PIERRE BURGER: The coming crypto arbitration

Cryptocurrency and crypto asset-related disputes are on the rise globally. Arbitration is becoming the dispute-resolution mechanism of choice in the crypto sector due to features suited to crypto disputes. 

These include neutrality and the ability to be enforced widely through the New York Convention, both of which align with the decentralised and cross-border nature of crypto trade; flexibility, which enables the appointment of subject-matter experts to adjudicate technical disputes; confidentiality, which appeals to crypto users who tend to value pseudonymity; and the ability to be agreed to up front in online agreements. 

The types of crypto disputes that lend themselves to arbitration are many and varied. The categories most commonly seen to date include breach of service contract claims by investors against trading platforms, typically arising from a lack of access to the platform and consequent loss. A prominent example was the Binance class arbitration initiated in the Hong Kong International Arbitration Centre by up to 700 claimants against the largest crypto exchange, arising from the shutdown of many parts of the Binance trading platform on May 19 2021, date of one of the largest percentage drops in the value of Bitcoin, allegedly resulting in huge losses to crypto derivative traders. 

Other examples include claims by platforms against investors arising from failure to make payment; claims by investors against platforms based on fraud and mis-selling (misrepresentations as to the reserve assets behind stablecoins, or the risk of investment); payment of outstanding crypto-denominated debts; financial transactions (failure of platforms to return nonfungible tokens or other crypto assets provided as collateral for cryptocurrency loans); and more. 

Cases of outright crypto fraud and theft do not lend themselves to arbitration as crypto scammers are generally not inclined to enter into consensual dispute resolution with their victims. Much jurisprudence has been generated by courts in various jurisdictions concerning freezing orders issued on stolen crypto assets. 

Arbitration in the crypto sector depends in practice on the parties having concluded an agreement to arbitrate before a dispute arises. Arbitration agreements are common in the sector. Examples of crypto agreements containing arbitration clauses include sale agreements requiring the transfer of crypto assets; online service provider-user agreements, which are frequently constituted by the platform’s terms of use and agreed to by the investor through click-wrap or browse-wrap contracting; and the terms of an initial coin offering, usually hosted on the website of the issuer or a related entity.

Arbitration agreements in the crypto sector have been challenged with varying success on a number of grounds, including that the user did not have proper notice of the terms on a website, or that they were not actively required to confirm the terms (a browse-wrap agreement), or that competing and incompatible versions of the agreement exist, a common problem with online agreements that are often updated, removed or overlap with other versions. 

Another potential problem relates to arbitrability, resulting from various jurisdictions having banned crypto outright or heavily regulated its use. In China, a court set aside a China-seated award that ordered payment of damages in Chinese yuan for failure to transfer the equivalent amount of Bitcoin in terms of an agreement. The award was set aside on the basis that it would facilitate circulation of crypto and its exchange with fiat currency, which might disrupt the integrity and security of the Chinese financial system. 

Even in jurisdictions that do not ban or onerously regulate crypto, courts have sometimes refused to uphold awards in crypto disputes on public policy grounds. In Greece, a court of appeal refused to recognise a US-seated award for repayment of a Bitcoin venture finance loan. The court reasoned that since crypto is considered a digital asset under Greek law, and not money, the European Central Bank did not guarantee any right to use it as payment, so posing a risk to users and potentially facilitating tax evasion and fraud.

In England, the commercial court recently refused, unusually, to enforce a US-seated award on public policy grounds, despite the terms and conditions of the crypto trading platform providing for Californian law and arbitration. The court found that those UK statutes are instruments of UK public policy, that the user was a consumer, and that his contract with the platform (a UK entity albeit trading overseas) was one with a close connection to the UK. It would therefore be contrary to public policy to allow the platform to sidestep UK consumer rights legislation by enforcing the award.

Other challenges that may arise in crypto arbitrations include identification of the correct counterparty, given that crypto businesses may be organised and operated in an opaque manner, sometimes by several entities in a number of different jurisdictions; securing interim measures over crypto assets, by an emergency arbitrator or more commonly by the courts; and difficulties in the valuation of crypto assets and crypto businesses for quantifying loss.

Advancing technology also raises the prospect of new forms of rules and procedures, including bespoke rules developed by US-based Judicial Arbitration & Mediation Services, as well as the possibility of “on chain” arbitration, a term that covers anything from enhancing current procedures and rules by providing for communication and storage of case documents on blockchains, to radical departures from traditional forms of dispute resolution. 

As the crypto landscape continues to develop rapidly, arbitration is providing an efficient, flexible and neutral mechanism for the resolution of crypto disputes, while crypto disputes and blockchain technology promise to take arbitration into new, unknown territory. 

• Burger is director at Werksmans Attorneys.