Practitioners around the world promote arbitration as the prime method of resolving disputes involving crypto assets. Considering the current global cryptocurrency market cap of more than USD 3.5 trillion[1]—an increase of well over 1,500 per cent over the past five years[2]—this is unsurprising. Where there are transactions—be it in fiat or crypto currency—there will be disputes, and arbitration practitioners are naturally advocating for a share in this emerging disputes market.
Among the most prominent arguments are those of arbitration’s flexibility including its purported adaptability to new technologies, its confidentiality, and its transnationality. Indeed there is a strong case for using arbitration in crypto disputes, put forward most recently by Bautista[3], Le & Nguyen[4], and others. At the same time, the blockchain ecosystem differs in several crucial aspects from more traditional settings and even other new technologies. Many of them are rooted in one of blockchain technology’s core principles: decentralization; often, shared language with different meanings adds a layer of complexity. As a result, conventional understandings of dispute resolution cannot simply be applied to this latest frontier of the legal industry without specific modifications. Below are three such aspects to keep in mind when approching the blockchain world from an arbitration perspective.
- Smart contracts are not actually contracts
When discussing blockhain-related transactions (which could potentially give rise to disputes), one of the first thoughts goes to smart contracts. A smart contract is essentially code that self-executes, meaning it automatically carries out obligations when pre-defined conditions are met. It is a computerized algorithm that sits on the blockchain and is thus not controlled by a single party but rather distributed, i.e. decentralized.
A smart contract may, to illustrate self-enforcement, be capable of paying out claims from a flood insurance policy as soon as the linked precipitation data feed from the UK Meteorological Office shows that the claim-triggering threshold is met.[5] From a legal perspective, however, this is a method of enforcing the underlying contract, not immediately a contract in itself. In order for the code to “work”, i.e. for the smart contract to self-execute as described, it requires neither consideration, capacity, nor legality, all of which are generally required for a valid contract in the legal sense.
The smart contract itself is thus not actually a contract, but a tool to aid execution of one. Ideally, smart contract and the underlying legal contract will correspond perfectly. The difference must not be overlooked, however. If the self-executing computer algorithm—the code of the smart contract—is faulty, for instance, the parties’ underlying substantive agreement, i.e. the legal contract, should be decisive. The same goes for endpoint or bridge vulnerabilities on the blockchain affecting execution of the smart contract. When evaluating validity, voidability, and enforceability of a contract, it is likewise the underlying legal contract that is decisive, not the code of the smart contract: if a jurisidiction’s contract law requires a specific contract to be in writing or notarized, for example, the code of the smart contract may not suffice, rendering it potentially unenforceable in a court of law.
This is not to say that smart contracts cannot be legally enforceable. Just that, in many cases, it is the underlying legal contract—not the code—that provides the enforceable rights and obligations. In practice, the legal contract underlying a smart contract will often not be a signed document. This is also not required, as many jurisdictions allow contracts to be formed electronically, orally, or even through conduct. However, while a smart contract and its corresponding legal contract may be semantically identical, they remain fundamentally distinct. In a court of law, a party must prove the requirements of enforcement of the legal contract. Only few jurisdictions have thus far explicitly recognized smart contracts as the legally binding version of the contract,[6] choosing not to differentiate them from legal contracts. Still, requirements such as legality, capacity, and consent remain untouched.
2. Arbitration and smart contracts do not automatically go hand-in-hand
This difference must also be observed for arbitral clauses written into smart contracts, especially with a view to the writing and signature requirements in article II of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958 (New York Convention). While some jurisdictions such as the United States have generally taken a more lenient approach to these requirements than others,[7] it is unlikely that courts—even in the US—will readily accept arbitral clauses expressed entirely in code. Considering the international and pseudonymous nature of blockchain technology, the place of enforcement is often another unknown at the time of contracting. To ensure globally enforceable arbitral clauses in the context of smart contracts, parties may want to conclude specifically signed arbitration agreements. Alternatively, the arbitral clause can be included in a written and signed plain-language legal contract in addition to the smart contract.
The linguistic similarity between “smart contracts” and (legal) “contracts” is deceptive. On a more abstract level, it illustrates the language barrier lawyers may face when entering the realm of blockchain technology. One must approach this language barrier not by learning the vocabulary, but by understanding what lies behind it. One of the proclaimed advantages of blockchain transactions such as those through smart contracts is to reduce or even remove altogether the possibility of legal disputes. Because smart contracts are self-executing and typically cannot be altered by a single party, it may appear as though they cannot be breached. While this may—if at all—only technically be true, not legally,[8] it encapsulates the broader notion of smart contracts as systems operating independently of traditional external influence, oversight, and correctives.
3. Smart / Blockchain arbitration is not actually arbitration as we know it
It is this decentralized notion that has given rise to services that offer dispute resolution services also entirely on the blockchain. Sometimes referred to as “smart arbitration”[9], “blockchain arbitration”[10] or “on-chain arbitration”[11], one proposed solution is to have crowd-sourced justice delivered by users of the blockchain as jurors. Promising “inexpensive, reliable, typically fast, and decentralized”[12] judgments, these services leverage core principles of blockchain technology such as pseudonymity and efficiency. In conjunction with a self-executing mechanism of enforcing the on-chain judgment (think smart contracts), this can be a powerful tool.
