Peter Bullock discusses the rise of crypto disputes and why they will continue to occur in 2023 and beyond
Although it has been 14 years since the the presumed pseudonymous Satoshi Nakamoto defined the genesis block of bitcoin, the subject of cryptocurrencies, digital assets or Non-Fungible Tokens (NFTs) is still polarising when discussed in general commercial circles. Although cryptocurrencies currently account for just 7% of the world’s money, the HKIAC recorded “banking and financial services” cases rising from 16.2% of its cases in 2021, to 36.9% in 2022. It is thought that the sharp increase may be largely attributed to cryptocurrency and other digital asset related arbitrations. For this reason alone, general commercial arbitration practitioners would be foolish to discount digital assets as a fad or aberration.
Naysayers may scoff that the high incidence of disputes is an indicator of the inherent unreliability of digital assets (or those using them), but having worked in this area for a number of years now, the writer believes the position is rather more complex than this.
Digital assets share a number of characteristics which may explain the increasing dispute environment, and in part the suitability of arbitration as a resolution tool:
1. Volatility
We are (hopefully) emerging from a crypto-winter, during which the values of cryptocurrencies have uniformly fallen (and in the case of a number of altcoins and stablecoins, have been trounced). However, the values of Bitcoin and Ethereum received support at their late 2021 levels. Whilst some investors may have suffered heavy losses, many more are still very much ahead – sufficiently above water to be able to fund litigation or arbitration. Around each transaction there is often a backstory. Whilst one side may feel aggrieved, they may not have lost their shirt, but rather failed to maximise their hoped for gains. In short, there are usually funds available to pursue a claim. A successful investor / trader may be involved in a number of claims, whilst maintaining an overall profit on their portfolio.
2. Poor paper
The legal documentation underlying many digital assets transactions is often technically suboptimal. This is for a number of reasons. Cryptocurrency exchanges are sometimes coy over where their management operates from. This can lead to misleading or contradictory choices of law and jurisdiction across standard terms offered by the platform. Previously, participants have been more keen on swift execution of transactions than figuring out the legal paperwork. Hopefully that will change in the more sober times ahead. In any case, whilst this may lead to jurisdictional argument, once jurisdiction is founded, there often remain a number of triable issues.
3. Enforceability
A constant in digital asset transactions is the significant geographical distribution of participants, intermediaries and assets. This means that a judgment or award may likely need to be enforced in a jurisdiction outside the place of adjudication. The wide reach of the New York Convention often marks out arbitration as preferable to litigation in any chosen national court. Reputable operators of platforms imposing arbitration agreements will not know whether they will be claimant or respondent so should hopefully seek viable routes to adjudication and enforcement.
4. Technical complexity
The language, technical effect and commercial practices of the cryptocurrency world are highly complex. Whether the dispute arises following a hacking event, the vagaries of the operation of stablecoins, or the use of complex derivatives, there is a very real risk that a judge in a national court will be ill-equipped to fully understand the matters in issue. Arbitration has a clear advantage here as the parties can choose an arbitrator with appropriate technical and industry expertise. Given the extent of the cryptocurrency caseload, HKIAC and other arbitral bodies will have increasing numbers of arbitrators with the requisite experience on their panels.
5. Confidentiality
The platforms and intermediaries offering standard terms of business (who often will be the party dictating the dispute resolution provisions) are usually very keen to maintain their reputation. The confidentiality of the arbitration process in disposing of any disputes is therefore of importance to them.
Another aspect of the trade in digital assets is the interconnectedness of market participants. It is fashionable to talk of digital assets in terms of ecosystems. This comes about owing to various factors. Ethereum is seen as an enabler of various strands of economic activity because its blockchain, and the ERC-20 and other tokens inhabiting it, share connectivity. Bitcoin has an ecosystem, owing to the interaction of miners, who validate “new” Bitcoins in exchange for a fee, separate from traders and investors (some will, of course wear a number of hats across the ecosystem). Separately, the route to market has tended to revolve around exchanges, such that investors have tended to trade their digital assets (whether as offeror or offeree) via the often fast growing exchanges.
In the event of a failure of a large player in one of these ecosystems – whether through a hack, a lack of liquidity, market sentiment or fraud, the collateral damage tends to be very significant. Many players run for the exits – making claims and allegations as they go. Co-founders often find themselves at loggerheads with one another, or with their investors. The potential for disputes is seemingly endless.
In the 1990s, courts across the world were very exercised in their attempts to determine the legal status of software. In a leading English case (St Albans City and District Council – v- ICL) Glidewell L.J. unhelpfully declared software sui generis (thankfully obiter), a decision which made it uncertain whether particular remedies (usually applied to goods or services) would apply to software. Thankfully, the courts have shown a willing and consistent approach to digital assets, routinely characterising them as “property”. Indeed, courts in Hong Kong, Singapore, England, China and New Zealand have all reached this conclusion within the past 12-18 months. This, importantly has permitted claimants access to interlocutory relief (by proprietary injunction) and the ability (theoretically at least) to trace through multiple levels of digital assets. Emergency relief is now available to be ordered by an emergency arbitrator under Section 22B of Hong Kong’s Arbitration Ordinance. In Hong Kong, the courts are also well placed to assist with such relief in appropriate cases.
In light of all the above considerations, it seems likely that cryptocurrencies and other digital assets will provide fertile ground for those involved in the arbitration ecosystem for the foreseeable future.
