With an increased interest in non-traditional financial transactions and record-high inflation rates, cryptoassets represent the next frontier for sophisticated and savvy investors. But as the number of such transactions increase, so do the quantity and variety of associated disputes. This article highlights four important issues for potential litigants to keep in mind. At all junctures, potential litigants would benefit from well-informed and experienced international dispute resolution counsel to avoid the pitfalls of an emerging and shifting regulatory landscape.
Once considered novel, cryptoassets are now pervasive in the financial world. In a recent Forbes article, Professor Philipp Sandner and Jong-Chan Chung of the Frankfurt School Blockchain Center noted that in 2021 market capitalization of cryptocurrencies reached $3 trillion USD for the first time.1 They forecasted that in the coming year bitcoin will become increasingly attractive, while the overall cryptoassets market will continue to grow in breadth and depth.2
Exponential acceptance and growth are the result of twin phenomena: first, an increased interest in financial transactions that operate outside the confines of traditional banking transactions to provide privacy and pseudonymity; and second, record-high rates of inflation that render cryptoassets potentially more stable financial investments than traditional currencies.3
Of course, as the number of cryptoasset transactions increases, we can expect a proportionate increase in related commercial disputes. This includes straightforward contract disputes over the transfer of cryptoassets and more complicated commercial disputes concerning the operation of smart contracts. Meanwhile, pseudonymity within the cryptoassets market creates risks of other kinds of claims, including fraud, violations of sanctions regimes, money laundering, and violation of terrorist financing regulations. This article highlights four important issues for potential litigants to keep in mind.
Issue 1: Cryptoassets Are Inherently Multi-jurisdictional
At their simplest, cryptoassets are records of transactions (blockchains) maintained on a decentralized ledger or database which can be accessed by all of its members. That ledger is updated whenever a new transaction (ie, the next block in the chain) is verified by a consensus mechanism. Some blockchains allow simple transfers, while others are more complex arrangements that automate transfers of cryptocurrency on the occurrence of specified triggers (also known as smart contracts).
The blockchain (or smart contract) has no specific physical location. It can be accessed anywhere in the world and simultaneously by multiple users in different jurisdictions. Moreover, cryptoassets can move freely between accounts held by individuals across jurisdictions. Thus, any cryptoasset tracing, information gathering exercise, or enforcement process will very likely cross jurisdictional boundaries. This means that the blockchain transaction (and any related dispute) could raise legal issues under different systems of law, each of which may have different levels of preparedness to engage with cryptoassets. At the moment, there is no predictability in how regulators may treat cryptoassets, even within a single jurisdiction. In the United States, for example, whether a particular token or digital asset is an ‘investment contract’ determines whether it will be regulated as a ‘security’ by the U.S. Securities and Exchange Commission (‘SEC’). But even this is not a fixed concept: in June 2018 William Hinman, the SEC’s Director of Corporate Finance, explained that even the regulation of a single specific asset may change over time as its characterization changes.4
Issue 2: Courts May Not be the Best Venue for Cryptoasset Disputes
Disputes involving cryptoassets are often technically complicated, multi-jurisdictional, and raise novel legal issues. These circumstances support the inclusion of arbitration agreements in contracts concerning cryptoassets. Arbitration provides autonomy for parties to tailor the dispute resolution process for their mutual benefit. Parties may select the forum, tribunal, language and procedure governing the arbitration. In particular, the parties’ ability to choose the composition of their tribunal ensures that the dispute will be heard by individuals that the parties trust and consider competent to adjudicate complex disputes that sit at the intersection of emerging law and shifting regulatory environments. This greater level of confidence in the dispute resolution process supports its success. The option to resolve a dispute confidentially may be another reason for parties to choose arbitration as their dispute resolution method.
Importantly, arbitration agreements and awards enjoy enforceability around the world through the power of the United Nations’ New York Convention, to which 169 countries are party. In sum, the Convention requires the courts of party states to give effect to arbitration agreements and recognize and enforce international arbitration awards rendered in other party states, save for some narrow exceptions. This provides a streamlined enforcement process as compared to foreign judgments that do not benefit from a unified enforcement mechanism.
