In recent years distributed ledger technology (DLT), digital assets and smart contracts have been hailed as having the potential to dramatically change the legal landscape. The rise of blockchain, smart contracts, cryptocurrency and non-fungible tokens (NFTs) now seems unstoppable. Across the world the law is now starting to embrace these new concepts and address complex questions concerning their classification, applicable regulatory regimes and liability for wrongdoing.
Cryptocurrencies (followed by NFTs) are the high-profile "public face" of these concepts. The current "crypto winter" has seen trillions of Dollars wiped off cryptocurrency markets, the sudden and catastrophic collapse of tokens (such as Terra Luna), the collapse of crypto trading firms (such as 3 Arrows Capital and Alameda Research), and the recent bankruptcy of the exchange FTX. As would be the case in any market going through such a devastating period of losses and upheaval, disputes are on the rise. While national court litigation is an important tool in relation to this emerging technology, arbitration is playing an important role and, in our view, this will only increase.
The rise of crypto disputes
National courts are increasingly faced with disputes in which this emerging technology plays some kind of role, whether as the subject of the claim, the backdrop to the claim, or even the means by which the claim is to be served1. From the decision of the US District Court for the Eastern District of Texas in SEC v Shavers2 to the French Commercial Court of Nanterre's judgment in Paymium v Bitspread3 and the Singapore High Court's decision in Janesh s/o Rajkumar v Unknown Person ("CHEFPIERRE")4, courts around the world have grappled with the status of cryptocurrencies and NFTs. Meanwhile, in March 2022, the Master of the Rolls set out his vision for integrated online dispute resolution processes in England and Wales, which aim to embed "smart processes" into the court system itself, to provide quicker, cheaper dispute resolution, without compromising on justice.
Commentators have suggested that the autonomous nature of smart contracts, which execute automatically (either wholly or in part) without human intervention, together with the transparency of the blockchain, may lead to the future elimination of contractual disputes. For now though, new technologies are giving rise to many conventional, off-chain, disputes. Issues arise out of hacking, increasing numbers of crypto fraud claims have dogged the industry for years, and the recent crash in cryptocurrency values has led to disputes relating the entitlement to tokens under SAFEs (simple agreements for future equity) and SAFTs (simple agreements for future tokens), control over project wallets and mis-selling claims in the context of crypto funds.
Some of these disputes are now being considered by national courts. But in many cases the characteristics of crypto transactions and smart contracts suggests that associated disputes may also be well-suited to arbitration.
Indeed, Mishcon lawyer Anne Rose, with the assistance of our arbitration team, was part of the drafting team for a set of Digital Dispute Resolution Rules launched in April 2021 which provide for arbitration of blockchain and crypto disputes. The Digital Dispute Resolution Rules project was a product of the UK Jurisdiction Taskforce at Lawtech UK (an initiative backed by the UK Government) and chaired by the Master of the Rolls, Sir Geoffrey Vos.
Litigating crypto disputes
There will remain certain types of crypto disputes, most notably fraud and tracing, where the courts will be the most appropriate forum, and where the courts have demonstrated their willingness and ability to adapt existing remedies and court processes to meet the challenges posed by crypto disputes, including to act quickly and effectively.
However, while the borderless nature of crypto transactions is, for some, one of its most appealing attributes, the decentralised and intangible nature of the blockchain can make conflict of laws issues particularly complex in some disputes. This is especially true if an agreement does not contain appropriate jurisdiction and governing law provisions, the parties' identity is unknown or the place of performance is impossible to determine. The English Law Commission recently announced a project to address this issue, but it is not expected to publish its consultation paper until the second half of 2023.
Meanwhile, the extent to which global legal systems recognise the legality of smart contracts and how digital assets will be treated remains unclear, notwithstanding the conclusions of the Law Commission that – at least in English law – current legal principles can apply to smart contracts in much the same way as they do to traditional contracts.
The speed at which transactions can be conducted over the blockchain also means that parties may be looking for a legal process that can offer a quicker and more flexible means of resolving disputes than may be traditionally offered by a conventional court-based trial. The anonymity offered by smart contracts can also make it difficult to commence court proceedings, although the power of the English court to grant orders against "persons unknown" does go some way towards ameliorating this issue. The courts in the US, Singapore, Malaysia and Hong Kong have also recognised this power in a modern context.
The benefits of arbitration
In order to deal with these concerns, market participants are already turning to arbitration.
For example, we have experience of token listing agreements with exchanges that variously provide for SIAC, JAMS and LCIA arbitration. This means that, as well as the highly publicised HKIAC claims by investors for the failure of Binance's trading platform in May 2021, other disputes between investors and exchanges for mis-selling, disputed margin calls and negligence over platform security are more likely to be determined in arbitration than litigation.
