International arbitration shaping cryptocurrency landscape: Opinion
Complex issues around the proper valuation of cryptocurrencies are common in many crypto arbitrations, given their volatility.
With use, comes abuse – or specifically, disputes. Given the growth of cryptocurrency use worldwide, disputes around the digital currencies are increasing in tandem. The highest profile to date could be the claims against cryptocurrency trading platform Binance for alleged losses from a widespread service outage in May 2021 which coincided with a massive drop in the price of Bitcoin. The outage had allegedly resulted in clogging transactions which prevented investors from closing out or liquidating their trading positions.
More recently, the volatile financial environments arising from force majeure events such as the Russia-Ukraine war might have enhanced the risk profiles of several cryptocurrency-based financial instruments and led to margin calls that might be disputed.
What should we know about cryptocurrency disputes?
Firstly, cryptocurrency disputes are inherently cross-border by nature, and the international feature of the disputes means that laws of different jurisdictions may apply, and possibly clash with each other, at the same time.
This presents fertile ground for parties to expend substantial time and money over technical, but no less real, disputes. This could take the forms of a jurisdictional challenge over where the main dispute ought to be resolved, challenges on which system of substantive law ought to apply to determine the main disputes, the choice of legal rules to apply, and more.
Emergency arbitration to prevent dissipation of cryptocurrencies
Given the ease in which cryptocurrencies can be converted into fiat currencies, disposed of (non-fungible tokens, or NFTs, are increasingly placed as collateral for loans) and transferred to anonymous or unknown users anywhere in the world, it is often of paramount importance that the cryptocurrencies be ‘frozen’ to preserve the status quo, pending the issuance of a final award by the arbitral tribunal.
The international enforceability of the Singapore International Arbitration Centre (SIAC) emergency arbitration mechanism is increasingly gaining recognition across different jurisdictions. The mechanism ensures the cryptocurrencies in question cannot be disposed of prior to the dispute outcome.
Recently in August 2021, the Indian Supreme Court in the decision of Amazon.com NV Investment Holdings LLC v Future Retail Limited & Ors enforced an order for urgent relief issued by an emergency arbitral tribunal appointed by the SIAC.
It is now possible under English law, Hong Kong law and more recently Singapore law to obtain a proprietary injunction to prohibit counterparties from dealing with, disposing of or diminishing the value of the relevant cryptocurrencies where there is a dispute over ownership of the cryptocurrencies, or a mareva freezing injunction to restrain counterparties from transferring assets of up to the value of the digital currencies in question.
Volatility, valuation concerns and the need for speed
Complex issues around the proper valuation of cryptocurrencies are common in many cryptocurrency arbitrations, given their volatility. There could be substantial differences between the market value of a token at the time of breach or obligation to pay, and the time when the arbitration award has been issued.
The valuation exercise may involve a consideration of a combination of factors such as the arbitrant’s prior trading behaviour, historical trend and projections around the relevant cryptocurrency, market trends and predictions, inherent value of the token in question and of the token issuer if any.
The SIAC’s Early Dismissal process is eminently suitable to resolve straightforward disputes around obligations to pay. A party may apply to an arbitral tribunal for the early dismissal of a claim or defence on the basis that a claim or defence is manifestly without legal merit. The SIAC rules provide that the order or award shall be made within 60 days of the filing of the application.
Legal issues in enforcing an international arbitration award
An international arbitration award is enforceable in over 150 countries under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention). This is particularly important given the cross-border nature of cryptocurrency disputes.
One of the limited grounds on which an award can be refused enforcement under the New York Convention is if it would be contrary to the public policy of the country where enforcement is sought. For example, in April 2020 an award in China was set aside on the grounds that it was contrary to China’s public policy and in particular, as China prohibits the exchange of cryptocurrencies into fiat currencies. Other countries, including several in the Middle East, have similarly banned cryptocurrencies or imposed strict rules against dealing with cryptocurrencies.
This presents serious difficulties as the award for monetary damages would invariably have to be prescribed in a particular fiat currency. One way to guarantee local enforceability is to view cryptocurrencies as property rather than a form of currency, and for the tribunal to order monetary damages to compensate for the loss of the property. This was the outcome in a 2019 case in the Shanghai First Intermediate People’s Court, where the court found it appropriate to order the unsuccessful party to return the specific Bitcoins owed to the successful party.
The key to resolving crypto disputes is to design processes for the prevention and mitigation of disputes before they occur, and to develop and deploy effective cross border strategies when disputes arise relating to cryptocurrencies and/or NFTs. For now at least, it is the rulings that come out of international arbitration cases that are helping to shape the dynamically developing crypto landscape.
The writer, partner at Withers KhattarWong, is an international arbitration specialist.
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