Cryptocurrency, or crypto, has taken the finance industry by storm, and since their inception in 2008, they haven’t stopped evolving. By December 2021, cryptocurrency’s market cap has reached $2.6 trillion.
With such rapid evolution and the ever-growing adoption of cryptocurrency, regulatory, administrative, and privacy concerns are also on the rise.
Eventually, traders, investors, and fans of cryptocurrency should ask, “can I dispute a cryptocurrency transaction?”
Ongoing efforts are made to regulate these decentralized virtual currencies, but a dedicated cryptocurrency dispute resolution system is yet to be set up.
In the meantime, litigation is the most widely used, and arbitration is thought to be the most well-suited dispute resolution procedure for cryptocurrency and blockchain disputes.
To learn more about disputes and chargebacks in platforms such as Coinbase check out Coinbase and Robinhood Disputes: Transactions and Chargebacks and Cryptocurrency Exchanges: Custody, Ownership, and Insurance.
Let’s explore the possible crypto disputes and the available means to resolve them.
Potential Cryptocurrency Disputes
Cryptocurrency disputes can arise due to unsatisfactory transactions or between traders and crypto exchanges in the event of losing their assets or access to them. They may also occur due to trust and agreement breaches.
Other disputes are also prevalent in the NFT space, which you can learn more about in NFT Legal Issues and Disputes.
Cryptocurrency Exchange Disputes
Disputes between traders and cryptocurrency exchanges can arise when an exchange fails to release currencies to their owners upon demand.
This has been the case for many traders on exchanges such as Mt.Gox (Japan), BitGrail (Italy), QuadrigaCX (Canada), and Cryptopia (New Zealand) that went bankrupt and collapsed due to cyberattacks or fraud. Traders on these exchanges lost all or most of their investments with no recourse to recoup them.
Other risks involving cryptocurrency exchanges include the mismanagement of the traders’ crypto wallets or losing their content to cyberattacks.
Yet the most significant risk facing traders and investors is the loss of ownership of the crypto they deposit in exchanges.
In some exchanges, investors’ deposit of the digital assets is automatically considered a transfer of ownership or renders the crypto investors unsecured creditors. An unsecured creditor is a lender who doesn’t obtain collateral for a loan and thus may not recoup his money in the event of insolvency.
This happens when the exchange doesn’t segregate its assets from those of the traders in separate blockchain addresses. The U.S based Coinbase, for example, doesn’t guarantee such segregation, contrary to Gemini.
Such incidents illustrate the crypto exchanges’ vulnerability to hacking and mismanagement, making a crypto dispute resolution body a dire necessity.
Other Cryptocurrency Disputes
Other disputes might arise during crypto transactions, such as an improperly recorded transfer on the public ledger, double-spending, and fraud.
Less common, yet equally distressing, disputes could involve access problems such as recovering the assets’ of deceased individuals and breach of smart contract agreements.
How to Resolve Cryptocurrency Disputes?
Cryptocurrency creates distinctive legal issues that necessitate a distinctive system of dispute resolution, one that suits its autonomous, anonymous, and decentralized nature.
Yet, although no such system is here yet, alternatives such as litigation, arbitration, and decentralized justice platforms are being used to resolve cryptocurrency disputes.
Litigation
At present, many disputes involving cryptocurrency traders are brought to courts. It might be a good option for disputes arising in centralized exchanges (CEXs) that are offered by private companies that act as custodians, such as Coinbase, Kraken, and Gemini.
Conversely, decentralized exchanges (DEXs) are non-custodial peer-to-peer marketplaces where sellers and buyers are directed connected.
Although the traditional legal system has proved inadequate in addressing these disputes, ongoing attempts are made to regulate and keep up with crypto.
Such attempts include Unifrom Laws’ URVCB act that requires cryptocurrency businesses to obtain a license to engage in virtual currency activities, Wyoming’s plans to create crypto-focused banks, Colorado’s exemption of cryptocurrency from state securities regulations, Ohio’s approving tax-paying in cryptocurrency, and Oklahoma’s recognition of cryptocurrency as an instrument of monetary value.
Evidently, the US and international courts and legislative bodies are far from consensus on cryptocurrency’s regulations or even definition.
While the US, UK, Singapore, and others have recognized crypto as property, El Salvador has recognized it as a legal tender, an official currency. Others have either banned it, restricted its trading, or haven’t yet decided.
Courts around the world have seen claims of fraud, money laundry, ownership, and breach of trust against crypto exchanges and issuing companies, suggesting that litigating cryptocurrency is possible.
