Recall late 2021 when cryptocurrencies were seen as the future of global transactions. Since that peak a few months ago, cryptocurrency assets have shrunk by a painfully staggering $2 trillion. With such monumental losses, a wave of crypto-related disputes in the form of international arbitration is imminent.

Cryptocurrency companies have been known to include arbitration agreements in their contracts, which is not surprising given the harmonious nature of cryptocurrency and international arbitration. As cryptocurrency identifies itself as a decentralized character, arbitration also enjoys the freedom of party autonomy that cannot be found in national courts.

This article aims to provide a guide to the challenges and solutions that are sure to arise in cryptocurrency arbitrage as well as an overview of the current Binance case.

VARIOUS FORMS OF CRYPTOCURRENCY DISPUTES

As with any subject, cryptocurrency disputes come in many forms, but because crypto is a new industry, some disputes can raise new legal issues. For example, in the absence of a governing law clause, questions may arise as to the law governing 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 a copyright license.
  • Investments
    • Example: Shareholder disputes associated with venture capital investments in cryptocurrency platforms.
  • Service provision
    • Example: A problem with the cryptocurrency trading software causes a crash, subsequently resulting in losses for the user.
    • A case in this regard will be discussed later in this article.
  • False declarations
    • Example: A trader misrepresenting the true value of a cryptocurrency.
  • Blockchain scams
    • Example: Ponzi schemes and/or initial fraudulent coin offerings.
  • Identity theft
    • Example: a hack or malicious takeover of a cryptocurrency trading account and its assets.

The underlying substantive issues may be familiar to some, but the disputed factual issues may be beyond one party’s purview. This is where industry experts come in handy. For example, lawyers may not know how a decentralized financial platform’s fake product identification system works. Engaging an industry expert to provide a technical analysis of disputed factual issues can go a long way in supplementing the legal reasoning.

THE BINANCE CASE

Binance is a leading crypto trading platform with offices in France, Spain, Italy, and the United Arab Emirates. On May 19, 2021, a power outage caused the platform to fail. This failure prevented users from exiting their positions as crypto prices fell in real time. Hundreds of users/investors initiated arbitration against Binance, seeking redress for the millions they lost as a direct result of the outage.

While the litigation is being led by White & Case, with minimum funding of $5 million from Swiss private equity firm Liti Capital, the litigation is the first of its kind, but certainly not the last.

One of the main challenges currently arising from this dispute is that Binance claims to have no official headquarters and as such has made it extremely difficult for investors to determine how and where to sue the company. .

Another challenge was to identify the right counterparties. Binance’s Terms of Service refer only to “Binance Operators” as the parties that operate Binance, without naming incorporated legal entities, and vice versa, including language indicating that the identity of such operators is subject to change. This open 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 up to the plaintiff to identify the counterparties to the dispute “according to the specific services [Claimant] particular uses and actions that affect rights or interests”. This caused immense problems because arbitration against the wrong party could result in a claim being dismissed by the court, despite the validity of the claim.

CHALLENGE I: NATURE OF COMPETENCE

Several jurisdictions around the world have taken steps to regulate cryptocurrency assets or even ban them outright. In Qatar, a circular warned all banks operating in Qatar against trading bitcoin. India and Russia are among the countries where bitcoin trading has been outright banned. The courts have been found to follow suit. In 2020, a court in mainland China overturned a decision regarding the cryptocurrency on the grounds that it violated public order.

That being said, the seat of arbitration is an important factor in cryptocurrency disputes. However, the risks can be mitigated. For example, depending on the jurisdiction, parties may choose to seek quantified damages in a currency of equivalent value to the cryptocurrency in dispute. This can reduce the likelihood that the execution will be refused.

CHALLENGE II: IDENTIFYING THE RIGHT STAKEHOLDERS

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

However, once the correct party(ies) have been identified, a review of their ability to meet the requirements of the award should be made. Several cryptocurrency companies lack the financial means to satisfy an award, due to the market’s steep decline, and arbitration against a party on the brink of financial collapse may not be beneficial.

CHALLENGE III: VALUATIONS

Valuing cryptocurrency companies can be a challenge due to the lack of comparable publicly traded companies with sufficient financial information to perform a market-based valuation. Similarly, the valuation of cryptocurrencies themselves can be simple, but when the currency is illiquid, difficulties can arise.

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

Thus, the identification of valuation data has a significant impact on the quantification of damage.

CHALLENGE IV: ARBITRAL AWARDS AND REDRESS

If an arbitral award is made in favor of one party, that party still faces the challenge of getting their money back. First, crypto assets and transactions take place on the blockchain, which makes it difficult to research and even locate amounts. Second, as noted earlier, some jurisdictions may disallow enforcement of cryptocurrency disputes on public order or other asset-related issues.

To address these challenges, parties and their attorneys can use some of the following:

Mareva injunction

A global asset freezing and disclosure order. It extends to all of a defendant’s assets worldwide, limiting the defendant’s use of those assets except for regulatory purposes (i.e. payment of employee salaries) to unless consent is given by the applicant. It also requires the defendant to disclose their worldwide assets above a certain threshold (i.e. above $10,000 or $50,000).

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

Norwich Commands

Injunction orders obtained against an innocent third party to identify a wrongdoer or details related to a potential wrongdoer. This can be used to coerce an innocent third party (such as a cryptocurrency exchange) into disclosing relevant information to a complainant/plaintiff.

In digital asset litigation, 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 requiring them to help identify what had happened to the cryptocurrency in question.

Orders of Anton Piller

A common law remedy that requires a defendant to permit a plaintiff to enter his property to search and seize evidence and records (including data and electronic equipment). An Anton Piller order in cryptocurrency litigation was recently issued by the Ontario Superior Court of Justice regarding an alleged theft of C$15 million worth of digital assets from the plaintiff’s crypto wallet.

CONCLUSION

Cryptocurrency and its arbitration develop over time, and it will be interesting to see what other challenges emerge over the coming months as courts around the world deal with cryptocurrency-related disputes.