OUT-LAW ANALYSIS 9 min. read
27 Sep 2022, 10:04 am
Cryptocurrency (crypto) related disputes are on the rise around the world. They are well suited for and are increasingly being referred to arbitration.
Andrea Utasy Clark
Legal Director
This is not surprising given that the decentralised nature of crypto aligns with the neutrality of arbitration and both foster participation across multiple jurisdictions; the value placed on pseudonymity in crypto is closely related to confidentiality, a core feature of arbitration; and the contractual nature of crypto’s investor-platform relationships, often formed by way of a platform’s terms of use, mean that arbitration can readily be agreed to in the same way.
The types of crypto-related disputes currently being pursued in relation to arbitration include, for example:
In addition to the usual expectations and issues arising in relation to the resolution of disputes through international arbitration, there are particular considerations that arise more critically in crypto-related arbitration. Given the nature of crypto and the players involved, the risk of dissipation of assets is even more acute, and it is often more complicated to establish and quantify loss. 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.
As we continue to observe increasing participation in the crypto market as well the arbitration of disputes arising in this context, investors and platforms alike should bear in mind the above key considerations and associated risks which, for some, are defi-ing expectations.
An aggrieved investor will likely need to search through the terms of use to identify the entity or entities covered by any arbitration agreement and that could therefore be named as a respondent in an arbitration. These entities might not all be readily identifiable from the terms and might differ from the entity providing services to the investor or which the investor makes payment to or receives payment from.
To address this concern the investor can be deliberate about reviewing the terms of service for these details and asking for any necessary clarifications, ideally before investing through a particular platform.
On the part of the platform, it may not have all the details needed to adequately identity an investor for purposes of bringing a claim against them, considering the level of pseudonymity permitted in the decentralised finance space.
The platform could expand the nature of details required from each investor before they invest, although this will of course need to be balanced with the level of pseudonymity that potential investors wish to retain, as the platform is operating in a highly competitive market. There may not be much that can be done after investment to obtain these further details.
Why is there a heightened risk with crypto?
For investors, pseudonymity and the ease of transacting with crypto assets in particular mean that assets can be more easily, quickly and discretely shifted in form and jurisdiction. For example, cash in jurisdiction A could be shifted to crypto on platform A and cashed out in jurisdiction B.
For platforms, complex holding structures may facilitate the shifting of assets between entities and jurisdictions.
In order to manage this risk in the early stages of arbitration, both types of claimants might consider seeking a freezing injunction from the tribunal or, if permitted and supported by the local arbitration legislation in the relevant jurisdiction, the local courts which have the additional practical power of enforcement.
Jennifer Craven
Partner
Claimants must act quickly if they wish to freeze crypto assets. Although it might be argued that it is easy to trace transactions through a publicly available blockchain, complex ways of concealing digital assets such as using “peeling” or “going cross chain” can make it harder to detect their whereabouts and ultimately recover assets that have been dissipated.
For the risk of dissipation by platforms, local regulatory agencies may already have measures in place to mitigate this risk as well.
The English High Court in AA v Persons Unknown granted a proprietary injunction over Bitcoin used as ransom payment in cyber extortion. Although the injunction was granted, approximately 13.25 BitcoinBitcoin that were not in the account in question were not traced and could not be frozen. This decision highlights that, without such injunctions, there is a very real possibility of crypto assets being dissipated beyond reach.
An English insurer brought an application in response to one of its customers being the victim of cyber extortion. The application identified four defendants including two unknown parties who demanded the ransom in Bitcoin and controlled the Bitcoin respectively, and two operators of the bittrex.com crypto exchange where the ransom was ultimately traced to and held. By the time the ransom was traced, approximately 13.25 of the Bitcoins had been dissipated, with 96 remaining in the account. The insurer brought an application for an injunction relating to the Bitcoin still held in the account.
