INTRODUCTION
With the rapid onset of online and virtual reality technology in the 21st century and the COVID-19 pandemic requiring individuals to move to virtual modes of communication, the global virtual reality realm has taken multiple strides and re-emerged as the ‘Metaverse’.
In common parlance, Metaverse indicates a parallel digital world with an integrated network of three-dimensional virtual worlds, which would bring together real users around the globe in the form of avatars through enhanced technology. Being a virtual environment, Metaverse plans to establish itself as the next generation of the internet by allowing users to truly experience and sense the virtual realm as an active participant, and just as an observer on screen.
The unique aspect of Metaverse is the ability to buy, own and resell virtual digital assets in real-time beyond all geographical and social limitations through Blockchain technology. As the technology behind Metaverse develops further widening the scope of activities possible through Metaverse, the possibility of rising legal complexities arises which are likely to create disputes in the future.
Modern-day technology enabled various Courts across India and globally to shift to the virtual mode of hearing when the COVID-19 was at its peak. Such technology also extended to modes of Alternate Dispute Resolution, enabling parties to resolve disputes through virtual proceedings. As dispute resolution gradually moves towards the virtual realm, it is inevitable that Metaverse plays a significant role in future dispute resolution.
This Blog shall discuss the rising mode of dispute resolution in Metaverse, i.e., Blockchain Arbitration, in the wake of the current ever-evolving digital transformations.
BLOCKCHAIN ARBITRATION IN METAVERSE
Within the Metaverse, most transactions are regulated and enabled through Smart Contracts. Smart Contracts essentially are contractual provisions integrated in technology and computer programmes. They are computerized algorithm that automatically perform the terms of the contract once the predefined terms stored on the Distributed Ledger Technology are satisfied.
As reliance on Smart Contracts rises in current times, it is pertinent to note that disputes arising out of Smart Contracts would prove difficult to be adjudicated within the traditional court system, due to lack of technical understanding and jurisdictional complexities.
Blockchain Arbitration attempts to address this issue through the mechanism of on-chain dispute resolution. Within the Smart Contract, the Blockchain Arbitration platform is usually encoded as an oracle, granting control over the contract as per the outcome of the Arbitral proceedings and the Award thereof. Being encoded in the Smart Contract, parties to the contract can instantaneously initiate the dispute resolution process as per the terms of the contract through Blockchain technology.
To aide in the process of Blockchain Arbitration, multiple Blockchain Arbitration platforms have already come into existence such as Kleros, Jur, Aragon and Mattereum. A prominent aspect of such Blockchain Arbitration platforms is the randomness of selection of Arbitrators, on-chain enforcement of Awards through Blockchain technology, minimal or nil human intervention and the prevalence of party anonymity.
In the Metaverse, disputes are likely to arise between the users and the platform, i.e. a “user-platform” dispute, or between users, i.e., a “inter-user” dispute. Such parties enter into contractual relations within the Metaverse through Smart Contracts, which mandates the dispute resolution mechanism as Blockchain Arbitration to be conducted by the suitable Blockchain Arbitration platform.
The Blockchain Arbitration proceeding consists of two mechanisms, namely ‘on-chain’ and ‘off-chain’ Arbitration. In on-chain Arbitration, the Arbitral proceedings are initiated and conducted through the Smart Contract, and the Award rendered is also enforced through the Smart Contract itself. On the other hand, off-chain Arbitration utilizes Blockchain technology for automation of certain aspects of the Arbitral proceedings but does not automate the enforcement of Arbitrator without judicial intervention.
On occurrence of a dispute, the oracle of Blockchain Arbitration present in the Smart Contract automatically redirects the dispute to be resolved through the Blockchain Arbitration platform. Thus, Blockchain Arbitration in the Metaverse signifies an automatic dispute resolution mechanism which is triggered upon the occurrence of a specified dispute, and ensures the rendering of Award and enforcement thereof through Blockchain technology.
Once the dispute is automatically referred to Blockchain Arbitration and the Award is rendered after conduct of the proceedings, the oracle within the Smart Contract ensures that the Award is enforced with respect to the Smart Contract, eliminating the stage of enforcement of Arbitral Awards as per the local laws through traditional Courts.
In essence, the automatic functionality of Blockchain Arbitration executed through Smart Contracts within the Metaverse envisages a form of Arbitration which is truly autonomous to the most possible extent. Its uniqueness and relevance emerge from the fact that it follows the traditional procedure of Arbitration through a digital medium, but does away with the restrictive aspects of traditional Arbitration which requires judicial interference at various stages of the Arbitration proceeding. Thus, the crucial features of Blockchain Arbitration can be enlisted as below:
- Selection of neutral and randomly-chosen Arbitrator(s): In a Blockchain Arbitration proceeding, upon reference of the dispute to such Arbitration, the Arbitrator(s) are automatically chosen from a pool of Arbitrators pre-constituted by the Blockchain Arbitration platform. At the option of the parties, such randomly chosen Arbitrator may be required to preserve their anonymity during conduct of the proceedings. The appointment of randomly-chosen Arbitrators without any information or knowledge of their identity to the parties is integral to ensure that the Arbitrator is neutral and free from biasness.
