What is a Cryptocurrency?
Cryptocurrency is any type of digital or virtual currency that utilizes encryption to safeguard transactions. Cryptocurrencies operate without a centralized issuing or regulating body, instead of relying on a decentralized system to track transactions and create new units.
It's a peer-to-peer system that allows anybody to make and receive payments from anywhere. Cryptocurrency payments exist solely as digital entries to an online database identifying specific transactions, rather than as tangible money moved around and traded in the real world. The transactions that you make with crypto funds are documented. Digital wallets are used to store cryptocurrency.
The concept of Arbitration
Arbitration is a method in which a disagreement is referred to by one or more arbitrators who issue a binding ruling based on the parties' agreement. Instead of going to court, the parties choose arbitration as a private dispute settlement system.
Arbitrations involving cryptocurrency are still uncommon, but they are expected to become more common in the future years as blockchain-related technologies become more popular.
Terms with arbitration clauses
Arbitration agreements are frequently included in the terms and conditions that consumers accept when they use an online platform or service (for example, in a user agreement for a cryptocurrency exchange). Terms and conditions are frequently posted on the websites of token and currency issuers. It requires to be accepted before signing up for an account which then becomes binding on the user. Before selecting whether to incorporate an arbitration agreement (or a choice of court agreement) in the Terms & conditions for a mass-market product, a thorough investigation of the location and make-up of the user base is essential.
Arbitration and Cryptocurrency
Cryptocurrencies are causing havoc in the financial world. These cryptocurrencies and the crypto exchanges on which they are exchanged, like any financial instruments, raise plenty of legal difficulties. Because of the large number of cryptocurrencies and their growing popularity, trade-related conflicts are certain to escalate, but it's unclear how they're to be addressed for many. Conventional non-binding mechanisms, such as negotiation and mediation, as well as binding legal mechanisms, such as litigation and arbitration, may be ill-equipped in the crypto context due to unique problems involving the identity of traders, the jurisdictional limits of courts, the relevant governing law(s), and difficult technical evidence. At the same time, crypto-specific dispute resolution procedures are still in their infancy. Cryptocurrencies and crypto exchanges are developing ways of resolving disputes with their users.
As a framework for resolving disputes originating from cryptocurrency and smart contracts, arbitration offers several advantages. It provides jurisdictional clarity, a neutral venue, and, in theory, broadly enforceable awards.
It is often a private process, making it an appealing option for disputes involving economically sensitive material. Arbitrators with particular competence can be chosen to both decide the disagreement and create an acceptable solution in highly technical disputes. The arbitration agreement between the parties, which establishes the arbitral tribunal's jurisdiction and forbids the parties from taking their issues to domestic courts, is a contract in and of itself and must follow the standard requirements for the creation of a binding contract.
Considering this, cryptocurrency investors and parties doing cryptocurrency-related transactions should carefully analyze the dispute resolution processes included in their contracts. Governing law provisions, as usual, should be taken into account. Arbitration agreements, in terms of forum, may be especially well-tailored to financial transactions cryptos, given that they are essentially borderless and currently undetermined, as stated above. Because arbitral awards are enforced across countries under the New York Convention, the global character of cryptocurrencies makes arbitration particularly appealing.
Additionally, selecting arbitration may provide investors with some security since it provides neutrality in comparison to national regulatory systems and allows parties to pick arbitrators who are well-versed in the appropriate technical disciplines. Judges, who monitor and regulate the legal process as legal experts, are viewed as unsuitable with growing technological futures and legal problems. While current courts will fulfill certain vital tasks, their dependence on national jurisdictions and paper-based contracts renders them incapable of dealing with modern concerns arising from online activities and e-transactions.
Arbitration also provides parties with more procedural freedom, such as in document discovery, and ensures the privacy of business information and/or intellectual property during the procedures. Arbitration also allows institutions to adopt and modify institutional rules to the specific nature of crypto disputes.
Innovation in Smart Contracts
According to the Arbitration Institute of the Stockholm Chamber of Commerce, the values registered on the blockchain can reflect anything that is only on the blockchain, such as a real estate registration or intellectual property rights, or something else that only appears on the blockchain, such as a cryptocurrency. You can use if-then rules to control actions in the system, as you can with most digital systems. For example, "If the buyer registers the receipt of the items on the blockchain, then a value, such as ETH, must be given to the seller." This is effectively a "smart contract" — a contract or program that automatically enforces itself through blockchain when specific circumstances are satisfied.
The next step is to apply this to arbitration rather than contract generation. Consider a "smart award" instead of a "smart contract." The judge issues a decision on a blockchain, which is immediately enforced as soon as it is made. For example, if the judgment specifies that the respondent must pay damages to the claimant, the award might be written to promptly transfer bitcoin to the claimant on the blockchain, similar to a "smart contract." Of course, the item might be a real-world asset, such as IP ownership, with registered ownership updated on the blockchain. There would be no need for a national institution to aid in the enforcement of a losing party that was reluctant to cooperate.
Although cryptocurrency arbitration is still in its early phases, it has the potential to be a game-changing development in international arbitration. It may eliminate the necessity for enforcement, jurisdictional issues, and, as a necessity, the requirement to follow today's procedural processes and protections.
If you have any further questions or need support with an arbitration, feel free to contact our Head of Arbitration.