However, the biggest factor in favor of dispute resolution through arbitration may be based in national public policy. Many global jurisdictions are seeing the emergence of anti-cryptoasset rhetoric. In September 2021, the People’s Bank of China banned all cryptocurrency transactions, citing their role in facilitating financial crimes and economic instability.5 Many speculate that their true concerns may be the risk of capital flight and a policy decision to ensure domestic circulation of the public’s wealth.6 Today, Russia’s Central Bank continues to push for an outright ban on all cryptocurrency trading by seeking to amend the Russian 2020 digital assets law.7 At the same time, the Central Bank continues to advance its own digital currency, a ‘digital ruble’, for which trials began in mid-February.8 With the February 24, 2022 invasion of Ukraine by Russia the situation surrounding the digital ruble has become more complex. The traditional ruble has fallen in value, Russia has faced severe economic sanctions, and the nation’s banking institutions have been cutoff the global SWIFT system. The latest news reports claim that Russia’s economic viability depends on the digital ruble and the opportunities this alternate cashless payment system presents.9
While national courts could be susceptible to the rhetoric and policy objectives of regulators and legislators, private arbitral tribunals present a comparatively neutral forum for dispute resolution. This alone could enhance parties’ confidence in the dispute resolution process and its outcome.
Issue 3: Know Your Customer or Accept the Risks
Blockchains may be desirable to investors because they offer the ability to engage in financial transactions without disclosing one’s identity. Each individual blockchain user is identified only by its personal blockchain wallet address, which is similar to a bank account number. In this sense, blockchains are especially unique because they are decentralized. Wallet addresses allow users to interact with other users of the blockchain to send and receive cryptoassets, without identifying the real person behind the transaction.
Unlike traditional financial transactions, they are not implemented by large institutions such as banks (which are required to identify their customers), but instead are implemented through the consensus of the users of the blockchain according to the coding that guides the blockchain. This means blockchain users can protect their transactions and ownership status from appearing in public records. However, blockchain transactions are far from fully anonymous. It may be that the ‘rules’ of a blockchain cause transactions to operate in manner that mirrors traditional banking transactions (which may also require users to disclose their identities).
In 2020, the Financial Action Task Force (FATF), an independent inter-governmental body that aims to protect the global financial system against money laundering, terrorist financing and the financing of proliferation of weapons of mass destruction, issued Recommendations on the regulation of cryptoassets.10 The Recommendations provide standards to address global anti-money laundering and counter-terrorist financing. While many countries have become ‘members’ and implemented the Guidelines, others merely maintain ‘observer’ status with further follow up steps still required.
The outcome is that, in many Asian states, despite recognition of a need to regulate cryptoassets transactions, the focus remains on monitoring conventional financial channels.11 This failure and/or delay has created loopholes for local terrorist groups to raise funds or launder money.12 Unwittingly acting as a transaction counterparty to such an organization can result in unnecessary and protracted litigation or civil and criminal penalties. Similarly, cryptoassets transactions could result in violation of sanction regimes or unintended tax evasion, which also can result in civil and criminal penalties. One solution to these risks may be to only participate in blockchains with rules that mimic traditional banking transactions.
Issue 4: Despite Pseudonymity, Ownership of Cryptoassets Can be Traced
Even if the individual users of a blockchain are anonymous, the blockchain itself will not be. In many cases, the blockchain is publicly accessible, free of charge, and in real time. This means that it is possible to view the transaction history of individual users, as well as their respective balances. In theory, with the right specialized support, each transfer of cryptoassets can be traced from one user to another. Thus, in a litigation context, not only is a user’s asset holding public information, but the related transaction history (ie, sources of those holdings) can also be traced.
