Unlocking Digital Asset Disputes: Strategies for Success
From the evolving regulatory landscape to the intricacies of enforcement in arbitration, Smith sheds light on key considerations for organizations and legal professionals operating in this dynamic space.
How has the popularity of arbitration among digital asset traders changed over the years, and what factors contribute to its appeal?
Digital asset traders have a preference for decentralized processes, anonymity in transactions, and participation in cross-border transactions. Arbitration has many recognised benefits in these areas over conventional court litigation. Arbitration is confidential and it allows the parties a degree of freedom over the appointment of the arbitrator who could be an expert in software or cybersecurity, for instance. Arbitral awards are generally easier to enforce internationally than court judgments and arbitration is more detached from state control than litigation, creating a relatively neutral space away from national attitudes to digital assets.
Could you share any insights into the role of legal decisions expected in 2024 regarding the enforcement of arbitral awards in digital asset disputes?
At a high level, we would expect several trends to develop in 2024 in respect of enforcement of arbitral awards in digital asset disputes.
First, there will be enforcement of awards in less conventional jurisdictions, which may be where blockchain organisations are based or their servers are located, in order to compel the transfer of assets – depending on national rules of enforcement.
Second, we will see more occasions where national courts are faced with challenges to enforcement under Article V (2) of the New York Convention (as mirrored in local arbitration laws), principally challenges on the ground of illegality or breach of public policy/public order. Many jurisdictions ostensibly ban cryptocurrency trading, but in practice computers and people within those jurisdictions are involved in digital asset disputes. This may therefore give rise to issues with enforcement in those jurisdictions, for instance, where, pursuant to an arbitral award, a party is ordered to pay a monetary sum that was merely converted from cryptocurrency to fiat currency; the national courts within those jurisdictions may consider such enforcement to be contrary to public policy.
However, at the same time, as countries regulate digital assets more, public policy considerations may change, and courts may be more willing to enforce awards relating to digital assets.
Third, we will see conflicts between private contracts and arbitration on the one hand and national laws that have a public policy perspective on the other, such as laws regulating gambling or protecting consumers, which may be justiciable only through litigation in national courts (and therefore provide grounds for not enforcing part or all of an award that encroaches on the jurisdiction of the national courts).
Dissipation of assets is a major consideration of any award creditor thinking about enforcement. We may therefore see more interim relief in national courts sought against third parties like blockchain servers, exchange trading companies and other platforms aimed at freezing assets for recovery. Following the preliminary decision of the English Court of Appeal in Tulip Trading Ltd v Van der Laan [2023] EWCA Civ 83, which recognised that there was a “realistic argument” developers of cryptocurrency networks are fiduciaries and owed fiduciary duties to cryptocurrency owners including a duty of loyalty to the users of the Bitcoin software, other national courts may gradually impose obligations forbidding programmers from acting in their own self-interest and compelling them to make provision for such cases (e.g. through software coding) so that stolen or otherwise misappropriated digital assets – including targets for enforcement – can be safely transferred.
How are regulations in the digital asset space evolving globally, and what are the varying attitudes towards these regulations in different jurisdictions?
The risks of creating, trading and storing digital assets are plain to see. They can be mis-sold, fluctuate widely in value, and be misappropriated or otherwise stolen like any other asset, but recovery can be difficult given the international nature of the digital asset trade, the anonymous and decentralised nature of digital asset markets, and so on. There is a wide and varied spectrum of regulation across the world, which varies according to the type of digital asset. Jurisdictions like the UAE, Bahrain and Oman are moving quickly to regulate because the authorities recognise that digital assets are becoming mainstream, and such evolving regulations are welcome steps in the right direction.
With respect to cryptocurrency, the EU recognises bitcoin and other cryptocurrencies as crypto-assets which are not illegal per se but says that crypto-asset activities are outside its control for the time being. In the US, regulators are generally very skeptical of cryptocurrencies, but the Securities and Exchange Commission has just permitted bitcoin exchange-traded funds. Countries like Qatar, KSA and China currently have restrictions on trading in cryptocurrencies, although this may not necessarily extend to other digital assets such as NFTs. In contrast, El Salvador has been the first (and so far, only) country to embrace bitcoin as legal tender.
In the absence of an international regulatory regime, national attitudes to regulation reflect domestic concerns about consumer and investor safety, and changes in regulation correspond to different paces of social acceptance of digital assets.