While creators of blockchain technology develop innovative solutions for today’s on-chain disputes, however, the New York Convention of 1958 struggles to keep up. In many jurisdictions, the legal status of cryptocurrencies is ambiguous at best, or they are prohibited at worst. This may result in public policy violations of on-chain judgments—or traditional arbitral awards awarding cryptocurrency—, rendering them unenforceable. Potential for public policy violations also lies in the anonymity and non-challengeability of potentially confliced “arbitrators” in crowd-sourced on-chain solutions. Blockchain-based disputes may further face arbitrability issues in some jurisdictions (article V(2)(a) New York Convention).
All of this is to say that, while on-chain solutions can offer efficient and effective means of dispute resolution, they will often not meet the criteria of arbitration as we know it under the New York Convention. For many users of such on-chain services, this will be sufficient. But one must be conscious of the fact that legal challenges to such systems will therefore regularly have to resort to local courts. In practice, lawyers in arbitration or litigation proceedings over cryptocurrency claims today often advise clients to claim fiat damages rather than the original cryptocurrency claim because of the challenges and uncertainties that would come with the latter. This highlights the current limitations of blockchain-related arbitration under traditional frameworks. It is further another instance where the language—smart or blockchain arbitration—may be misleading to the arbitration practitioner. Because of the described challenges, as well as the uncertainty of how jurisdictions around the world will deal with blockchain technology and cryptocurrencies in enforcement proceedings, global enforcement of arbitral awards under the New York Convention must not be taken for granted in blockchain disputes today.
Conclusion
Arbitration is certainly capable of adapting to new industries, new types of disputes, and, most of all, new technologies. But this adaptability is an ability, not an automatism. When it comes to blockchain-related arbitration, it requires lawyers and arbitrators to challenge some of the understandings and legal principles that have served them well in the past, and to gain a deep understanding of this new, decentralized ecosystem—including its players and their language. This is because there is more to blockchain-related disputes than just a new technology. It is a different way of thinking commercial interactions, one that is designed without many of the traditional elements of transactions. It is thus only natural that many of the traditional elements of dispute resolution do not fit quite so easily, but need to be adapted. Resolving these challenges will allow arbitration to leverage its flexibility and conventional advantages over state court proceedings and to position it as a preferred method of resolving blockhain-related disputes.
[1] https://www.forbes.com/digital-assets/crypto-prices/?sh=1c4cffdf2478 (retireved 9 December 2024).
[2] https://www.statista.com/statistics/730876/cryptocurrency-maket-value/ (retireved 9 December 2024).
[3] https://arbitrationblog.kluwerarbitration.com/2023/12/14/adr-in-the-blockchain-ecosystem-a-primer/ (retrieved 29 December 2024).
[4] https://www.lntpartners.com/legal-briefing/arbitration-an-effective-dispute-resolution-mechanism-for-crypto-disputes-in-vietnam(retrieved 29 December 2024).
[5] https://www.nortonrosefulbright.com/en/knowledge/publications/ea958758/arbitrating-smart-contract-disputes (retireved 29 December 2024).
[6] Cf. Sibilla Grenon, Codifying code? Evaluating US smart contract legislation, International Bar Association (2019) (https://www.ibanet.org/MediaHandler?id=C8D2EBA4-57D1-4F01-8AA5-24C9CFF2B447, retrieved 29 December 2024), p. 6–8.
[7] United Nations Commission on International Trade Law, UNCITRAL Secretariat Guide on the Convention on the Recognition and Rnforcement of Foreign Arbitral Awards (New York, 1958) (2016), Article II paras 37, 46.
[8] Cf. Dirk Wiegandt, Blockchain, Smart Contracts and the Role of Arbitration, 39 Journal of International Arbitration 671–690 (2022), at 680.
[9] https://cilj.co.uk/2020/12/16/blockchain-arbitration-the-future-of-dispute-resolution-mechanisms/; https://portolano.it/en/newsletter/litigation-arbitration/arbitration-and-the-metaverse (both retrieved 29 December 2024)
[10] Luis Bergolla, Karen Seif, & Can Eken, Kleros: A Socio-Legal Case Study of Decentralized Justice & Blockchain Arbitration, 37 Ohio State Journal on Dispute Resolution 55-98 (2022); https://arbitrationblog.kluwerarbitration.com/2022/03/11/autonomous-arbitration-in-the-era-of-the-metaverse/ (retrieved 29 December 2024).
[11] https://www.cliffordchance.com/content/dam/cliffordchance/briefings/2023/08/arbitration-of-cryptoasset-and-smart-contract.pdf; https://newtech.law/en/articles/on-chain-and-off-chain-arbitration-using-smart-contracts-to-amicably-resolve-disputes (both retrieved 29 December 2024).
[12] Clément Lesaege, William George & Federico Ast, Kleros: Long Paper v2.0.2 1 (Jul. 2021), https://kleros.io/static/yellowpaper_en-8ac96b06f39f19a6a28106cf624e3342.pdf (retrieved 29 December 2024).