in arbitration-friendly jurisdictions such as the UK, there have been instances of refusal to enforce an arbitration award on public policy grounds. In Payward v Chechetkin [2023] EWHC 1780 (Comm), Bright J refused to enforce a Californian-seated award on the basis that the arbitration award refused to take into consideration the effects of the Consumer Rights Act 2015 as well as the Financial Services and Markets Act 2000. In essence, Bright J ruled that the provisions of these acts were public policy and to enforce an award that went against these provisions would be in breach of public policy. 

A factor that also must be considered is the realistic ability of an award debtor/respondent to actually satisfy the sums of an award, regardless of whether it is successfully enforced. This again can be affected by market fluctuations, as if the individual(s) or entity being pursued only has cryptoassets, any sudden downturn in the market is likely to have a bearing on their ability to satisfy an award, especially if such an award is in fiat currency or equivalent. This also ties in to the jurisdictional considerations, in so much as whether the individual(s) or entity has sufficient assets in the jurisdiction in which the award is being enforced. This could result in the need for an award to be enforced in multiple jurisdictions in order to recover the full quantity awarded. 

There may well also be grounds to challenge the enforcement of an award. Such grounds may include whether a party was made fully aware of the arbitration clauses within the Terms of Use. If, for example’s sake, the arbitration clause in question was buried two-thirds of the way through a 1,000-plus page Terms of Use, there may well be grounds to assert that it is not reasonable nor fair for an average consumer to be aware of such a clause. Furthermore, where ‘click-wrap agreements’ are concerned - where a consumer clicks a box, typically, to provide affirmative consent to the Terms of Use – there could be argument about whether it is fair and reasonable in the circumstances to conclude that the consumer knowingly agreed to any arbitration clause. 

Conclusion 

The novel issues that arise in crypto-related disputes would often be likely to have a similar bearing on typical proceedings in national courts as they would on arbitration processes. However, it is clear to all that arbitration has many positive capabilities when it comes to tackling the shortfalls of the national courts. It can often prove to be an attractive and effective alternative form of dispute resolution. 

Although it should be emphasised that there are many unique obstacles to the arbitration process in the context of crypto disputes – and these need to be considered throughout the entirety of the process. But with there being no universal governing rule of law over crypto disputes, arbitration offers assistance in overcoming the range of challenges that individuals or entities face in recovering assets or resolving disputes through civil procedures. 

Syedur Rahman C 09551

Syedur Rahman

Partner

syedur.rahman@rahmanravelli.co.uk
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Syedur Rahman is known for his in-depth experience of serious fraud, white-collar crime and serious crime cases, as well as his expertise in worldwide asset tracing and recovery, international arbitration, civil recovery, cryptocurrency and high-stakes commercial disputes.


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Rhys Evans

Associate Solicitor

rhys.evans@rahmanravelli.co.uk
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Rhys works on major criminal and regulatory investigations, high-level commercial litigation and worldwide asset tracing and recovery for companies and private clients.

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