What advice would you give to organizations and legal professionals navigating the landscape of digital asset disputes to ensure effective resolution?
The best advice is to take proper action when entering into the contract. Ensure you have proper contract documentation with detailed descriptions of obligations and allocations of risk. In the hopefully unlikely event that a dispute arises, get legal advice early on. A key question for legal advisors is the content of the dispute resolution clause. If you are the victim of fraud, or your assets are at risk of dissipation, interim measures like freezing orders may be effective. This might require litigation in foreign jurisdictions, which is why considerations as to enforcement should be taken into account at the outset of the matter, i.e. whether you would be able to enforce an award in the defendant’s jurisdiction, does that jurisdiction recognise or restrict the trading in digital assets, etc.
With your experience across various sectors, including technology and construction, how do you see the management of digital asset disputes differing from other types of disputes?
There are a few aspects which come up more frequently in digital asset disputes than other types of disputes, which is why these disputes sometimes require a different approach to the way the case is managed.
First, one of the key issues relates to the technical evidence; for instance, considerations as to the mechanics of holding cryptocurrencies in ‘hot’ or ‘cold’ storage or the protocols for safeguarding digital assets, which might require expert witnesses or even the selection of specific arbitrators with experience in digital asset disputes given the technical nature and complexities of such matters.
Second, the evidence underlying the dispute may be much more fragmentary than the formal contractual documentation found in construction agreements, consisting of text messages often in shorthand or technical language, financial negotiations involving the terse exchange of numbers without context, and oral meetings without any contemporaneous documentary evidence and perhaps only digital evidence that needs to be interpreted by an expert.
How do you balance the legal complexities of digital asset disputes with the practical realities of operating in and out of the Middle East region?
In general terms, jurisdictions within the Middle East have recognised the increased appetite of individuals and business to trade in digital assets and have taken practical steps to legislate, whether through regulation or through prohibition. Given that each Middle East jurisdiction has a different attitude to digital assets (some largely ban them, others whole-heartedly encourage them), consideration should be given to the legal implication of, or risks posed by, legislation enacted within each particular jurisdiction. Good legal advice is therefore essential, pertinent to the jurisdictions in which the digital assets will be held, as well as the industries and activities in which they will be used.
Attitudes change even within countries, such as the differences between the different regulators in the UAE (the Central Bank and the Securities and Commodities Authority), the financial freezones of the Dubai International Financial Centre and Abu Dhabi Global Market, and the authorities of individual emirates.
There are also cross-cutting problems like concerns over sanctions busting and money laundering, which digital assets can be abused for. Cultural and language differences can play roles in digital asset disputes. Some people have cultural preferences for privacy and secrecy (which may attract them to digital assets in the first place), whereas others want to advertise their adoption and use of innovative technologies.
Can you discuss any emerging trends and developments in the management of digital asset disputes that stakeholders should be aware of?
We expect to see an increased focus on digital asset disputes in all dispute resolution forums moving forward which will, in turn, result in increased certainty for traders in digital assets, from a practical and legal perspective.
For example, authorities like the Dubai Virtual Assets Regulatory Authority and the Dubai International Financial Centre Authority have set up formal rules and processes for the creation (through initial coin offerings and other events), holding and trading in digital assets. These set out specific benchmarks for such procedures, which, in turn, may be relied upon in the event that a dispute arises and such provisions have not been complied with.
National courts are also developing novel rules for digital asset dispute resolution, like service of documents on non-fungible token wallets, and we have also seen the establishment of specialised courts such as the Dubai International Financial Centre’s Digital Economy Court. This is coupled with a range of specialist arbitral rules for the resolution of digital asset disputes, like the Digital Dispute Resolution Rules in the UK and JAMS’ draft smart contract rules, and we expect these to be used more frequently.
Whole industries are growing around digital assets to support industry transactions. For instance, innovative insurers now offer insurance for the directors and office holders in crypto companies, plus professional indemnity and commercial fraud insurance. Litigation funders are increasingly interested in paying for digital asset disputes too.
As a collective result of the above, we expect that the availability, and appointment, of specialised arbitrators, with the relevant technical and legal experience, will increase in such disputes thereby allowing parties to manage, and resolve, disputes more effectively.
Reproduced with the premission from Legal Community MENA. This exclusive interview with Suzan Taha was first published in Legal Community MENA - Unlocking Digital Asset Disputes: Strategies for Success. For further information, please visit: Home - Legalcommunity MENA
