Commercial disputes are often best settled by arbitration rather than in court. That applies to disagreements involving cryptoassets as much as to any other area of business, as Andrew Pimlott explains.
As cryptocurrencies, non-fungible tokens (NFTs), and other cryptoassets continue to grow in popularity – if not always in value – the number of disputes is also increasing. The innovative, fast-moving, lightly regulated, and often “Wild West” nature of the market means there are frequent disagreements between the parties involved. The fact that it is decentralized and international, spanning different countries and legal systems, makes it harder to work out who is in the wrong and how to resolve arguments between crypto issuers, investors, trading platforms, and other participants.
Probably the highest profile example to date is the legal action initiated last year by thousands of claimants seeking hundreds of millions of dollars in damages from Binance, the world’s biggest crypto exchange. The case will go to arbitration and is being led by U.S. law firm White & Case and Swiss litigation finance provider Liti Capital, under Hong Kong International Arbitration Centre rules.
In fact, Binance and other crypto firms prefer arbitrators to traditional courts. Their terms and conditions require that all claims be resolved through legally binding arbitration. That is why Nifty Gateway, an NFT (non-fungible token) auction house, pursued an investor for non-payment of an NFT through JAMS, a New York arbitration service provider.
And in 2020, a class-action lawsuit against entities behind crypto company MakerDAO, alleging that they misrepresented the risks of investment, was referred to the American Arbitration Association.
What is arbitration?
According to the Cambridge Dictionary, arbitration is “a process in which an independent person”, an arbitrator, “makes an official decision that ends a legal disagreement” between people or companies “without the need for it to be solved in court”.
Cases are heard by a tribunal of one or more arbitrators, using rules and administrative support provided by arbitral institutions such as the London Court of International Arbitration (LCIA), Hong Kong International Arbitration Center, Singapore International Arbitration Center, and the International Center for Settlement of Investment Disputes which is part of the World Bank. Institutions like these have a successful track record of helping resolve commercial disputes of all kinds across many jurisdictions.
In a court, a judge decides a dispute between parties and arrives at a judgement. An arbitration tribunal works similarly, but instead of a judge, one or more people, usually lawyers or professionals in a relevant industry, such as bankers or engineers, are appointed as arbitrators to decide the dispute and make an award, according to the LCIA. Arbitral awards are legally binding, meaning that if an “award says that party A owes money to party B, party A will be required by law to pay party B”, says the LCIA. Although the LCIA has the word “court” in its name, it is a historical anomaly stemming from its foundation in 1892, and it is not a court in the modern sense.
Other key interesting aspects of arbitration are that:
- All parties must agree to use arbitration. Usually they agree to use it at the same time they enter into a contract, in an arbitration clause. However, if such a clause is not in the contract they can still enter into an arbitration agreement when a dispute arises if both sides agree.
- It is more flexible than court proceedings.
- The party starting the arbitration is called the “claimant” because they are making a claim against the other party, and the other party is called the “respondent” because they are responding to the claim.
- The parties present their positions through “submissions”, usually via legal representatives, in writing, or, orally, or both.
- The arbitrator(s) decide the dispute and make an “award”.
- Arbitration makes it easier to obtain money kept overseas. If a losing party refuses to pay, it is easier for the winning party to enforce an arbitral award in a foreign country than a court judgment. Almost every country in the world has agreed to recognize and enforce awards made by arbitrators.
- Arbitral awards are almost always final, whereas court judgments can usually be appealed to a higher court.
Arbitration for crypto disputes
Arbitration has many benefits as a way of resolving disputes arising from cryptoassets. “It provides certainty as to jurisdiction, a neutral forum and, in principle, widely enforceable awards,” says law firm Clifford Chance in a recently published report, Arbitration for Crypto assets and Smart Contract Disputes.
It is a confidential process, which is especially important for disputes involving commercially sensitive information. Another advantage is the ability to appoint arbitrators with specialist knowledge to handle highly technical matters such as coding and other aspects of the blockchain and other types of distributed ledger technology (DLT) that underpin cryptoassets and smart contracts. Smart contracts are digital contracts stored on a blockchain that are automatically executed when predetermined terms and conditions are met by each party.
In agreement, Andrea Utasy Clark, a Senior Associate at law firm Pinsent Masons, explained in an analysis published this September that cryptocurrency disputes “are well suited for, and are increasingly being referred to, arbitration”. This is because “the decentralized nature of crypto aligns with the neutrality of arbitration and both foster participation across multiple jurisdictions”.
The types of crypto disputes currently being dealt with through arbitration, she adds, include breach of contract claims by investors against platforms arising from lack of access to the trading platform, and by platforms against investors arising from failure to make payment; misrepresentation claims by investors against platforms concerning the represented risks of investment; and claims relating to the enforcement of arbitral awards in national courts.