- Smart Contract based Enforcement: As Blockchain Arbitration usually takes place through Smart Contracts, once the Arbitral Award is passed, the Award is directly enforced through the oracle in the Smart Contract resulting in automatic transfer of the staked asset or any payment from the Award-debtor’s account to the Award-holder as per the Award.
- Party Anonymity: Blockchain Arbitration, in consonance with decentralized and autonomous nature of Blockchain technology, grants significant anonymity to the parties behind the dispute and the Arbitrators if so agreed by the parties. Such anonymous parties can digitally connect to the proceeding in Metaverse through their cryptocurrency wallet, without the need to disclose their identity.
- Effective collection and examination of Evidence: As Smart Contracts are executed on the virtual realm consistent with all the terms and conditions of the contract, evidence required for such disputes are easily collected and examined as all such transactions, actions, events, etc. associated with the Smart Contract take place on the Blockchain technology and can be accessed, monitored and recorded in real time.
APPLICABLE LAW FOR BLOCKCHAIN ARBITRATION
As the Metaverse is a highly decentralized virtual realm bringing together individuals from all over the world, disputes associated with the Metaverse and Smart Contracts should be resolved in accordance with the international law, with the international conventions, customs and general principles which apply to international Arbitrations applying mutatis mutandis to Blockchain Arbitration in the Metaverse.
Similarly, Arbitrators conducting Blockchain Arbitration can utilize such international law, subject to the parties’ agreement, to render the Arbitral Award in Metaverse. Reliance upon such international law would not take away the autonomy and discretion of the Arbitrator, but would rather enable them to converge the legalities of international Arbitration law with the autonomous, digitalized nature of Blockchain Arbitration.
DIGITAL DISPUTE RESOLUTION RULES, 2021
The United Kingdom Jurisdictional Taskforce issued the Digital Dispute Resolution Rules, 2021 (“the DDR Rules”) on 22.04.2021 with a view to provide the Arbitration Rules for dispute resolution through on-chain Blockchain Arbitration enabled by Smart Contracts.
The DDR Rules stipulate the applicable provisions for resolution of dispute related to a Smart Contract through an automatic dispute resolution process of on-chain Arbitration, without the interference of Courts.
As per the DDR Rules, a Smart Contract is a digital asset and may expressly provide for the reference of disputes arising out of a Smart Contract to on-chain Blockchain Arbitration. For this purpose, the Smart Contract must include the statement “any dispute shall be resolved in accordance with UKJT Digital Dispute Resolution Rules” and incorporated into codes of the Smart Contract. A prominent aspect of the DDR Rules is that it does not grant parties the automatic right to oral hearing, and requires the Arbitrator to render their decision within 30 days.
ISSUES CONCERNING BLOCKCHAIN ARBITRATION
Blockchain Arbitration emphasizes upon the anonymity of parties and Arbitrators as a significant aspect of such proceedings. However, when the identity of the Arbitrator is not known, parties may be doubtful of the Arbitrator’s competency and qualification to adjudicate a dispute involving complex technology-based issues.
At the same time, as the Arbitrator’s actual person would not be visible to the parties, questions would also arise regarding the reliability of the Arbitrator and if the Arbitrator is actively present during the entire proceeding.
Anonymity of the parties during the Arbitration proceedings further raises multiple issues, such as whether the parties were actually present during the hearings, whether they abided by the principles of fairness and integrity usually maintained during a traditional Arbitration, and so on.
Moreover, some disputes may arise between an identifiable holder of cryptocurrency wallet or a platform and a completely anonymous, untraceable user of Metaverse. Such anonymous users may also be bots powered by Artificial Intelligence, making them further untraceable. In such circumstances, ensuring a fair and just dispute resolution is rather impossible when the remedy cannot be enforced against any particular individual or account holder.
AMLEGALS REMARKS
As Metaverse rises in popularity amongst the technologically-enabled masses, it is crucial for the individuals actively participating in the virtual realm that a reliable, autonomous and technologically-sound dispute resolution mechanism exists within the Metaverse. Blockchain Arbitration sufficiently addresses this requirement of Metaverse users, as it combines the technology and decentralization of Metaverse with the traditional mechanism of Arbitration.
Most notably, Blockchain Arbitration molds together the existing Arbitral proceedings with Blockchain technology through Smart Contracts, enabling parties to a dispute to resolve their disputes in a cost-effective, efficient, digitally-enabled and automated manner. Combined with the automatic enforcement of Arbitral Awards, Blockchain Arbitration will definitely emerge as a preferred mode of dispute resolution within the Metaverse.
However, as associated with all things decentralized, Blockchain Arbitration on Metaverse also brings forth multiple challenges due to the anonymous nature of the parties to Arbitration and the Arbitrators. Thus, the need of the hour is for international authorities and institutional bodies of Arbitration to prescribe appropriate Rules for Blockchain Arbitration, with an attempt to address the prominent lacunae in such proceedings.
For any queries or feedback, please feel free to get in touch with rohit.lalwani@amlegals.com or riddhi.dutta@amlegals.com.
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