The current trending buzzword in the digital assets space in Singapore is “crypto winter” (with its seasonal variations aplenty: see crypto ice age and even crypto spring by the FT). With that topic on everyone’s mind, increasingly we are having conversations with clients about how to resolve their cryptocurrency disputes, NFT disputes, and other digital assets disputes, and whether arbitration of cryptocurrency disputes is the way to go. These include digital asset exchange platforms, venture capital firms, and family offices whose portfolios include cryptocurrency, NFTs, or other digital assets.
Arbitration is a great option to resolve disputes in this space. It is important to note that even if you don’t already have an arbitration agreement in your contract, you might still be able to choose arbitration, if the other side agrees to arbitration after a dispute has arisen.
Which disputes do we have in mind?
We anticipate that the two most common types of disputes which will arise are:
- Investor v platform / exchange. Why? Platforms / exchanges tend to be slightly more moneyed targets than failing crypto projects. It is tempting for investors who have lost vast sums of money to conjure creative strategies to go after the moneyed target, rather than the failing investment promoter;
- Investor v crypto project, despite the fact that such projects may not be the most viable targets if they are seeing troubled times. That has not stopped claims being launched, potentially for publicity in the hopes of some settlement, or attempt at personal liability of founders.
We have answered below three common questions which explain why arbitration is well-suited to resolve cryptocurrency disputes and NFT disputes and other digital assets disputes.
I don’t have an arbitration agreement in my platform agreement, or in my investment agreement. Can I still arbitrate?
It is necessary to have an arbitration agreement to arbitrate. However, if your underlying agreement (be it the platform terms and conditions or investment agreement) does not have an arbitration agreement or arbitration clause, you can still arbitrate if the other side agrees after the dispute has arisen (and they may have compelling reasons to do so!). It is not necessary for an arbitration agreement to be entered into before the dispute arises.
The natural question is: why would a prospective respondent agree to this? Primarily because the respondent may have compelling reasons to stay out of the public eye. For example, it wishes to avoid the negative publicity that comes from being named as a defendant in court proceedings, or does not want other investors to panic, or it may not want other prospective claimants to have sight of the creative claim strategies which target gaps in their liability cover. Arbitration, as a confidential process, allows disputes to be resolved privately, and as such, even defendants may prefer it to a public forum.
On the flip side, if the platform / exchange you wish to sue includes an arbitration clause in the terms and conditions to which you agreed, you will have no choice but to arbitrate as Mr Soleymani discovered in Soleymani v Nifty Gateway LLC.
Is arbitration time-consuming and costly? Is arbitration for cryptocurrency disputes and other digital asset disputes more efficient than court proceedings?
A typical arbitration will last around 18 months, but the timeframe depends heavily on its complexity, the procedural steps that the parties agree to, and the recalcitrance of the respondent. So, yes, it can be time-consuming. With that comes legal fees (lawyers, arbitrators, technical experts) for that period, and the exposure to paying the other side’s fees.
That said many platform terms and conditions specify arbitration rules that allow for an expedited process (for example Open Sea and Nifty Gateway both specify the JAMS Rules in New York that have special rules for consumer arbitrations).
Nevertheless, there are three significant advantages in choosing arbitration to resolve cryptocurrency disputes and other digital assets disputes:
- First, arbitration procedural timetables can include the steps and timeframes that the parties and arbitral tribunal consider necessary for the dispute at hand. For example, parties can agree to an expedited procedure whereby the dispute is resolved within six months. Court procedures are not usually as flexible. This ability to tailor the process to the problem is a huge advantage, and when used correctly, can save a tremendous amount of time and cost;
- Second, parties are at liberty to choose specialists (both in terms of the arbitrators and the counsel representing them) with the right blockchain, cryptocurrency, NFT, digital assets knowledge. Ensuring disputes are resolved by individuals with the right technical expertise adds to the efficiency, effectiveness, and predictability of outcomes. While certain national courts are sufficiently sophisticated to deal with cutting edge digital assets’ disputes, not every jurisdiction has had enough of these disputes go to courts;
- Third, you can choose a neutral jurisdiction with a reliable court and arbitration law as seat of the arbitration regardless as to where the platform/ exchange is established or you are located.
The respondent’s assets are largely in the form of cryptocurrency of questionable value. What’s the point of suing them? Can I enforce a favourable award?
If enforcement is not possible, an award is of very little value. As such, enforcement ought to be at the forefront of all potential claimants’ minds. On this note, there are three tips to bear in mind:
- First, enforcement of an arbitration award is far simpler than enforcement of an overseas court judgment. The New York Convention allows enforcement in any contracting state, of an arbitration award from any other contracting state (with some exceptions which typically go to procedural integrity of the relevant arbitration or public policy of the enforcing state);
- Second, early asset searches are crucial. Historically, asset tracing has been an expensive process. With the advent of digital assets, asset tracing is much more feasible, but tools such as tumblers and mixers which seek to obfuscate the trail of digital assets do complicate this process. Further, privacy coins are designed to be untraceable. It is important to engage with skilled asset tracing firms early on to assess what digital assets can / cannot be traced;
- Third, in well-developed arbitration jurisdictions (such as Singapore and Hong Kong), parties can seek interim asset preservation measures prior to commencing arbitration. This way, parties know exactly what they might be able to enforce against. In the right case, they may even be able to seek preservation of the money worth rather than the actual digital assets (whose value may subject to much more market volatility than traditional fiat currency). On this note, check out our recent blog post which deals with a recent decision where the Singapore Court allowed freezing of a Bored Ape Yacht Club NFT, pending underlying substantive proceedings.
The takeaway on whether to use arbitration in cryptocurrency disputes:
- Always try to arbitrate. Even without a pre-agreed arbitration agreement, there may be sufficient reasons for parties to agree to arbitrate after a dispute has already arisen;
- Arbitration has the potential to give parties a quicker and more effective resolution process as they can tailor the steps and timelines to the circumstances, and choose their own specialist arbitrators;
- Enforcement of an arbitral award is much more likely to bear fruit across borders, than national court judgments. Devise an enforcement strategy quickly and early.
Of course, avoiding cryptocurrency and other digital asset disputes entirely is the goal for all, but when one is inevitable, arbitration has much to offer.