The English courts and international arbitral institutions have observed a steady uptick in crypto disputes (especially fraud claims) as investment in cryptocurrencies has become more widespread. The value of these disputes is on the rise, and they increasingly
involve sophisticated commercial entities such as crypto exchanges and lenders, not just individuals.
Familiar substantive and procedural points of law have had to be applied to a novel digital context — with judges asked to determine, for example, whether Bitcoin constitutes personal property (yes), whether it can be provided as security for costs (no),
and whether individuals engaging in the trading of cryptoassets may qualify as consumers under consumer protection legislation (yes).
The landmark rulings of 2023 have shown not just that crypto cases are on the rise, but have also given us an insight into the ability of English courts handle crypto disputes as well as an outlook to what we can expect looking to 2024 and beyond.
Changing tides: Hot topics across crypto litigation in 2023
The overarching theme across crypto litigation was not just that there is more of it, but also that the courts are showing themselves properly able to deal with crypto disputes. Among other challenges, the courts have had to grapple with defining what is
the nature of these new technologies and to consider how established legal concepts apply to them.
Significant litigation cases in 2023:
1: Service permitted via NFT alone
Traditional methods of service are likely to be unavailable in crypto fraud claims, in which the defendant’s identity, let alone their address, is often unknown. The courts have therefore shown a willingness to permit proceedings to be served by unconventional
means. In 2023, a claimant was allowed to serve proceedings solely by uploading a non-fungible token (NFT) to a cryptoasset wallet that she believed to be held by the defendant. This decision illustrates the flexibility of the courts in addressing crypto-fraud
as reports of cryptoasset investment scams increase.
2: Developers may owe fiduciary duties to crypto holders
Other issues which arose in 2023 related to the liability of crypto exchanges and software developers rather than just the people who are trading. In February, the UK Court of Appeal dismissed an application to set aside service out of the jurisdiction, holding
that there was a serious issue to be tried as to whether Bitcoin software developers owed fiduciary duties to Bitcoin holders. Interestingly, the Judge accepted that software developers could conceivably have both negative and positive duties – so a duty not
to introduce software that, for example, would be advantageous to the software developers but not to the users, as well as a positive duty to fix bugs or to transfer back stolen Bitcoin — although it was acknowledged that this would involve “a significant
development of the common law on fiduciary duties”.
3: Successful challenge to injunction against crypto exchange
The UK High Court, for the first time, discharged an injunction requiring a crypto exchange to preserve cryptocurrency alleged to have been obtained by fraud. This case considered practically how crypto deposits are held by the crypto exchange and whether it
would make sense in that context to apply a proprietary injunction to those assets. Given that crypto deposits were pooled by the exchange (with each customer receiving credit in lieu), the High Court found that it would have been a “futile… and possibly impossible
exercise” to isolate and preserve the claimant’s sum of cryptocurrency. The injunction therefore served no useful purpose — and a bona fide purchaser defence was likely available to the exchange (a point the claimant had omitted to explain at an earlier “without
notice” hearing).
Crypto arbitration on the rise
Similarly to litigation, we are seeing more and more arbitration in the crypto space. This is particularly so for crypto exchanges and lenders, which can benefit from the procedural flexibility, confidentiality, and broad international enforceability of
arbitration awards.
While the courts have risen up to the challenge of understanding the technical issues and technological developments, sometimes parties prefer to refer their disputes to practitioners with particular expertise in this area, or even software engineers for
very technical disputes.
Recent developments serve as a timely reminder to closely review the terms of arbitration agreements and the procedural rules they incorporate, particularly with respect to the possibility of class arbitration in the US and suitability of arbitration as
a dispute resolution mechanism with consumers in the UK and the EU.
Significant developments in crypto arbitration:
1: Class arbitrations in the crypto space are on the rise in the US.
One interesting development has been the advent of class arbitrations in the crypto space in the US. While class arbitration is not quite as straight-forward as class litigation, which is a well-established system in the US, we are starting to see more
and more class arbitrations against crypto exchanges and lenders, and a number of cases remain on foot. Both parties must expressly consent to class arbitration, and agreements typically incorporate a host of procedural rules through the choice of a supervising
arbitral institution. For example, the American Arbitration Association’s consumer arbitration rules allow for individual claims to be heard in batches of up to 100. On the basis of such rules, 96 claimants brought a consolidated arbitration demand in October
2022 against a crypto exchange over an alleged wallet-draining scam. In contrast, many other arbitral institutions do not permit class arbitrations, and parties must carefully consider the issue when deciding which arbitration to select in any terms of service.
2: Disputes with individuals in the UK and the EU may not be arbitrable under mandatory consumer protection legislation.
Another interesting development is that in the UK and the EU, there are restrictions on the ability to agree to arbitration with consumers. Courts in those jurisdictions may refuse to enforce arbitral awards that are contrary to mandatory consumer protection
law. Indeed, for this reason, an English court took the rare step of refusing to enforce a foreign award related to a crypto dispute in July 2023. A UK-based lawyer, who was acting in an individual capacity, had a dispute with a crypto exchange that had arbitration
in its terms of service. The crypto exchange pursued the arbitration in California and won an arbitral award of damages, yet the English court refused to enforce the award on the basis that it violated public policy. Under the Consumer Rights Act (CRA), arbitration
agreements can be considered Unfair Terms in certain circumstances, and this this was an unfair term in the court's ruling. The case serves as a reminder that in order to ensure enforceability of awards, adaptations need to be made for clients in the UK and
the EU which can be challenging for crypto exchanges that operate on a global level.
Looking ahead – what’s on the horizon for crypto?
Setting a precedent going forward, the 2023 crypto litigation landscape shows us that we can expect the volumes of crypto disputes to rise and exchanges and lenders to increasingly become involved in litigation as well.
In turn, there is going to be increasing regulation around crypto assets. On 8 October 2023, the financial promotions regime was extended to cryptoassets. Since then, all cryptoasset promotions made by non-authorised persons have required approval under
s.21 FSMA from an authorised person, unless they are exempt or the promoter is registered as a cryptoasset business under the Money Laundering Regulations. Once issued, 143 market participants were added to the FCA’s “warning list” overnight for non-compliance.
Further regulation in the space is anticipated. At the end of October 2023 the Treasury published its response to a consultation on the future regulatory regime for cryptoassets, something which is considered to be a matter of urgent concern. Looking towards
2024 and beyond, these developments will make for a fertile ground for increased regulation as well as regulatory disputes as participants in the crypto industry get to grips with the new normal.