INTRODUCTION
What are Cryptocurrencies?
Cryptocurrencies, or virtual currencies, are a new class of digital instruments, which exist without physical counterparts but can be exchanged peer-to-peer through blockchain technology. Such currencies are not issued by any sovereign institution or commercial banks, and thus, do not hold the value of legal tender.
A significant aspect of cryptocurrency is that it denotes a form of cryptographically decentralized digital currency, wherein the issuer is a decentralized entity not within the control of the Government.
The European Commission has, in a Proposal for the European Government, defined “virtual currency” as “a digital representation of value that is neither issued by a central bank or a public authority, nor necessarily attached to a fiat currency, but is accepted by natural or legal persons as a means of payment and can be transferred, stored or traded electronically.”
Cryptocurrency exchanges are platforms enabling users to trade cryptocurrencies for other assets, including conventional money or other cryptocurrencies. They act as a marketplace facilitating the buying and selling of cryptocurrencies. Binance is one such cryptocurrency exchange which provides a platform for trading of cryptocurrencies through its website or mobile application.
Arbitrability of Cryptocurrency Disputes
With the advent of cryptocurrency, individuals and entities alike have invested in cryptocurrencies considering its promising returns and lack of governmental control. However, investment in cryptocurrency is not immune from disputes, as cryptocurrencies are not subject to any governmental approach for its regulation.
Certain areas of dispute exist in the sphere of cryptocurrency and its transactions, including commercial disputes pertaining to transfer of cryptocurrency; the enforceability of smart contracts (which automate cryptocurrency transfers when specific triggers occur); and security concerns concerning its market infrastructure. Additionally, cryptocurrency transactions may also be misused for fraudulent purposes, including money laundering, terrorist financing, cybercrimes, trafficking, etc.
Keeping in mind the possibility of occurrence of such risks while investing in cryptocurrencies, investors would prefer having access to timely and affordable dispute resolution to effectively address and deal with such issues.
International Arbitration is one such form of dispute resolution that efficiently and expeditiously enables the resolution of complex commercial disputes, including disputes associated with cryptocurrencies.
It is pertinent to note that a major factor attracting investments in cryptocurrencies is their highly unregulated and decentralized structure. Likewise, cryptocurrency investors are more likely to prefer Arbitration Proceedings for the resolution of cryptocurrency disputes wherein the parties can decide upon the Arbitrators, governing law, seat and venue themselves without any governmental intervention.
A prominent practice of the cryptocurrency industry is to stipulate the Arbitration Forum, Arbitration Rules, venue and other Arbitration Terms for cryptocurrency dispute resolution, in the governing User Agreements of each cryptocurrency trading platform. Some User Agreements also impose restrictions on claims and remedies, such as a one-year time limit for raising claims, restrictions on payment of punitive damages, etc.
Binance, being a large-scale cryptocurrency exchange platform, has attracted investment-related disputes in the last few years. This article shall discuss the disputes in brief and the role of International Arbitration for their resolution.
BINANCE DISPUTES: CASE STUDIES
1. International Chamber of Commerce (“ICC”) Arbitration Proceedings initiated against unjust liquidation of an Investor’s cryptocurrencies
Background:
An unnamed European investor alleged that a large amount of his cryptocurrency was sold by Binance without his consent and against his interests by the automated liquidation system of Binance. The Investor also alleged that the unauthorized liquidation of his cryptocurrency was due to conflict of interest of Binance.
Proceedings:
The Investor initiated ICC Arbitration Proceedings against Binance, seeking compensation of more than $140 million. The claim was initiated against all entities associated with Binance across the world, as Binance has not publicly disclosed the location of its official headquarters. The ICC Arbitration Proceedings have begun in Switzerland, with one Arbitrator appointed by the Investor, one by the entities of Binance, and the third Arbitrator mutually appointed by the two Arbitrators.
2. Hong Kong International Arbitration Centre (“HKIAC”) Arbitration Proceedings for the losses suffered by multiple investors during the May outage of the Binance platform
Background:
On 19.05.2021, the Binance platform suffered a major outage when the crypto markets underwent a major drop in prices. The outage occurred for an hour when approximately thousands of trading accounts on Binance froze and became untradable for multiple hours.
