Dubai. Crypto and Arbitration?

Mine, in the article title above, could simply refer to the main reasons I’m heading to Dubai next week; in particular, what I might say about the two topics I expect to be talking about most while there. Perhaps, though, the question mark is intended to interrogate what else I’ll be seeing/saying/doing during my trip, which has not been said. (Plenty, I hope!) It could also be a signpost for a discussion generally on Dubai as a jurisdiction for resolving crypto disputes, and specifically about how comfortable crypto and arbitration are (or are not) as connected topics in a conversation about dispute resolution—and I concede at the outset that it is somewhat uncommon for crypto and arbitration to appear together in this way.

While the answer to the question mark above is “all three”¹, the focus of this piece is mostly the latter.

Cryptoassets and arbitration: why not?

When it comes to crypto fraud and the recovery of stolen cryptoassets, where the perpetrators are generally unknown to the victim and are almost certainly not party to any arbitration agreement for a tribunal to be seized of the matter, arbitration is unlikely to be a viable option. It is also usually the powers of the courts that are needed to pursue and obtain a remedy in such situations. For example, by means of a court’s making of disclosure or Norwich Pharmacal orders, which can compel an exchange to reveal who the holders of the assets identified in a tracing exercise are, and of worldwide freezing orders and proprietary injunctions against those associated with the victim’s crypto or its traceable proceeds, to stop the assets being dissipated.

Crypto fraud is therefore not a domain in which arbitration fits particularly comfortably, although that’s not to say it is out of the question—say, where an action for loss is brought by a victim against an exchange.

Cryptoassets and arbitration: why then?

Away from the sphere of crypto fraud, arbitration can make for a very attractive forum for dispute resolution in other crypto matters. For example, in a dispute with an exchange, as mentioned; or where payment under a contract is to be by crypto; in disputes involving cryptoasset management services or crypto custody providers; where issues arise in online games or auctions involving NFTs; or even in IP disputes where the property within a token or its terms (say, an NFT artwork) is challenged. It is attractive both where the parties have agreed to such in advance (by means of an arbitration agreement when contracting with each other), as well as when parties agree to arbitrate after a dispute has arisen (so-called ad hoc arbitration).

One of the obvious benefits of arbitration is the substantial international enforceability of an arbitral award. A tribunal’s award can be taken to upward of 160 countries for recognition, meaning a successful party can enforce it in (almost) any territory worldwide where the unsuccessful party has assets.

Arbitration agreements also allow the parties to take a pragmatic approach to questions of governing law, procedure and jurisdiction, distinct from their respective locations. This can be crucial for disputes involving cryptoassets, which, typically being intangible assets recorded on decentralised networks that exist concurrently in multiple territories, have the added complexity of an uncertain location.

The English courts have done much to establish legal principles and rules of law for determining the lex situs of cryptoassets, even where these might, on some views, be situated abroad. But when it comes to litigation elsewhere, a lot still needs to be established as to how other jurisdictions will approach this problem, what conflicts of laws rules will be applied, and whether any real consistency is likely to emerge for dealing with cryptoassets, potentially making the legal recognition and enforcement of a court judgment in a foreign jurisdiction problematic (if the option is even available). Arbitration, however, given the extensive enforcement regime provided by the 1958 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, can help overcome such problems.

As an alternative to litigation, arbitration would allow the parties to decide that, say, the laws of England and Wales apply to the substance of their dispute, which may be beneficial given the law in the UK as it applies to cryptoassets is relatively mature. They can also have those laws applied in a territory convenient to them, or remotely, without the parties ever having to meet in person, let alone in an English court. The parties can also choose the applicable procedural law, if something is particularly well-suited to their needs, and select an arbitrator (or arbitrators) with field-specific knowledge and expertise appropriate to their dispute.

This could be very important in the context of crypto, bearing in mind that cryptoassets are banned or heavily regulated in some jurisdictions. Certainly, public policy issues could inhibit the recognition of an arbitral award in those jurisdictions if not properly thought through. However, the flexibility that arbitration provides by allowing the parties to control the forum can also be used to overcome those public policy issues, by the selection of jurisdictions and legal frameworks that might not otherwise be available to the parties in their home territories.

As arbitration takes place in private, the parties can also agree to keep details of the dispute and the award confidential. This can be key in disagreements concerning technology, where trade secrets commonly feature.

Of course, care needs to be taken to ensure that parties which are expected to submit to arbitration in the event of a dispute will be required to do so.