However, litigation outcomes vary from one jurisdiction to another due to the lack of uniform laws and regulations within and between countries.
How To File a Cryptocurrency Case in US Courts
You can sue a cryptocurrency exchange or issuing company in court where it is physically present or as stated in its terms and conditions.
Exceptions to this are exchanges that have no physical headquarters and thus don’t fall under any jurisdiction. In this case, claims have to be handled per the exchange’s terms and conditions, usually through arbitration.
The steps you should follow can be either found in the exchange terms and conditions or at the court in which you are filing your case.
Cryptocurrency Cases in Courts
A famous example of cryptocurrency litigation is the case brought by B2C2 against the Japanese exchange Quoine before the Singapore International Commercial Court.
The platform’s CTO reversed B2C2’s Quoine trades after he discovered that the former had sold Etherium at a much higher rate at the time.
In retaliation, B2C2 sued Quoine for breach of contract and trust and won.
In the United States, a class-action lawsuit was raised against the cryptocurrency company Nano, known as XRB or Railblocks, after traders lost their crypto after the BitGrail hack/Fraud.
The plaintiffs sought to compel Nano to return the stolen funds through a “rescue fork” to generate new XRB units as recoupment.
After this lawsuit, Nano has updated its terms and conditions to include class action lawsuits and arbitration waivers and imposed arbitration as the only dispute resolution option.
Arbitration of Crypo Related Disputes
Arbitration has been found the closest-fitting legal system to blockchain and cryptocurrency disputes because of its flexibility and ability to preserve the anonymous and decentralized nature of cryptocurrency transactions and traders.
Two types of arbitration are currently used to resolve cryptocurrency disputes: traditional and online crypto-arbitration.
Traditional Arbitration
Traditional arbitration is a primary recourse for crypto disputes resolution. It offers confidentiality, the ability to appoint arbitrators, and the enforcement of arbitral awards.
Major providers of arbitration such as the American Judicial Arbitration and Mediation Services (JAMS) and the American Arbitration Association (AAA), and France’s International Court of Arbitration of the International Chamber of Commerce (ICC) have taken measures to address crypto, smart contracts, and blockchain disputes.
These arbitration centers accept international claims regarding crypto disputes. Find their fees and other centers’ in this comprehensive arbitration fees guide.
Online Crypto-Arbitration
Attempts to make arbitration more suited to the distinctive cryptocurrency legal issues. Initiatives such as Cryptonomica, Blockchain Arbitration Society, and Datarella’s CodeLegit seek to bridge blockchain technology and law by offering arbitration services.
Online crypto-arbitration address the centralized nature of traditional arbitration by following the “ex aequo et bono (according to what’s equitable and good)” rule rather than a particular national law, unless otherwise desired by the involved parties.
The CodeLegit’s Blockchain Arbitration Library for smart contracts offers parties the ability to pause the further execution of a smart contract if they suspect a contract breach, an otherwise impossible action in smart contracting.
Arbitration awards produced on these platforms are encrypted and made public on blockchains, such as Bitcoin and Ethereum.
It is noteworthy to mention that these alternatives are relatively cheaper than most traditional arbitration centers.
Decentralized Justice Platforms
The most recent dispute resolution mechanism in this list is decentralized justice platforms. These are platforms incorporate arbitration mechanisms such as neutral decision-makers into decentralized crypto platforms.
Essentially, they select anonymous third-party adjudicators from different parts of the world to make a determination on a crypto transaction. The adjudicator, or group thereof, will vote on which party should receive the disputed cryptocurrencies.
Leading platforms in this category include Kleros and Aragon Court.
Kleros uses game theory incentives to encourage the anonymous jurors to make a unanimous vote on a particular dispute. It categorizes disputes by types and topics and assigns specialized jurors to each one.
Similarly, Aragon Court also relies on incentives to help jurors reach a consensus. However, it specializes in complex disputes that smart contracts can’t resolve.
These platforms differ from traditional arbitration primarily because of the decentralized decision-making process. They add anonymity and decentralization to the arbitral tribunal.
Moreover, the agreements reached through these decentralized justice platforms are enforced through self-executing smart contracts.
In traditional arbitration, awards are enforceable by central authorities if a written agreement is produced and signed by the involved parties.
Conclusion
Cryptocurrency disputes can be resolved through litigation, arbitration, or decentralized justice platforms. However, they are all far from perfect for the technological novelty known as decentralized virtual currencies.
The world expects the creation of a dedicated and universal blockchain dispute resolution system that supports and advances its fundamentals.