The English High Court held that the requirements for granting an injunction were satisfied in the circumstances. It referred to Elena Vorotyntseva v Money-4 limited and others and B2C2 Ltd v Quoine Pte Ltd for the proposition that crypto constituted “property” in certain specific circumstances and found that cryptocurrencies such as Bitcoin constituted property under English law, allowing the 96 Bitcoin remaining in the account to be subject to an injunction.
In Nico Constantijn Antonius Samara v Stive Jean Paul Dan the Hong Kong High Court granted an injunction over crypto that was misappropriated by a fraudulent agent. The Hong Kong High Court concluded that fraud had been sufficiently established and that an injunction was necessary to prevent the fraudulent agent's assets from being dissipated.
Dutch citizen Nico from Curaçao had 1,000 Bitcoin that Stive was to sell at 3% commission. Nico was unable to open a Hong Kong bank account to receive the sale proceeds and agreed that they should be deposited into Stive’s bank account then transferred to Nico’s German bank account. Nico subsequently discovered that Stive’s account could not be transferred and claimed the balance (approximately US$2.6 million) as well as all remaining unsold Bitcoin. Nico applied for a Mareva injunction to freeze Stive’s account on the basis that, as Stive was fraudulently using multiple passports and different names, there was a risk of Stive dissipating the bank account monies and crypto.
The Hong Kong High Court found that there was a good arguable case of fraud and dishonesty based on a thorough review of the circumstances of the case, and concluded that there was a real risk of dissipation of assets. It therefore granted the injunction application in favour of Nico.
The Singapore High Court in CLM v CLN and others granted injunctions to prevent the dissipation of crypto assets, together with ancillary disclosure orders to assist in the tracing of stolen crypto and the identification of the parties responsible for the theft.
CLM commenced an action to trace and recover 109.83 Bitcoin and 1487.54 Ethereum that had been allegedly misappropriated by unidentified persons. A portion of the stolen assets could be traced to digital wallets controlled by crypto exchanges with operations in Singapore. CLM sought a worldwide freezing injunction prohibiting the disposal of assets from those digital wallets of up to US$7.1 million, being the value of the stolen crypto assets.
The Singapore High Court found that there were no issues with ordering injunctions against unknown persons based on existing jurisprudence, that the usual principles of American Cyanamid Co v Ethicon Ltd applied, and that the requirements for granting an injunction per Bouvier, Yves Charles Edgar and another v Accent Delight International Ltd and another appeal were satisfied on the facts. The court ultimately found that there was a serious question to be tried and that the balance of convenience lay in favour of granting the injunction as there was a real risk of dissipation of the stolen crypto assets that would prevent recovery even if judgement was obtained in CLM's favour.
Market fluctuations and the decentralised nature of crypto mean it is generally more complicated to establish and quantify loss in crypto-related disputes. This is especially true where a claimant is seeking damages for loss of chance to invest on a platform and make a profit, as well as damages calculated by reference to the purchase price and the market price at a particular point in time.
Andrea Utasy Clark
Legal Director
Cryptocurrency disputes are on the rise in Asia Pacific, often involving cryptocurrency exchange platforms based in Hong Kong / Singapore. It is important for lawyers to work with experts to trace or value the funds to help evidentially with the arbitration at an early stage.
Potential claimants or defendants should consider the nature of the claim to be pursued and the types of available remedies associated with that, including the methodology for establishing any financial loss claimed. Expert evidence will likely be critical to establishing and quantifying, or rebutting, any financial loss claimed.
One of the most significant advantages of international arbitration is the ability to have a resulting award recognised and enforced in a multitude of jurisdictions as if it were a judgment of the local courts, as a result of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. The public policy exception in the New York Convention, however, may preclude enforcement in certain jurisdictions if it would run contrary to its public policy.
Andrea Utasy Clark
Legal Director
A claimant will need to identify jurisdictions both where the respondent has assets, and which are likely to permit the enforcement of the intended arbitral award. This assessment is increasingly complicated when crypto is involved and has potentially severe consequences for a successful claimant, especially where the respondent holds most or all of its assets in a jurisdiction whose public policy does not favour the enforcement of crypto-related arbitral awards.
