Following on from the phenomenal growth in the use of cryptocurrencies worldwide, there is increasing incidence of cryptocurrency disputes across the globe. 

In probably one of the highest profile international cryptocurrency disputes in recent times, hundreds of derivatives investors are apparently looking to bring claims against cryptocurrency trading platform Binance for alleged losses arising from a widespread service outage in May 2021 which coincided with a massive drop in the price of Bitcoin. The massive sell off of cryptocurrencies at the material time allegedly resulted in clogged transactions which prevented investors from closing out or liquidating their trading positions during the outage.

In January this year, Singapore-based cryptocurrency exchange platform Crypto.com was hacked, with the accounts of over 400 users being affected and which resulted in unauthorized withdrawals of cryptocurrencies worth USD 35 million.

More recently, the volatile financial environments informed by force majeure events and geopolitical developments might have enhanced the risk profiles of several cryptocurrency based financial instruments and led to margin calls that could be disputed.

This piece highlights some strategic aspects around the international arbitration of cryptocurrency disputes. In my next article, I will examine legal issues in enforcement of international arbitration awards in cryptocurrency disputes and practical issues in enforcement against digital assets.

Cross-jurisdictional nature of cryptocurrency disputes

Cryptocurrencies are records on a series of ledgers in a large network of computers worldwide. There are no national borders in the decentralised blockchain. These digital assets are not located in any particular physical location and could be perceived to be “everywhere” at the same time. The users of cryptocurrencies may come from different parts of the world or may not even be readily identifiable. Cryptocurrency exchanges, NFT marketplaces and platforms may not necessarily have a legal presence in the place where the users come from, if at all, or may not have any or substantial real assets in places where they have a legal presence in. At the same time, cryptocurrencies held via a wallet or account in one part of the world can be readily transferred to another part of the world in minutes.

Accordingly, cryptocurrency disputes are inherently cross-border by nature, and invariably invokes legal issues that span across different countries. The internationality of such disputes means that the 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 disputing 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 law rules to apply, and more. Savvy arbitrants could deploy cross border tactics, whether legitimate or guerrilla, to exhaust the counterparty such that there is little money and energy left by the time parties get to properly arbitrate their disputes.

The Binance class action arbitration provides a contemporaneous illustration of the myriad of technical challenges relating to the internationality of cryptocurrency disputes. Binance has been perceived to be a decentralized entity with no global headquarters. As the Binance User Terms could seemingly be clearer as to which specific Binance entity contracted with the investors (with a generic reference to “Binance operators”), parties may face jurisdictional challenges around whether any arbitration would be commenced against the correct party to the arbitration agreement.

Further, there could be challenges around whether the dispute could even be arbitrated to begin with. The Binance User Terms provide for a substantive law to govern its agreement. The same law however requires cryptocurrencies derivatives trading to be licensed. This could mean that the arbitral tribunal might have to first determine the preliminary question of whether the matter is arbitrable (and if so, under what system of law) before the arbitration may proceed.

There are in addition serious questions to be asked around whether the relevant arbitration rules allow for a “class action” arbitration. Where Binance’s consent is required under the rules for parties to be joined and arbitrations to be consolidated, and where such consent is not obtained, each investor may have to pay for separate costs for each arbitration. Other concerns include security for costs in a funded class action, and the extent in which the publication of the dispute across different fora would constitute a breach of the arbitration agreement, amongst others.