Written by 8:17 pm Cryptocurrency

The Cryptocurrency Arbitration Handbook – Lexology

Remember late 2021 when cryptocurrencies were perceived as the future of global transactions. Since that peak a few months ago, cryptocurrency assets have declined a painfully staggering USD 2 trillion. With losses so monumental, a wave of crypto-related disputes in the form of international arbitration are imminent.

Cryptocurrency businesses have been known to include arbitration agreements in their contracts, which is unsurprising considering the harmonious nature of both cryptocurrency and international arbitration. As cryptocurrency identifies itself as a decentralized character, arbitration similarly enjoys the freedom of party autonomy that cannot be found before national courts.

This article seeks to provide a guide to the challenges and remedies that are bound to arise in cryptocurrency arbitrations as well as a look at the current Binance case.

VARIOUS FORMS OF CRYPTOCURRENCY DISPUTES

As with any subject matter, cryptocurrency disputes come in various forms, but as crypto is a novel sector, some disputes may raise novel legal issues. For instance, in the absence of a governing law clause, issues may arise as to what law governs the blockchain transactions. Expect to see some of the following forms of disputes:

  • Intellectual Property
    • Example: An individual using artwork to create a non-fungible token without copyright licensing.
  • Investments
    • Example: Shareholder disputes associated with venture capital investments in cryptocurrency platforms.
  • Supply of Services
    • Example: An issue with the cryptocurrency trading software causes an outage, subsequently resulting in losses for the user.
    • A case in this regard will be discussed later in this article.
  • Misrepresentations
    • Example: A trader misrepresenting the true value of a cryptocurrency.
  • Blockchain Frauds
    • Example: Ponzi schemes and/or fraudulent initial coin offerings.
  • Identity Theft
    • Example: A hack or malicious takeover of a cryptocurrency trading account and its assets.

The substantive underlying issues may be familiar to some, but the disputed factual issues may be outside of a party’s scope. This is where industry experts come in handy. For instance, counsel may be unaware of how a decentralized finance platform’s fake product identification system works. Engaging an industry expert to provide technical analysis of the disputed factual issues may go a long way in complimenting the legal reasoning.

THE BINANCE CASE

Binance is one of the leading crypto trading platforms with offices in France, Spain, Italy, and the UAE. On May 19, 2021, a power outage caused the platform to fail. This failure left users unable to exit their positions all whilst crypto prices were dipping in real-time. Hundreds of users/investors commenced arbitration against Binance, seeking relief for the millions they had lost as a direct result of the outage.

Whilst the dispute is being headed by White & Case, with a USD 5 million minimum in funding from Swiss private equity firm Liti Capital, the dispute is the first of its kind, but certainly not the last.

One of the main challenges currently arising from this dispute is the fact that Binance states they have no official headquarters and as such, it has been incredibly difficult for investors to figure out how, and where, to take the company to court.

Another challenge was identifying the correct counterparties. The Binance terms of use refer only to “Binance Operators” as being the parties that run Binance, without naming any incorporated legal persons, and conversely, including language to the effect that the identities of these operators are subject to change. This open-ended definition includes but is “not limited to legal persons (including Binance UAB), unincorporated organizations and teams that provide Binance Services and are responsible for such services”. When a dispute arises, it is the task of the claimant to identify the counterparties to the dispute “depending on the specific services [Claimant] uses and the particular actions that affect rights or interests”. This caused immense issues as arbitrating against the wrong party could result in the tribunal rejecting a claim, despite the validity of the claim.

CHALLENGE I: NATURE OF THE JURISDICTION

Several jurisdictions across the globe have taken steps to regulate cryptocurrency assets or even just outright ban them. In Qatar, a circular warned all banks operating in Qatar against trading in bitcoin. India and Russia are among the nations where bitcoin trading has been outright outlawed. Courts have been found to follow suit. In 2020, a court in Mainland China set aside an award regarding cryptocurrency on the grounds that it violated public policy.

All this being said, the seat of arbitration is a significant factor in cryptocurrency disputes. However, risks can be mitigated. For instance, based on the jurisdiction, parties may opt to request an award in damages quantified in a currency of equivalent value to the cryptocurrency in dispute. This may reduce the likelihood of the enforcement being denied.

CHALLENGE II: IDENTIFYING THE CORRECT PARTIES

As we saw in the Binance case, cryptocurrency businesses are sometimes organized in opaque ways which may it difficult to identify the correct counterparties to the arbitration agreement.

However, once the correct party(ies) have been identified an examination of their ability to satisfy the requirements of the award should be done. Several cryptocurrency businesses do not have the financial means to satisfy an award, due to the staggering decline of the market and arbitrating against a party on the brink of financial collapse may not be beneficial.

CHALLENGE III: VALUATIONS

Valuating cryptocurrency businesses may be a challenge due to the lack of comparable publicly listed companies with sufficient financial information to conduct a market-based valuation. Similarly, valuating the cryptocurrencies themselves may be straightforward but where the currency is illiquid, difficulties may arise.

Another issue with valuations is assessing the future prospects of crypto businesses, at their valuation date and identifying key driving factors. Again, this may seem straightforward, but problems are prosed when the valuation date falls within a period of significant market volatility, such as that seen during the winter of 2021.

As such, identifying the valuation data has a significant impact on the quantification of damages.

CHALLENGE IV: ARBITRAL AWARDS AND RELIEF

If an arbitral award is rendered in a party’s favor, they still face the challenge of receiving their money. First, crypto assets and transactions take place on blockchain which makes it difficult to track down and even locate the amounts. Second, as previously discussed, some jurisdictions may reject enforcement of cryptocurrency-related disputes on the grounds of public policy or some other issue relating to the assets.

In addressing these challenges, parties and their counsel may utilize some of the following:

Mareva Injunction

A worldwide freezing order and asset disclosure order. It extends to all a defendant’s assets worldwide, limiting the defendant from utilizing those assets except for regulatory purposes (i.e., paying employment salaries) unless consent is granted by the plaintiff. It also requires the defendant to disclose its worldwide assets over a certain threshold value (i.e., over USD 10,000 or USD 50,000).

The Hong Kong High Court recently granted a Mareva injunction over bitcoins that had been fraudulently misappropriated freezing up to USD 2.6 million of the defendant’s assets (including any digital assets).

Norwich Orders

Injunctive orders obtained against an innocent third party in order to identify a wrongdoer or details related to a potential wrongdoer. This can be used to compel an innocent third party (such as a cryptocurrency exchange) to disclose relevant information to a plaintiff/applicant.

In digital asset disputes, these orders have been used to compel exchanges to disclose details related to crypto wallets and digital assets. The English High Court recently issued a Norwich order against two cryptocurrency exchanges outside of England compelling them to assist in identifying what had happened to the cryptocurrency in question.

Anton Piller Orders

A common law remedy which compels a defendant to permit a plaintiff to enter its property to search for and seize evidence and records (including electronic data and equipment). An Anton Piller order in a cryptocurrency dispute was recently issued by the Ontario Superior Court of Justice in relation to an alleged theft of CAD 15 million in digital assets from the plaintiff’s crypto wallet.

CONCLUSION

Cryptocurrency and its arbitration are developing over time and it will be interesting to see the other challenges which will emerge over the coming months as tribunals around the world deal with cryptocurrency-related disputes.

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