Digital disputes on the rise: international arbitration at the forefront?

Legal status of digital assets and entities

Jurisdictions differ in how they legally categorize cryptoassets. The divergence in the US is even more marked: the US Securities and Exchange Commission classifies digital assets as securities, while the US Commodities Future Trading Commission deems Bitcoin and Ethereum to be commodities. The EU's Markets in Crypto-Assets Regulation distinguishes asset referenced tokens, e-money tokens and utility tokens.

In 2019, the UK Jurisdiction Taskforce (UKJT) concluded in its Legal statement on cryptoassets and smart contracts that “cryptoassets have all of the indicia of property”, and the English courts have recognised cryptoassets as property in cases such as AA v Persons Unknown [2019] EWHC 3556 (Comm).

The legal identity of decentralised autonomous organisations (DAOs), organisations constructed through code, deployed on blockchain and typically managed communally by token holders, depends on the structure chosen for that DAO and the legal principles in the relevant jurisdiction (although it may not be clear in which jurisdiction a DAO “exists”, particularly if it lacks formal legal personality). DAOs have been recognised as legal entities if they have a “legal wrapping”; without one, courts in certain jurisdictions in the US have threatened to recognise them as partnerships with unlimited liability. The Law Commission of England & Wales in its July 2024 scoping paper on DAOs concluded that “there is no current need to develop a DAO-specific legal entity for England and Wales, however, the Government should keep this matter under review”.

Smart contracts: code vs intent

Although difficult to precisely define, smart contracts are self-executing contracts implemented using code and performed, at least in part, by a network system without human input. They deploy blockchain technology to provide insulated and tamper-proof operation.

The “code is law” principle, which states that the execution of the smart contract is final, may, when taken to the extreme, be seen as envisaging that anything “allowed” by the smart contract is “legal” despite any adverse or harmful effects. This interpretation clashes with traditional contractual concepts which hinge on party intent, such as mistake, duress and illegality. However, it is likely that these concepts will need to be considered alongside code in some smart contract-related disputes.

For example, performance could be affected by an event extrinsic to the code, such as a system failure. Further, where code mishandles ambiguities or operates in an unforeseen or unintended manner, the “wronged” party may be unwilling to surrender to the output of the code and seek to rely on traditional principles under the smart contract's governing law (which itself may be a subject of dispute, if not specified by the parties).

Digital asset valuation

Valuing digital assets and quantifying loss in digital disputes can bring novel challenges. Poor regulation of crypto trading platforms means a lack of publicly available information to facilitate market-based valuations. Extreme volatility complicates quantification of damages, including the point at which loss is assessed, as shown by Fantom Foundation Ltd v Multichain Foundation Ltd [2024] SGHC 173, although this may be surmounted to an extent if evidence of blockchain records, which are immutable and timestamped, is admissible.

Arbitration has emerged as a preferred mechanism for resolving digital disputes; arbitration agreements have been incorporated into the terms and conditions of crypto currency exchanges and in the code of smart contracts. This reflects the fact that the features of arbitration make it well-suited to resolving digital asset disputes.

1. The ease of enforcing arbitral awards across jurisdictions under the New York Convention on the Recognition and Enforcement of Arbitral Awards 1958 (NYC), ratified by over 170 states, is a significant advantage given digital assets are transnational. To take advantage of this wide (off-chain) enforcement mechanism, a valid arbitration agreement must exist to avoid jurisdictional issues disrupting the arbitration and subsequent award enforcement. This presents challenges in the digital world where it may be hard to establish consent to arbitration and/or there may be anonymous or pseudonymous parties. To minimise this risk, arbitration clauses should be embedded in smart contracts, platform documents (such as online service provider user agreements) and bilateral agreements for cryptoasset transfers. When an arbitration is London-seated, the English courts, which exercise supervisory jurisdiction, can grant injunctions over digital assets (because, as stated above, they are viewed as property under English law), providing a valuable enforcement aid.
2. The private nature of arbitration is attractive as parties in the digital assets space prize the pseudonymity permitted in crypto exchanges. Arbitration proceedings are typically private and often confidential, with awards not usually publicly disclosed unless required in the enforcement process. By contrast, in litigation, court filings and judgments are often in the public domain, potentially exposing the identities of pseudonymous actors and information relating to cryptoassets.
3. The value placed on party autonomy in international arbitration makes it a compelling choice for parties to digital disputes. Parties may select arbitrator(s) with expertise in blockchain, decentralised finance, cybersecurity or digital law, as appropriate, to resolve their dispute. Parties can also tailor the process to suit the assets and issues in dispute more readily than in litigation.

The major arbitral institutions have not yet introduced specific rules for digital asset arbitrations. This could be because, arguably, current rules are flexible enough to resolve such disputes efficiently and effectively. However, in 2021, the UKJT introduced its Digital Dispute Resolution Rules to be “used for and incorporated into on-chain digital relationships and smart contracts”. These Rules:

• anticipate arbitral or expert dispute resolution in very short periods;
• allow for optional party anonymity; and
• empower arbitrators to “operate, modify, sign or cancel any digital asset relevant to the dispute using any digital signature, cryptographic key, password or other digital access or control mechanism available to it” and to direct any other interested party to do the same.

The London Chamber of Arbitration and Mediation launched its Blockchain Expedited Arbitration Rules last December. These provide for optional anonymity, a streamlined documents-only procedure, limited (if any) document production and confidential proceedings and award.

Crucially, because these Rules provide a framework for “traditional” arbitration tailored to the specific requirements of digital disputes, they should result in binding awards capable of recognition and enforcement in over 170 states under the NYC. This contrasts radically with the decentralized arbitration service offered by Kleros (built on the Ethereum blockchain and using game theory) in which randomly chosen anonymous jurors (whose decisions are unenforceable under the NYC) decide cases.