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Resolving Crypto Disputes Through International Arbitration – Fin Tech – United States


Commercial disputes are often best settled by arbitration
rather than in court. That applies to disagreements involving
cryptoassets as much as to any other area of business, as
Andrew Pimlott explains.

As cryptocurrencies, non-fungible tokens (NFTs) and other
cryptoassets continue to grow in popularity – if not always in
value – the number of disputes is also increasing. The innovative,
fast-moving, lightly regulated and often “Wild West”
nature of the market means there are frequent disagreements between
the parties involved. The fact that it is decentralized and
international, spanning different countries and legal systems,
makes it harder to work out who is in the wrong and how to resolve
arguments between crypto issuers, investors, trading platforms and
other participants.

Probably the highest profile example to date is the legal action
initiated last year by thousands of claimants seeking hundreds of
millions of dollars in damages from Binance, the world’s
biggest crypto exchange. The case will go to arbitration and is
being led by US law firm White & Case and Swiss litigation
finance provider Liti Capital, under Hong Kong International
Arbitration Centre rules.

In fact, Binance and other crypto firms prefer arbitrators to
traditional courts. Their terms and conditions require that all
claims be resolved through legally binding arbitration. That is why
Nifty Gateway, an NFT (non-fungible token)
auction house, pursued an investor for non-payment of an NFT
through JAMS, a New York arbitration service provider.

And in 2020, a class-action lawsuit against entities behind
crypto company MakerDAO, alleging that they misrepresented
the risks of investment, was referred to the American Arbitration
Association.

What is arbitration?

First of all, it’s worth saying, I’m not a lawyer.
However, a good search on the Cambridge Dictionary, arbitration is “a
process in which an independent person”, an arbitrator,
“makes an official decision that ends a legal
disagreement” between people or companies “without the
need for it to be solved in court”.

Cases are heard by a tribunal of one or more arbitrators, using
rules and administrative support provided by arbitral institutions
such as the London Court of International Arbitration (LCIA), Hong
Kong International Arbitration Centre, Singapore International
Arbitration Centre and the International Centre for Settlement of
Investment Disputes which is part of the World Bank. Institutions
like these have a successful track record of helping resolve
commercial disputes of all kinds across many jurisdictions.

Other key aspects of arbitration include:

  • All parties must agree to use arbitration. Usually they agree
    to use it at the same time they enter into a contract, in an
    arbitration clause. However, if such a clause is not in the
    contract they can still enter into an arbitration agreement when a
    dispute arises if both sides agree.
  • It is more flexible than court proceedings.
  • The party starting the arbitration is called the
    “claimant” because they are making a claim against the
    other party, and the other party is called the
    “respondent” because they are responding to the
    claim.
  • The parties present their positions through
    “submissions”, usually via legal representatives, in
    writing or orally or both.
  • The arbitrator(s) decide the dispute and make an
    “award”.
  • Arbitration makes it easier to obtain money kept overseas. If a
    losing party refuses to pay, it is easier for the winning party to
    enforce an arbitral award in a foreign country than a court
    judgement. Almost every country in the world has agreed to
    recognise and enforce awards made by arbitrators.
  • Arbitral awards are almost always final, whereas court
    judgements can usually be appealed to a higher court.

Arbitration for crypto disputes

Arbitration has many benefits as a way of resolving disputes
arising from cryptoassets. “It provides certainty as to
jurisdiction, a neutral forum and, in principle, widely enforceable
awards,” says law firm Clifford Chance in a recently published
report, Arbitration for Cryptoasset and Smart Contract
Disputes
.

It is a confidential process, which is especially important for
disputes involving commercially sensitive information. Another
advantage is the ability to appoint arbitrators with specialist
knowledge to handle highly technical matters such as coding and
other aspects of the blockchain and other types of distributed
ledger technology (DLT) that underpin cryptoassets and smart
contracts. Smart contracts are digital contracts stored on
a blockchain that are automatically executed when predetermined
terms and conditions are met by each party.

