In the rapidly evolving digital landscape, cryptocurrencies have emerged as disruptive sources, revolutionizing traditional financial systems and introducing unique legal challenges. As the global adoption of crypto continues to gain momentum, disputes arising from their use, ownership, and transactions have become increasingly prevalent. International arbitration stands as a vital mechanism for resolving cross border disputes by offering parties a neutral platform to navigate the complex legal issues arising from the decentralized nature of cryptocurrencies.
Developing Rules & Regulations
In April 2021, the UK Jurisdiction Taskforce developed and published the brief but innovative, Digital Resolution Rules, designed to guide parties through a procedural framework that allows for the resolution of disputes relating to, among other digital technologies, cryptocurrency. The Rules include a default period of thirty days where an arbitral tribunal must determine a dispute within this timeline. Another key benefit of these rules is anonymity between parties – although the tribunal might request information regarding the identity of the parties, the parties can remain anonymous as to each other. The Rules also specify that English law is the default procedural law that governs the dispute as well as the arbitration agreement, which shortens the arbitration time period as parties cannot challenge jurisdiction.
The Singapore International Arbitration Centre (“SIAC”) developed an emergency arbitration mechanism that has become very useful in preventing parties from quickly ridding themselves of cryptocurrencies. The SIAC Rules mandate an appointment of an Emergency Arbitrator within one day of an emergency arbitration application; the Arbitrator is then required under the rules to put forth either an interim order or an arbitral award within fourteen days of appointment.
Taking Swift Action
Due to the easy nature of transfer and disposition of cryptocurrencies to anonymous sources, it is essential that parties move quickly to have assets frozen pending a decision by an arbitral tribunal.
The United Kingdom
The English High Court ruled in AA v. Persons Unknown [2019] EWHC 3556 that Bitcoin, and other cryptocurrencies, are considered property under English law and therefore can be subject to a proprietary injunction. The Bitcoin at issue in AA v. Persons Unknown were ransomed in a cyberattack on a Canadian insurance company – the cyberattack prevented the insurance company from accessing its IT systems and the hackers demanded 109.25 Bitcoin (USD 950,000) for the insurance company to regain access to its IT systems. The Canadian company was insured against cyberattacks through an English insurance company – the insurer was able to track down the ransom payment and sought a proprietary injunction to recover the Bitcoins.
The High Court debated if cryptocurrency falls into traditionally identifiable property under English law. English case law specifies that property falls into two categories – (1) a thing in possession and (2) a thing in action. Although the Court deliberated whether cryptocurrency can be truly “possessed” under English case law, the Court ultimately came to the conclusion, after referring to the UK Jurisdiction Taskforce analysis on intangibles, that cryptocurrency may be treated as property and thus may be possessed. The Court not only granted the proprietary injunction but also required the owners of the crypto exchange to reveal the identity of the hackers in order to ensure the proprietary injunction can be enforced.
Hong Kong
On the other side of the world in Hong Kong, the Hong Kong Court of First Instance also determined that cryptocurrencies are property and can be held in trust. In Re Gatecoin Limited [2023] HKCFI 914 involved a Hong Kong cryptocurrency exchange that was in liquidation and three different groups of customers who agreed to three different sets of terms and conditions. The Liquidators tasked to determine which customers agreed to which terms & conditions, argued in Court that only two out of the three groups of customers were entitled to crypto held and protected by Gatecoin, while the third group only had a contractual claim against Gatecoin for the cryptocurrencies.
In order to determine whether cryptocurrency can be held in trust, the Court had to first determine whether cryptocurrency can be considered property. After reviewing the technology behind cryptocurrency and blockchains, Justice Linda Chan took and applied the principles from an English land law case: National Provincial Bank Ltd v Ainsworth and determined that cryptocurrency is: (1) definable, (2) identifiable to third parties, (3) capable of assumption by third parties, and (4) has a degree of permanency or stability. The Court found that cryptocurrency satisfies all four requirements and thus is able to be held in a trust. Just as other intangibles, such as stocks and shares, cryptocurrency is now considered property by the Hong Kong Court of First Instance, which affords parties certainty as well as solid legal protections in cases of dispute.
Singapore
The Singapore High Court granted an unprecedented freezing injunction against “persons unknown” for about USD 7 million in cryptocurrency assets stolen from Plaintiff in the case CLM v. CLN and others [2022] SGHC 46. While on vacation, Plaintiff requested that an acquaintance of his retrieve some cryptocurrency assets that were contained in two separate hot wallets[1], which were controlled by Plaintiff via his phone. Plaintiff’s acquaintance accidentally revealed the access code to the hot wallets to persons unknown who in turn stole the Plaintiff’s cryptocurrency assets. The Plaintiff was completely unaware of the identity of the perpetrators and thus requested from the Court a worldwide freezing injunction as well as a proprietary injunction to stop the cryptocurrency from being dissipated to anonymous sources even further.
In order to grant a proprietary injunction the Court had to determine whether the Plaintiff had any proprietary interest in the cryptocurrency assets, which was decided via a two-part test: (1) there is a serious question to be tried and (2) whether the balance of convenience[2] is in favor of granting an injunction. Through an analysis of a New Zealand case as well as the English land law case, National Provincial Bank Ltd v Ainsworth, the Singapore High Court determined that cryptocurrency satisfy the definition of property right as detailed in National Provicial Bank Ltd. Under this English ruling, a property right must be – (1) definable, (2) identifiable to third parties, (3) capable of assumption by third parties, and (4) has a degree of permanency or stability.
The Singapore High Court also granted a worldwide freezing injunction to prevent Defendants from scattering the stolen cryptocurrency funds. The Court noted that due to the volatile nature of cryptocurrency, it is essential that swift action be taken as dissipation of cryptocurrency takes a mere click of a button to sources anonymous and unknown. Actions like these taken by the courts, not only legitimize cryptocurrency, but also create security for parties using cryptocurrency in daily transactions.
Embracing the Future
The intersection of international arbitration and cryptocurrency presents a compelling landscape for parties seeking effective dispute resolution in a rapidly evolving digital era. As the global economy continues to be even more interconnected, cryptocurrencies have emerged as a prominent force bringing with them unique legal challenges and opportunities. International arbitration offers a flexible and efficient framework to address cross-border disputes involving digital assets as well as providing parties access to a neutral forum.
[1] A hot wallet is a cryptocurrency wallet that is always connected to the internet and a cryptocurrency network. A cold wallet is a cryptocurrency wallet that is not connected to the internet or a network and is a secure solution for preventing hackers from reaching and stealing cryptocurrency assets.
[2] The balance of convenience is a test applied by the courts to determine whether an injunction should be issued against the Defendants allegedly unfair practices.