Crypto-Asset Disputes and the Role of Arbitration: Emerging Trends and Case Law

Understanding Cryptocurrency Disputes

When it comes to the conflicts that arise in cryptocurrency, the scope of cryptocurrency disputes is broad and adds complications to an already complicated area of law based on block-chain related transactions. Many disputes arise from transactions that do not have any identified governing law clause, or from terms of dispute resolution included in a smart contract. Contract-based relationships may be similar to regular commercial or investment disputes, but the factual scenario is different due to the nature of crypto transactions.

Disputes arising from investments may include disagreements regarding seed funds for start-ups, venture capital, or shareholder disagreements in crypto-related ventures. Financial transaction disputes come up quite often that may include margin calls, a crypto exchange forcing liquidation, or a platform failure to return non-fungible tokens or crypto assets as collateral.

Service-related claims arise when exchanges crash and cause financial loss. Disputes related to sale of goods often arise regarding the sale of defective mining equipment, or delayed delivery. Fraud and mis-selling disputes may arise from misrepresentation of the reserves of a “stable coin,” or hedge-fund defaults on crypto assets that they borrowed. There are also intellectual property disputes that arise when an NFT is built on artwork that does not have the proper licensing rights.

Because these matters require a mix of legal and technical expertise such as analysing DeFi risk systems, lawyers often rely on experts, similar to disputes in construction or other complex industries.

Need for Arbitration in Crypto Disputes

Crypto assets exist as decentralized digital data, often across multiple jurisdictions and involving anonymous or semi-anonymous parties. This global and intangible nature complicates litigation, as seen in disputes involving platforms like Bitcoin and Ethereum, which operate without contractual terms or governing law frameworks.

Arbitration becomes essential because mutually agreed clauses regarding jurisdiction, applicable law, or dispute resolution provide certainty. Incorporating such clauses in crypto contracts reduces the unpredictability of litigation and helps parties adopt a structured means of resolving conflicts.

Benefits of Arbitration

Arbitration provides flexibility, allowing both individual and class actions, and encourages the involvement of professionals including non-lawyers with relevant technical expertise. Confidentiality protects sensitive crypto-related information, and the global enforceability of awards under the New York Convention enhances user confidence.

However, the lack of traditional “wet” contracts poses challenges, requiring new approaches to validate smart-contract-based agreements.

Existing Arbitration Platforms and Existing Rules (Current State of Arbitration)

In crypto disputes, the parties adopt known institutional rules rather than industry-specific arbitration rules. Instead of developing industry-specific arbitration rules, user agreements online (“Yatta”), such as in Bielski v. Coinbase, Inc. (2022), and Donovan v. Coinbase Global, Inc. (2023), rely on the American Arbitration Association (AAA) or JAMS rules.

Prior to the ban of cryptocurrency exchanges in the region, many platforms became more willing to arbitrate under SIAC and HKIAC arbitration rules. One example is the user agreement disputes on Binance, who had HKIAC arbitrate for users that went through financial losses when the platform went down. Again, there are also signs of Seychelles being a preferred arbitral seat for crypto businesses, again, a strategic decision by crypto businesses.

New Arbitration Rules in the Crypto Industry

There are many efforts to create bespoke arbitration in the crypto industry. For example, JAMS introduced Smart Contract Rules in 2018, which included rules that expressly emphasize the interpretation of the code, limit discovery obligations to foster expedited proceedings, and require an award to be made within 30 days.

The Digital Dispute Resolution Rules (DDRR) formed in 2021 by Lawtech UK embraced speed in its processes, allowed for “on-chain” arbitration, and gave arbitrators the authority to act where digital assets were “technologically capable of being acted on.”

The EOSIO framework introduced an on-chain arbitration process through the EOS Core Arbitration Forum (ECAF), where blockchain validators enforce arbitral decisions. This system experimented with emergency orders and interim freezes to combat fraud.

Challenges in Crypto Arbitration

Regulatory Barriers and Public Policy Concerns

Countries like China, Russia and Qatar restrict or ban crypto use, creating enforcement barriers. Courts may refuse enforcement based on public policy, as seen when a Chinese court set aside an award involving cryptocurrency in 2020. Similar reasoning occurred in Greece, where the Court of Appeal refused enforcement of a bitcoin-related award due to public policy concerns in 2021.

Identifying the Correct Counterparty

Complexities of business structure impede party identification. Under its definition of “Binance Operators” for the purpose of its contracts demonstrated that challenge of identifying who is culpable for the conduct alleged against the parties required the claimants to identify the party responsible for their service experience. Does it matter anyway? The insolvency risk in the crypto world calls into question recovery of damages even if the party is identified.

Difficulty in Obtaining Interim Relief

Crypto assets are easily transferable and, in this reason, haste is required. The courts in Hong Kong and Singapore have recognized proprietary rights in crypto assets, and the UK courts seem ready to embrace technological solutions to issues around service over technology (e.g. service on the parties through NFT) and other issues. An emergency arbitrator would have possibly made provisional orders in Johnson v. Maker Ecosystem Growth Holdings (2020).

Difficulties in Valuation

Valuing cryptocurrency is still difficult due to world market conditions of volatility, bid/ask spreads and no equivalent comparable publicly traded companies and Coinbase was just the only flagship publicly traded exchange, and its data has become public knowledge as of April 2021.

Conclusion

Despite technological advancement, cryptocurrency arbitration remains in its early stages. Courts still do not enforce when public policy concerns exist. In 2018, for example, the Shenzhen Intermediate Court set aside an arbitral award requiring bitcoin transfer, reasoning that it would enable the illegal circulation of cryptocurrency. Additionally, in 2022, a Greek court refused to enforce a bitcoin-loan award on the basis of the legal status of cryptocurrency and the risk of tax evasion, among a range of other concerns.

In 2023, the English Commercial Court refused to enforce a JAMS award in Payward Inc. v. Chechetkin on the basis of the arbitrator not considering the requisite consumer protections under English law applicable to consumers in the U.K. In 2019, the Amsterdam Court of Appeal refused to uphold an award, which paid in bitcoin, issued by Net-Arb on the basis of problematic procedures that operated exclusively online. These examples point to the continued uncertainty in this context and the urgent need for greater clarity and any potential regulatory framework as the idea of crypto arbitrations develops.