Similarly, the terms and conditions of an initial coin offering (ICO) or token sale may provide for arbitration. The allegations about delays in the issuance of Worldwide Asset eXchange tokens in 2017 is an example of arbitration proceedings arising in such a scenario. There is also no restriction on arbitrators determining issues of fraud in relation to alleged cryptocurrency scams, as long as the parties have consented to arbitration
User agreements between platforms and consumers may also provide for arbitration – a recent English case, Soleymani v Nifty Gateway5, addresses the issue of consumer protection rights in relation to the purchase of NFTs.
More broadly, arbitration is also relevant where crypto-related issues are governed by traditional contracts. The sometimes close network within the crypto industry means that many deals and arrangements may be done without formal contracts (and therefore arbitration agreements) in place. However, many such deals do include arbitration provisions. Examples of deals that can include arbitration agreements include: investments in crypto platforms or businesses, loans for crypto-related purposes (loans of crypto assets themselves, loans of fiat currency, or swaps/exchanges of crypto), or loan or use of NFTs.
As well as dealing with some of the complexities arising out of the decentralised and developing nature of crypto business, arbitration offers many other advantages that mean it is particularly well-suited to this kind of dispute. The confidentiality that is typically viewed as one of the defining features of arbitration compliments the anonymous nature of many crypto transactions. Similarly, while judicial awareness of the industry continues apace, parties may welcome the opportunity to sidestep gaps in knowledge by appointing crypto specialists to their tribunal. The ability to apply tailored, abbreviated and accelerated procedures is also valuable in an industry where speed is often crucial.
Traditional arbitral institutions are now developing specialist rules, including JAMS' draft rules for smart contracts and the UK Jurisdiction Taskforce Digital Dispute Resolution Rules referred to above. These provide for a more streamlined procedure than traditional arbitration as well as making allowances for the nature of crypto disputes. The JAMS rules, for example, pay due regard to the fact that smart contracts are likely to be written in code, and provide that the code will govern the interpretation of the smart contract. To the extent that the terms are reduced to natural language, they will be considered by the arbitrator only if there is any ambiguity in the code. The Digital Dispute Resolution Rules go further, providing that not only may parties withhold disclosure of their identity from each other, the tribunal may also be empowered to operate, modify, sign or cancel any digital asset relevant to the dispute.
An ambitious new form of decentralised arbitration is also emerging which seeks to use blockchain technology to enable parties to resolve their disputes "on-chain". Platforms like Kleros and Aragon use "jurists" to determine disputes by applying game theory, financially rewarding jurists who vote with the majority consensus. The Digital Dispute Resolution Rules recognise such "automatic dispute resolution processes" and are intended to complement such systems. More traditional on-chain arbitration services are also available, whereby disputes are referred to an arbitrator within the relevant platform, and determined on the basis of evidence and submissions. In the future, AI-powered dispute resolution may also play a role, although currently remains in its infancy.
As well as providing a quick and efficient determination, a significant benefit of on-chain arbitration includes the power to make changes directly to the blockchain, enabling automatic transfer of assets or even amendments to the relevant coding, without requiring recourse to the offline world. However, it is currently unclear whether such an "award" would qualify as an award for the purposes of the New York Convention, and significant questions remain as to what a party can do if off-chain intervention is required.
Protection of crypto investments
In the context of investment treaty arbitration, questions are emerging as to the extent to which bilateral treaties may be used to protect crypto investments, particularly in circumstances where a state seeks to ban or restrict a particular crypto asset. While a number of countries have sought to attract foreign investors with the aim of developing their crypto capabilities, other jurisdictions, including China, have declared cryptocurrencies illegal, or have sought to restrict crypto mining. In those circumstances, foreign investors may wish to consider whether a claim under an investment treaty can be brought.
Governments and regulators are still trying to determine the nature of crypto assets. However, it is notable that many investment treaties have a broad definition of a protected investment. It may, therefore, be possible to contend that cryptocurrencies, NFTs and other digital assets will fall within the applicable definition. A more complicated issue is whether the relevant investment is located in a qualifying territory. The borderless nature of crypto transactions, which render the use of commercial arbitration provisions so attractive, may well be a limiting factor in relation to investment treaty arbitration. However, if that question can be satisfactorily determined, we may well see a rise in claims in this space.
The availability of arbitration is not a panacea for every dispute arising in the crypto space. In cases of theft and misuse, for example, it may be more appropriate and effective to seek the assistance of national courts – indeed fraud and tracing claims in the courts in relation to crypto assets have grown significantly and will continue to increase. But in the context of commercial disputes, arbitration also offers clear benefits to market participants. The use of arbitration to resolve blockchain disputes is likely to grow as adoption of the technology becomes more widespread.