Andrea Utasy Clark, a Senior Associate at law firm
Pinsent Masons,
in an analysis published this September,
explains that cryptocurrency disputes “are well suited for,
and are increasingly being referred to, arbitration”. This is
because “the decentralized nature of crypto aligns with the
neutrality of arbitration, and both foster participation across
multiple jurisdictions” .

The types of crypto disputes currently being dealt with through
arbitration, she adds, include breach of contract claims by
investors against platforms arising from lack of access to the
trading platform, and by platforms against investors arising from
failure to make payment; misrepresentation claims by investors
against platforms concerning the represented risks of investment;
and claims relating to the enforcement of arbitral awards in
national courts.

In September, I attended Mishcon de Reya retail metaverse
seminar, and the topic of Metaverse brand valuation popped up. How
will an arbitrator deal with a dispute on the metaverse? I’m
pretty sure the next ten years will see a boom in online sales
within the Metaverse which will undoubtedly increase the number of
arbitrations between suppliers, coders, metaverse noisy neighbors,
etc. We are already seeing several consultancy firms and law firms
enter the metaverse for this reason.

The Binance case

The arbitration with crypto platform Binance –
which operates around the world and is incorporated in France,
Spain, Italy, the UAE, and several other countries, – was started
by users who claim to have lost millions when the platform failed
on May 19, 2021, leaving them unable to exit their positions while
crypto prices dipped. US law firm White & Case is co-ordinating the action
for claimants, while Swiss litigation finance provider Liti
Capital is funding the case
up to $5m in exchange for a return
on the investment plus 30% of the award or settlement.

Liti Capital is a private equity company that raises funds from
retail and institutional investors to invest in legal action. There
are now thousands of claimants in the Binance claim in
what Liti Capital believes is “the first ever group action in the crypto
sector”
and “a landmark event in defining how
organisations operating in the sector behave and treat their
customers”. David Kay, Liti Capital’s CEO, said
“crypto and blockchain are the future but they’ve just got
to get cleaned up, it is the Wild West out there”.

Under Binance’s terms and conditions, users seeking
compensation are required to file disputes with the Hong Kong
International Arbitration Centre, which is costly for an
individual. Details of how to join the group action is available on
the website www.binanceclaim.com, which has been set up by
Liti Capital and others representing the claimants. It explains
that traders who believe they may be entitled to compensation
should contact Binance first, and if they are unable to resolve
their dispute “they may pursue claims against Binance in
international arbitration”.

An arbitral award does not guarantee payment

Even if claimants win an arbitral award it may still be
difficult, even impossible, for them to receive the money. First,
the assets of the respondent may be hard to track down and, even if
they are located, they may be impossible to retrieve. Second,
although most countries recognize arbitral decisions, some may not
enforce a cryptoasset-related award if cryptoassets are illegal in
that country, or for other reasons relating to these types of
asset.

“Given the nature of crypto and the players involved, the
risk of dissipation of assets is… acute, and it is often more
complicated to establish and quantify loss,” writes Pinsent Mason’s Andrea Utasy Clark.
“Further, some jurisdictions have taken the view that
enforcing an award made in a crypto-related arbitration may run
contrary to the public policy of that jurisdiction and preclude
enforcement.”

The public policy exception is written into the New York
Convention on the Recognition and Enforcement of Foreign Arbitral
Awards, and has been used on a number of occasions. For example,
the Shenzen Intermediate People’s Court in China set aside an
arbitral award issued by an arbitral institution on public policy
grounds because, as Ms. Utasy Clark writes, “China has banned
crypto and does not recognize digital currencies as having any
legal status”.

As with any legal action, pursuing a crypto-related claim
through the arbitration process is not a simple matter. However, if
an aggrieved party cannot achieve redress by dealing directly with
the party alleged to have caused that grievance – using either
in-house legal expertise or an external law firm – then arbitration
if probably the best, and often the only, alternative.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.



Read More: Resolving Crypto Disputes Through International Arbitration – Fin Tech – United States

Disclaimer:The information provided on this website does not constitute investment advice, financial advice, trading advice, or any other sort of advice and you should not treat any of the website’s content as such. NewsOfBitcoin.com does not recommend that any cryptocurrency should be bought, sold, or held by you. Do conduct your own due diligence and consult your financial advisor before making any investment decisions.

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