I recently had a discussion with Compliance, Investigations, and White-Collar Crime Partner Richard Gibbon at Squire Patton Boggs regarding crypto and the rise of arbitration. Richard said, “The world is experiencing a rise in dispute resolution involving digital assets. While this is true of litigation, it is not terribly surprising that it is most true of arbitration. First, the word “crypto” literally means concealed or secret, reflecting the pseudonymity inherent to cryptocurrency, while a key advantage of arbitration over litigation is confidentiality. Second, there is a synergy between the decentralized ethos of blockchain technology and the multijurisdictional nature of cryptocurrency disputes, making arbitration a more natural and neutral forum to resolve disputes than the courts of any one country. Third, the transfer of administrative and supervisory authority in blockchain from a centralized association to a distributed network resembles the focus in arbitration on party autonomy that affords participants the flexibility to tailor procedures, maximize efficiency, and minimize costs and time.”
One interesting future arbitration area is the Metaverse, I recently attended Mishcon de Reya LLP London office for a discussion on the fashion industry within the Metaverse. The panelists mentioned that the Metaverse is in its infancy, and will over time become more widely accepted. In my opinion, this will undoubtedly increase the number of arbitrations between big brands, suppliers, coders, metaverse noisy neighbors, etc. We are already seeing several consultancy firms and law firms enter the metaverse for this reason.
The Binance case
The arbitration with crypto platform Binance, which operates largely outside of regulation and has no headquarters, was started by users who claim to have lost millions when the platform failed on May 19, 2021, leaving them unable to exit their positions while crypto prices dipped. U.S. law firm White & Case is coordinating the action for claimants, while Swiss litigation finance provider Liti Capital is funding the case up to $5m in exchange for a return on the investment plus 30% of the award or settlement.
Liti Capital is a private equity company that raises funds from retail and institutional investors to invest in legal action. There are now thousands of claimants in the Binance claim in what Liti Capital believes is “the first ever group action in the crypto sector” and “a landmark event in defining how organizations operating in the sector behave and treat their customers”. David Kay, Liti Capital’s CEO, said “crypto and blockchain are the future but they’ve just got to get cleaned up, it is the Wild West out there”.
Under Binance’s terms and conditions, users seeking compensation are required to file disputes with the Hong Kong International Arbitration Center, which is costly for an individual. Details of how to join the group action are available on the website www.binanceclaim.com, which has been set up by Liti Capital and others representing the claimants. It explains that traders who believe they may be entitled to compensation should contact Binance first, and if they are unable to resolve their dispute “they may pursue claims against Binance in international arbitration”.
An arbitral award does not guarantee payment
Even if claimants win an arbitral award it may still be difficult for them to recover the money. The two key challenges that they might face are:
- Tracing the assets of the respondents; and
- Recognition and enforcement of the arbitration awards in various jurisdictions.
“The first one is the relatively easier one of the two when you have the right techniques and thanks to the human nature to still want to pivot to more material things such as luxury real estate, yachts, and cash investments”, says Nikita Vaidya, a Senior Director at Ankura based in the UAE with expertise in asset tracing. With a carefully developed network of human intelligence sources and knowledge of searching the public domain, asset tracing can play a vital role in the recovery strategy. There are numerous instances where crypto assets have eventually been converted into more traditional and tangible assets such as properties, art, vehicles, etc. and this is exactly where an asset tracing exercise is extremely valuable.
In fraud investigations, where the forensic teams typically have access to the emails and other digital data of the defendants, it is likely that one might find leads to the keys or tokens which can help map the flow of even crypto funds and transactions across blockchains and digital wallets.
Regarding the second challenge, although most countries recognize arbitral decisions, some may not enforce a crypto asset-related award if crypto assets are illegal in that country, or for other reasons relating to these types of assets.
The public policy exception is written into the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, and has been used on a number of occasions. For example, the Shenzen Intermediate People’s Court in China set aside an arbitral award issued by an arbitral institution on public policy grounds because, as Utasy Clark writes, “China has banned crypto and does not recognize digital currencies as having any legal status”.
As with any legal action, pursuing a crypto-related claim through the arbitration process is not a simple matter. However, if an aggrieved party cannot achieve redress by dealing directly with the party alleged to have caused that grievance – using either in-house legal expertise or an external law firm – then arbitration is probably the best, and often the only, alternative.
Andrew Pimlott is Senior Managing Director, Financial Services, Data and Technology, EMEIA, Ankura Consulting.
© Copyright 2022. The views expressed herein are those of the author(s) and not necessarily the views of Ankura Consulting Group, LLC., its management, its subsidiaries, its affiliates, or its other professionals. Ankura is not a law firm and cannot provide legal advice.