Part 1: A Proliferation Of International Cryptocurrency Dispute Arbitrations

Following the phenomenal growth in the use of cryptocurrencies around the world, there is an increasing incidence of cryptocurrency litigation across the globe. In possibly one of the most high-profile international cryptocurrency disputes of recent times, thousands of derivatives investors are apparently seeking to sue cryptocurrency trading platform Binance for alleged losses resulting from a widespread service outage in May 2021 that coincided with a massive drop in price. of Bitcoin. The massive cryptocurrency sell-off at the time reportedly resulted in stalled trades that prevented investors from closing or liquidating their trading positions during the outage.

In January this year, Singapore-based cryptocurrency exchange platform was hacked, affecting the accounts of over 400 users and resulting in unauthorized cryptocurrency withdrawals worth $35 million.

More recently, volatile financial environments informed by force majeure events and geopolitical developments may have enhanced the risk profiles of several cryptocurrency-based financial instruments and led to margin calls that could be challenged.

This article highlights some strategic aspects around the international arbitration of cryptocurrency disputes. In my next article, I will examine the legal issues of enforcing international arbitral awards in cryptocurrency disputes and the practical issues of enforcing digital assets.

Cross-Jurisdictional Nature of Cryptocurrency Disputes

Cryptocurrencies are records on a series of ledgers in a large network of computers around the world. There are no national boundaries in decentralized blockchain. These digital assets are not located in any particular physical location and could be perceived as being “everywhere” at the same time. Cryptocurrency users may come from different parts of the world or may not even be easily identifiable. Cryptocurrency exchanges, marketplaces, and NFT platforms may not necessarily have a legal presence where users are coming from, if at all, or may have real or substantial assets in places where they have a legal presence. At the same time, cryptocurrencies held through a wallet or account in one part of the world can be easily transferred to another part of the world within minutes.

As a result, cryptocurrency disputes are inherently cross-border in nature, and invariably invokes legal issues that span across different countries. The internationality of these disputes means that the laws of different jurisdictions may apply and possibly conflict with each other at the same time.

This presents fertile ground for parties to spend a great deal of time and money on technical, but no less real, disputes. This could take the form of a jurisdictional challenge over where the main dispute should be resolved, which system of substantive law should apply to determine the main disputes, which rules of law should apply, etc. Savvy arbitrators could deploy cross-border tactics, whether legitimate or guerrilla, to exhaust the counterparty so that there is little money and energy left by the time the parties manage to properly arbitrate their disputes.

The Binance class action arbitration provides a contemporary illustration of the myriad technical challenges associated with the internationality of cryptocurrency litigation. Binance was seen as a decentralized entity with no global headquarters. Since Binance’s Terms of Service could apparently be clearer as to the specific Binance entity that has entered into a contract with investors (with a generic reference to “Binance Operators”), parties may face jurisdictional issues as to whether arbitration would be initiated against the correct party in arbitration. OK.

Additionally, there could be challenges as to whether the dispute could even be arbitrated to begin with. Binance’s Terms of Service provide a substantive right to govern its agreement. The same law, however, requires trading in cryptocurrency derivatives to be permitted. This could mean that the arbitral tribunal might first have to determine the preliminary question of whether the matter is arbitrable (and if so, under what system of law) before the arbitration can proceed.

There are also serious questions to be asked as to whether the relevant arbitration rules permit “class action” arbitration. Where Binance’s consent is required under the rules for parties to be joined and arbitrations to be consolidated, and where such consent is not obtained, each investor may be required to pay a separate fee for each arbitration. Other concerns include securing costs in a funded class action lawsuit and the extent to which posting the dispute in different forums would constitute a breach of the arbitration agreement, among others.

Emergency Arbitration to Prevent Dissipation of Cryptocurrencies

Given the ease with which cryptocurrencies can be transferred, converted to fiat currencies, disposed of (NFTs are increasingly placed as collateral for loans), and dissipated to anonymous or unknown users anywhere in the world, it is often of paramount importance that cryptocurrencies be “frozen” to preserve the status quo, pending the issuance of a final award by the arbitral tribunal. Regarding NFTs, a digital wallet or trading account can be opened by anyone and the private keys of the NFT can be easily sold with a simple click to third parties who have not been informed that the NFT may be subject to dispute.