One issue I have previously commented on is the enforceability of click-wrap and browser-wrap agreements to arbitrate. In a US court case against Amazon, for example, the web giant’s attempt to enforce an arbitration agreement, purportedly entered into when a customer clicked the ‘Place your order’ button on their website, was rejected. A US court held that there had not been sufficient “inquiry notice” of the relevant term. That is, insufficient information had been provided such that a reasonably prudent person would investigate the matter further. Arbitration agreements have also not been upheld where they have attempted to entirely oust the jurisdiction of the courts, and where they have been deemed unconscionable class action waivers. These are all issues that need proper consideration, but which can quite readily be overcome to help ensure an arbitration proceeds as intended.

A less obvious though related consideration concerns the use of smart contracts and their potential role(s) in crypto disputes and arbitration.

Smart contracts often automate and perform transactions on cryptocurrency exchanges, facilitate the transfer of crypto tokens and crypto collectibles between participants (such as NFTs), and are the backbones of DAOs. As such, they can quite readily be a feature of a crypto dispute.

The Law Commission of England and Wales concluded in 2021 that the current UK legal framework is able to facilitate and support the use of smart legal contracts whose consequences may be binding, but noted that those contracts which rely solely on code as the record of terms or of an obligation could present difficulties. Special consideration therefore needs to be given to ensure the requisite ingredients for a contract to be binding are present if a legal smart contract is to be formed. This is an important point to consider if a smart contract is intended as the mechanism to bind parties to arbitrate—although, in the UK at least, section 7 of the Arbitration Act 1996 could potentially provide a remedy here in the event of problems arising.

Rather than being part of the substance of a crypto dispute, however, smart contracts might be a part of the resolution of the dispute instead. An example of where smart contracts could enhance conventional arbitral procedures is by the use of the blockchain, as a public and immutable record of data, to record the details of an award. An example of how a smart contract might entirely replace a part of the arbitral procedure, say by automating award enforcement, would be by the transfer of a sum of cryptocurrency or of a disputed cryptoasset from one party to another upon the making of an award—the parties having provided the arbitrators with the keys to the crypto, or having put the assets into crypto escrow, in advance.

The potential for effective crypto arbitration was highlighted in 2021, when the UK Jurisdiction Taskforce published its proposal for a set of Digital Dispute Resolution Rules (DDRR). These provided for, in summary:

• Arbitral or expert dispute resolution in very short periods
• Arbitrators to implement decisions directly on-chain using a private key
• The optional anonymity of the parties

This combination could prove particularly potent for the resolution of crypto disputes, as, while the courts are used to dealing with “persons unknown”, the open court principle makes them somewhat less suited to disputes involving persons who are engaged in the legal process but who are anonymous. Many of those involved in crypto transactions, and some who are facing potential crypto disputes, will fall into this category. The private and confidential nature of arbitration though does not necessarily demand for the identities of the parties to be known in the same way, making arbitration ideal for certain crypto disputes. Increasingly, it is possible to find arbitration rules and even ADR service providers that facilitate a number of the DDRR objectives.

Conclusion

There are many features of arbitration which make it particularly suitable for crypto and other technology disputes, and there are accordingly plenty of reasons why crypto and arbitration should appear together more often in conversations about dispute resolution.

As for Dubai, this will certainly be an interesting place to discuss the union of these two concepts, particularly given the recent opening of Dubai’s Digital Economy Court (DEC) as a new division of the Dubai International Finance Centre (DIFC). It remains to be seen whether the newly published Part 58 of the Court’s rules for litigating digital economy claims will influence the Dubai Court’s ADR rules under Part 27, or the rules of the Dubai International Arbitration Centre (DIAC), or even the rules of international arbitration courts elsewhere. Still, that’s no reason that these two concepts cannot usefully be combined now.

If you would like to discuss why and how arbitration might be a good choice for your crypto or technology business, or if you have a potential or actual crypto dispute you would like to talk through, then get in touch.

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¹ I will definitely be talking a lot about crypto while attending Dubai Arbitration Week 2023, including with friends at Disruptive Focus at a masterclass on virtual assets. I also expect to say plenty about tech law more broadly and my work in this space both in practice at the Bar and in arbitration. If you are planning to be in Dubai next week and would like to chat about any of these topics, do reach out to me. If you are interested in my virtual assets masterclass or another of my tech law talks, then please also feel free to contact me.