This is crucial information should a litigant wish to enforce a judgment against cryptoassets. This said, blockchain users are often sophisticated players who are capable of covering up their tracks if so desired (the same as traditional banking transactions) and it is common for blockchain users to ‘mix’ and ‘peel’ transactions to render their transactions less traceable.
Despite these novel circumstances, traditional approaches to award compliance and enforcement remain useful. Experienced international dispute resolution counsel already know how to leverage contempt of court and other strategies to increase pressure and ensure compliance. These same strategies can be adapted to the cryptoassets context.
While cryptoassets continue to change the face of fruitful financial transactions, in many ways digital transactions are comparable to traditional banking transactions. A key challenge, however, is the murky and shifting patchwork of global regulatory schemes. It is therefore crucial for parties to secure expert legal advice to ensure that transactions do not have unintended consequences and that any related disputes are effectively and efficiently resolved.
About the Authors
Charles H. Camp is an international lawyer with over thirty years of experience representing foreign and domestic clients in international litigation, arbitration, negotiation, and international debt recovery, with specialized expertise in international banking disputes. In 2001, Mr. Camp opened the Law Offices of Charles H. Camp, P.C. in Washington, D.C. to focus on effective, personalized representation in complex, international matters. Mr. Camp teaches international negotiations at the George Washington University Law School.
Kiran Nasir Gore is Counsel at the Law Offices of Charles H. Camp, P.C. Her expertise is in international dispute resolution, including advocacy before U.S. courts, commercial and investment arbitration tribunals, and investigative authorities. Ms. Gore has experience representing globally renowned clients in the banking and finance sector. She also draws on her professional experiences as an educator at the George Washington University Law School and New York University’s Global Study Center in Washington, D.C.
- Prof. Dr. Philipp Sandner, Jong-Chan Chung, ‘10 Predictions For Blockchain, Crypto Assets, DeFi, And NFTs For 2022,’ Forbes, 13 January 2021, available at: https://www.forbes.com/sites/philippsandner/2022/01/13/10-predictions-for-blockchain-crypto-assets-defi-and-nfts-for-2022/?sh=34eceeca4911.
- Anneken Tappe, ‘Surging prices: Key inflation measure hits a 39-year high’, CNN, 12 January 2021, available at: https://www.cnn.com/2022/01/12/economy/inflation-consumer-price-index-december/index.html.
- Remarks by William Hinman at the Yahoo Finance All Markets Summit: Crypto (June 14, 2018), available at: https://www.sec.gov/news/speech/speech-hinman-061418.
- Francis Shin, ‘What’s Behind China’s Cryptocurrency Ban?’, World Economic Forum (January 31, 2022), available at: https://www.weforum.org/agenda/2022/01/what-s-behind-china-s-cryptocurrency-ban/.
- Anna Baydakova, ‘Bank of Russia Proceeds With Digital Ruble, Renews Push for Crypto Ban, CoinDesk (February 16, 2022), available at: https://www.coindesk.com/policy/2022/02/16/bank-of-russia-proceeds-with-digital-ruble-renews-push-for-crypto-ban/.
- Helen Partz, ‘Digital ruble trial goes live as Bank of Russia insists on Bitcoin ban, CoinTelegraph (February 15, 2022), available at: https://cointelegraph.com/news/digital-ruble-trial-goes-live-as-bank-of-russia-insists-on-bitcoin-ban.
- Casey Wagner, ‘Digital Ruble Likely To Help Russia Move Away From US Dollar, Economists Say,’ Blockworks (1 March 2022), available at https://blockworks.co/digital-ruble-likely-to-help-russia-move-away-from-us-dollar-economists-say/
- The Recommendations are available at: https://www.fatf-gafi.org/publications/fatfrecommendations/documents/fatf-recommendations.html.
- Asif Muztaba Hassan and Shamsul Nawed Nafees, ‘Cryptocurrency and Terrorist Financing in Asia’, The Diplomat (February 4, 2022), available at: https://thediplomat.com/2022/02/cryptocurrency – and – terrorist – financing – in – asia/.
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