Some jurisdictions have taken the view that enforcing an award relating to crypto which orders the payment of damages in either fiat currency, as in China, or in crypto, as in Greece, would run contrary to the public policy of that jurisdiction and thus justifies a refusal of enforcement.
A significant issue in the enforcement of monetary awards intended to represent the value of crypto assets arises when the intended jurisdiction for enforcement has laws and regulations against crypto or the conversion of crypto into fiat currencies.
The Shenzhen Intermediate People’s Court set aside an arbitral award issued by an arbitral institution in Shenzhen in Gao Zheyu v Shenzhen Yunsilu Innovation Development Fund Enterprise (LP) and Li Bin on the ground that enforcement would be contrary to public policy. China has banned crypto and does not recognise digital currencies as having any legal status. Therefore, any enforcement of an award of damages in fiat currency to effectively replace or compensate a loss in crypto would constitute a violation of the laws prohibiting dealing with crypto as fiat currency, and therefore a violation of public policy. The Supreme People’s Court of China has since approved the Shenzhen Intermediate People’s Court’s decision to set aside that arbitral award.
G contracted with L to manage L’s personal assets which included crypto. A separate contract was entered into with a company, G and L, under which there was an agreement to sell to G 5% of shares in another company. L and G agreed to pay the company in exchange for the shares while G would also return the crypto to L in instalments. L alleged that G did not perform the contract and commenced an arbitration together with the company against G.
The arbitral tribunal found that G had breached the contract with L and was liable to compensate L for the crypto that was not returned. The tribunal found in the claimants’ favour on other claims as well. G applied to the Shenzhen Intermediate People’s Court to set aside the arbitral award and the application was allowed.
The Shenzhen Intermediate People’s Court relied on the Notice on Precautions Against the Risks of Bitcoins issued by five PRC authorities including the People’s Bank of China stating that crypto does not have the same legal status as fiat currency and therefore would not be circulated and used in the Chinese financial markets as such. The court also cited the Announcement on Preventing the Financial Risks of Initial Coin Offerings issued by seven PRC authorities including the People’s Bank of China prohibiting the provision of exchange services between crypto and fiat currency, buying or selling crypto or acting as facilitators for the trade of crypto and other pricing or information intermediary services.
The court found that the circulation of crypto would disrupt the integrity and security of the Chinese financial system and it set aside the arbitral award on the grounds that the award was, and its enforcement would be, contrary to China’s public policy.
The Court of Appeal of Western Central Greece in decision No 88/2021 ruled that the recognition of a US-seated arbitral award granting damages in Bitcoin would run contrary to Greek public policy.
The applicant, a resident of Germany, was a member of a US company-owned website which enabled members to conclude credit contracts using crypto. The applicant agreed with a Greek resident to finance a venture using crypto (in the value of 1.13662301 Bitcoin) but the Greek resident did not fulfil its repayment obligations. The applicant referred the matter to arbitration and thereafter sought to enforce the resulting award in Greece.
The court of first instance in Greece refused to recognize the award on public policy grounds and the matter was appealed in the Court of Appeal of Western Central Greece.
The Court of Appeal of Western Central Greece reasoned that, since crypto was considered a digital asset under Greek law and not money by the European Central Bank (ECB), the ECB did not guarantee any rights to use crypto Bitcoinas payment. Against this background, the court found that the use of crypto endangered transactions and was harmful to Greece’s interests due to the lack of regulation and tax-free nature of crypto. The Court of Appeal of Western Central Greece held that the recognition of an award that utilised Bitcoin as a decentralised currency unit and ordered the payment of a debt in Bitcoin contravened Greek public policy and therefore refused to enforce the award on this basis as well as in light of the potential disturbance to prevailing standards in Greece regarding the use of crypto in payment agreements.
Co-written by Jennifer Craven of Pinsent Masons.
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