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Crypto Assets and Arbitration

Author: Syedur Rahman  15 April 2024
4 min read

A short summary of how the law has responded to the challenges posed by crypto.

The UK courts have found ways to apply the law innovatively to fit the framework of crypto assets. By way of example, the courts have served judgment by means of a Non Fungible Token airdrop, directly into the crypto wallet (Jones v Persons Unknown [2022] EWHC 2543 (Comm), and granted Bankers Trust Orders were granted against a cryptocurrency exchange (Fetch.ai Ltd v Persons Unknown [2021] EWHC 2254).

The court process tends to be the right forum for disputes involving fraud. Often in cases of fraud, an important part of the recovery process is finding and freezing the assets. The courts have jurisdiction to grant freezing injunctions, to order disclosure to track the movement of assets and identify those who hold the accounts and wallets holding the assets, and to impose sanctions on parties who do not cooperate with the court process.

Arbitration however has a different role in resolving disputes involving crypto assets. Arbitration in the crypto-sphere refers to its own development of rules and processes. It is not necessarily a simple translation of traditional commercial arbitration into the crypto-world. It has its own procedures, language, and nuances.

 

Smart Contracts

First, a short explanation of smart contracts, because they play a role in some forms of crypto arbitration. Smart contracts are digital contracts that are recorded on a blockchain. They come in two parts;

  1. The coded part.
  2. The written part (often referred to as the ‘wrapper’ contract).

A smart contract functions differently to a ‘normal’ written commercial contract. It is ‘self-executing’, which means that it is executed automatically when predetermined terms and conditions are met. Smart contracts are typically used to release funds to the right parties, send notifications, or issue tickets.

The reason they are relevant to crypto arbitrations is that they play a role in ‘on-chain’ arbitrations.

On-chain Arbitration

On-chain arbitration describes the situation in which smart contracts are used to automate some or all of the arbitral process. Indeed, the arbitration award itself is executed automatically by a smart contract.

The parties make their cryptocurrency available to the smart contract, and when the award is issued, the cryptocurrency is transferred from one party to the other. It works in a similar way to an escrow account.

On-chain arbitration is used for simple disputes, which do not involve voluminous and complicated documentation. An example would be a small value e-commerce dispute. It is a quick, cost-efficient, technological option for resolving disputes.

Certain platforms offer on-chain arbitration services, including Kleros, Juris, Confideal, Mattereum, and CodeLegit.

Off-chain Arbitration

Off-chain arbitration is more akin to traditional arbitration and can be conducted in line with existing commercial arbitral rules, such as LCIA, UNCITRAL or ICC for example.

In an off-chain arbitration, some of the procedural elements of the arbitration can be automated, such as the appointment of the arbitrator. In some cases, parties introduce game theory into the decision-making process of the tribunal.

However, there is no automatic enforcement of the award, as there would be in an on-chain arbitration.

Benefits of Crypto Arbitrations

1. Enforceability

One of the benefits of arbitration for crypto-asset disputes is the relative ease of enforceability of awards. Given that blockchain technology is essentially borderless, awards must be enforceable transnationally. Arbitration awards are enforced via the New York Convention, which is signed by over 160 states, making enforcement in those countries straightforward.

However, considering the nature of crypto-assets, some countries are reluctant to enforce awards (see the ‘issues’ section below).

2. Confidentiality

Generally arbitration is a confidential process. Disputes arising from smart contracts and blockchain technology will often require expert witnesses to explain the technology. The parties may want to keep information about new, innovative technology confidential, which makes arbitration a more preferable choice to court procedure. It allows the parties to protect commercially sensitive information.

However, be aware that not all crypto arbitrations will be entirely confidential. Information about the parties’ claims and arguments may appear on the public, distributed ledger.

3. Specialist Expertise

In an arbitration it is possible to appoint arbitrators with specialist expertise to decide the dispute and craft the remedy. However, given the relative newness of crypto-assets, there are few experts in the area. Additionally, in order to enforce some awards, the arbitrator would not only need to understand the law and the technicalities of crypto, but also the technology to alter the digital assets.

Issues with Crypto Arbitration

1. Arbitration Agreements

In order for arbitration to be a legitimate forum for a dispute, the parties must have entered into an arbitration agreement. For on-chain arbitrations, it is possible to insert the arbitration agreement into the wrapper. In off-chain arbitration, the relevant agreement is usually included in the terms and conditions that users accept when they begin to use the platform or service.

2. Enforceability

Some jurisdictions have tight regulations on the use and transfer of crypto-assets. These jurisdictions include China, Russia, and Qatar for example. If a party is trying to enforce an arbitration award in one of these jurisdictions, they may face opposition on grounds of public policy.

3. Lack of Flexibility

While arbitrations themselves have a degree of flexibility in how the rules are applied, there is little choice as to whether or not an arbitration will take place in the situation of an on-chain arbitration. The self-executing nature of the smart contract means that after a dispute rises, it triggers an automated process. Parties do not have the freedom to consider other possibilities like an amicable resolution.

Specific Arbitration Rules for Crypto-asset Disputes

Most institutional arbitration rules are sufficiently flexible to allow arbitrators to adapt procedures so that they are suitable for disputes involving crypto-assets. But dedicated blockchain rules are emerging.

For example, JAMS published a draft set of rules in 2018 for disputes arising from smart contracts (they remain in draft). They set out rules for various issues such as how a smart contract written in code should be interpreted. It is designed to be a quick process, whereby the arbitrator is required to issue an award within 30 days of their appointment.

In 2021 the UK Jurisdiction Taskforce of LawtechUK published the Digital Dispute Resolution Rules (DDRR). These rules set out a simple procedure with gaps that are intended to be filled by the Arbitration Act 1996 or by the parties. Interestingly, under these rules, parties can remain anonymous from one another if they agree to do so.

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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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