In this regard, the Singapore International Arbitration Center (“SIAC”) Emergency Arbitration The mechanism plays a vital role in ensuring that the final arbitral award is not rendered useless by the dissipation or elimination of cryptocurrencies before the dispute is resolved. The SIAC Emergency Arbitrator is empowered under Rule 30 read with Schedule 1 of the SIAC Rules 2016 to, upon application by a party, make an order or award granting an injunction or other interim relief that he deems appropriate. The SIAC rules require that an emergency arbitrator be appointed by the president of the SIAC tribunal within one day of a request for emergency arbitration, and the emergency arbitrator is obliged under SIAC rules to make any interim order or decision within 14 days of his/her appointment.

The international enforceability of a SIAC emergency arbitral award is increasingly recognized in different jurisdictions. Recently in August 2021, the Supreme Court of India in the decision of NV Investment Holdings LLC v Future Retail Limited & Ors enforced an emergency order issued by a SIAC-appointed emergency arbitral tribunal.

It is now possible in English law _Elena Vorotyntseva against Money-4 limited and others [2018] EWHC 2596 (Ch)), Hong Kong Law (Nico Constantijn Antonius Samara vs Stive Jean Paul Dan [2019] HKCFI 2718) and more recently Singapore law (CLM versus CLN and others [2022] SGHC 46) to obtain a proprietary injunction to prohibit counterparties from dealing, disposing of, or diminishing the value of the relevant cryptocurrencies in the event of a dispute over the ownership of the cryptocurrencies, or a mareva freezing injunction to prevent counterparties from dissipate assets up to the value of the cryptocurrencies in question.

It remains to be seen to what extent an anti-arbitration injunction can be sought from a jurisdiction that does not allow such injunctions, for the purpose of thwarting an emergency arbitration seeking to preserve the status quo of an arbitration.

Volatility, valuation issues and the need for speed

The spot price of a digital token may be pennies in the first quarter of 2022, but rise to a dollar (US) plus in the third quarter of 2022. If the obligation to pay cryptocurrencies crystallizes over time in the first quarter, should the arbitral tribunal order the debtor to compensate on the basis of the spot price in Q1, or should the tribunal take into consideration the gains that the creditor could have realized in Q3 if the payment had actually been made at T1. What if, by the time the court is ready to assess the damages to be compensated, the market value of the tokens drops to a lower level than it was before the arbitration began (perhaps Due to force majeure events)?

Complex issues related to the proper valuation of cryptocurrencies are common in many cryptocurrency arbitrages, given the volatility of cryptocurrencies. There could be material differences between the market value of a token at the time of the breach or obligation to pay and the time the arbitration award was made. The volatility of cryptocurrencies is recognized in the recent English decision of Tulip Trading Ltd v Bitcoin Association for BSV & Ors [2022] EWHC 2 (Ch), where cryptocurrencies are not considered a good security for costs in litigation, as the court adopted the view that a potential decline in the value of cryptocurrencies would render such securities ineffective .

Expert witnesses could be involved in an arbitration to be submitted on the valuation of cryptocurrencies, where the valuation methodologies used and the assumptions adopted by each expert could be tested against each other. The valuation exercise may involve consideration of a combination of factors such as the arbitrator’s past trading behavior, historical trend and projections around the relevant cryptocurrency, market trends and forecasts, the inherent value of the token in question and the issuer of the token, if any.

Of course, one way to avoid complex valuation issues altogether would be to resolve the cryptocurrency dispute as quickly as possible, before dramatic changes in valuation can take place. JAMS, formerly called Judicial Arbitration and Mediation Services, Inc. in the United States, has published a set of rules specifically aimed at resolving disputes arising from smart contracts. Notably, the rules state that disclosure of documents should be limited to the written statement of an expert witness as to the meaning of how the relevant code in the smart contract is to be interpreted, and the “only documentation that will be reviewed or considered by the arbitrator will be the written contract, the computer code and the [expert] testimony of the witness” (Rule 12). The arbitrator must render an award no later than 30 days after his appointment.

In the same vein, the SIAC Early Termination Process is particularly suitable for resolving simple disputes around the obligations to pay crypto-currencies. Under Rule 29 of the SIAC Rules 2016, a party may request an arbitral tribunal to early dismiss a claim or defense on the ground that a claim or defense is manifestly without legal merit. SIAC rules provide that the order or award must be made within 60 days of the filing of the application.

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Part 1: A Proliferation Of International Cryptocurrency Dispute Arbitrations

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