These investors incurred significant losses as they were unable to sell their cryptocurrencies on Binance when the cryptocurrency exchange rates kept dropping drastically. The margin trading features of Binance further caused the cryptocurrencies of some traders to be forcibly liquidated, as their collaterals were much lesser than the scale of their losses. The investors alleged that even after approaching Binance for support and compensation, Binance either refused to or poorly compensated such investors.
Proceedings:
Aggrieved by the same, around 2300 claimants are in the process of jointly initiating Arbitration Proceedings in the HKIAC. This is likely to form the largest International Consumer Arbitration in the world and a landmark case for the cryptocurrency industry.
The major issue of concern for the Arbitration Proceedings is the stateless nature of Binance, as it is not registered officially under the laws of any country, remaining unregulated by any country’s law despite having such a huge presence worldwide.
Notably, most of the claimants were engaged in the trading of cryptocurrency derivatives, which are contracts or products whose values are determined by the underlying cryptocurrency. Therefore, arbitrating over such a complex dispute would be a challenging task, keeping in mind the regulatory norms applicable on derivative trading across the world.
KEY CONSIDERATIONS FOR INTERNATIONAL ARBITRATION OF THE BINANCE DISPUTES
- Jurisdictional Issues: Binance either does not have, or has not disclosed the details of its official headquarters. Likewise, investors may face difficulties in determining the jurisdictional realms of Binance. However, Binance has declared in its Terms of Use that all disputes would be referred to HKIAC, having seat of Arbitration at Hong Kong and subject to the laws of Hong Kong.
- Multiple Corporate Entities: An unrevealed number of corporate entities are associated with the Binance platform, including Binance Holdings Limited, a company incorporated in the Cayman Islands and Binance Limited, a company incorporated in Hong Kong. Hence, the joining of proper parties in the Arbitration Proceedings may prove challenging for the claimants, as Binance has not yet disclosed the identities of legal persons who act as ‘Binance Operators’ under the Terms of Use.
- Waiver of Class-Action Lawsuits: The Terms of Use of Binance provide for waiver of class action by all its users, which would hinder the class-action Arbitration Proceedings before HKIAC. However, it is likely that the waiver was incorporated in the Terms of Use only after the May-outage dispute arose.
- Applicability of the Laws of Hong Kong: Even though the Terms of Use of Binance stipulate the laws of Hong Kong as the governing law, the laws of Hong Kong prohibit the trading of unlicensed derivatives within its territory. Thus, an isolated application of the Hong Kong laws to a dispute involving highly unregulated, decentralized services including the trading of cryptocurrency derivatives, which is beyond any regulatory control would defeat the purpose of initiating the Arbitration Proceedings.
- Issues in Enforceability of Awards: As many jurisdictions are yet to determine the legal status of cryptocurrencies, any Award associated with a cryptocurrency dispute would be subject to judicial scrutiny for its enforcement by traditional Courts. Enforcement of such Awards may be undertaken through on-chain methods, such as automatic transfer of ownership of cryptographic assets to the winning parties by executing a smart contract through blockchain technology.
AMLEGALS REMARKS
Binance, as a cryptocurrency exchange platform, has witnessed large-scale growth in its user base as more and more investors undertake cryptocurrency and derivative trading across the world. Although the decentralized and unregulated aspect of the Binance platform may appeal to many, it is also subject to a multitude of legal concerns regarding its jurisdiction, governing laws, and so on.
Cryptocurrency disputes are best suited for resolution through Arbitration, as evident in the Binance disputes before the ICC and HKIAC. The issues involved in both the Binance disputes are of complex and unprecedented nature concerning cryptocurrency and its derivatives.
Thus, the ICC and HKIAC Arbitration Proceedings and enforcement of Awards therein would be a cumbersome, albeit noteworthy process; laying down the stepping stone for regulation of cryptocurrencies and Arbitration as the preferred mode for resolution of cryptocurrency disputes.
For any queries or feedback, feel free to get in touch with rohit.lalwani@amlegals.com or riddhi.dutta@amlegals.com.
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