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posted 7 months ago
Turgut Aycan Özcan, LL.M.
Managing Partner of Özcan Legal
Introduction
The volume of cryptocurrency deals steadily increases by each year in all around the world, including Türkiye. This, of course, on the other hand, increases the number of disputes that may arise from cryptocurrency deals. For instance, Crypto Traders v. Binance can be given as one of the most important examples for cryptocurrency-related arbitration.
This is a commercial arbitration case filed by 73 individuals against Binance before Hong Kong International Arbitration Centre in 2021 to claim their losses occurred due to the failure of Binance platform on 19 March 2021 in the relevant markets. To the best of our knowledge, this arbitration case is still pending.[1]
In view of the foregoing, it is very likely that the number of disputes arising from cryptocurrency may reach hundreds or more in the near future. This fact, for sure, will compel the relevant parties and their legal counsels to consider arbitration as a final remedy to solve the disputes in question.
This Article aims to explain (i) the role of arbitration in cryptocurrency disputes and (ii) general practice as to the arbitrability of cryptocurrency disputes in the world and lastly (iii) to assess the arbitrability of cryptocurrency disputes in Türkiye by taking into consideration the latest regulations which were entered into force in Türkiye regarding cryptocurrency transactions.
The Role of Arbitration in Cryptocurrency Disputes
When discussing the intersection of arbitration and cryptocurrency we delve into a complex and evolving legal landscape that addresses the unique challenges posed by digital currencies and blockchain technology. The integration of arbitration in the cryptocurrency realm is not only innovative but also necessary given the global, decentralized and often ambiguous regulatory environment surrounding digital assets.
Cryptocurrency disputes may arise from various scenarios reflecting the diverse applications and rapid development of this technology. For instance, disputes may occur when smart contracts do not execute as programmed due to bugs or misinterpretations of the contract terms. Besides, issues with deposits, withdrawals, trading irregularities, or account suspensions at cryptocurrency exchanges may also lead to some disputes. On the other hand, there may be conflicts over the management, delivery, or performance of ICOs (Initial Coin Offerings) or specific token-related promises as well. Some disputes may also result from the loss or theft of cryptocurrencies due to security breaches or wallet mismanagement. Last but not least, the nascent Decentralized Finance (DeFi) sector, which includes everything from lending platforms to yield farming, often sees disputes over contract terms, performance, and the distribution of financial returns.
Arbitration offers several benefits that are particularly well-suited to the nature of cryptocurrency disputes. For instance, arbitrators can be chosen for their specific expertise in blockchain and cryptocurrency, ensuring that the nuances and technical aspects of such disputes are well understood. Moreover, arbitration procedures can be customized to the needs of the parties, often allowing for faster resolution compared to traditional court systems. As to cross-border enforceability, the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards ensures that arbitral awards are recognized and enforceable in over 160 countries, which is crucial for cryptocurrency disputes that often involve parties from different jurisdictions. Besides, unlike court proceedings, which are typically public, arbitration can be conducted in a confidential manner, preserving the privacy of the parties involved.
While arbitration is beneficial, it also faces specific challenges in the context of cryptocurrencies especially because the legal framework around cryptocurrencies is still developing and varies significantly by country, which may lead to uncertainties in arbitral proceedings. On the other hand, the high volatility in cryptocurrency values may complicate the assessment of damages or restitution. Finally, gathering and presenting digital evidence, especially from blockchain and decentralized systems, requires technical expertise and therefore, it may be logistically challenging.
Developments and innovations in cryptocurrency arbitration are currently seeing innovative approaches to integrate arbitration as a dispute resolution mechanism for cryptocurrency disputes more effectively. For instance, blockchain-based arbitration platforms aim to automate parts of the arbitration process using blockchain technology to potentially reduce time and cost.[2] Additionally, some initiatives are exploring the incorporation of arbitration clauses directly within smart contracts, which can automatically trigger an arbitration process if a dispute arises.[3] There are also proposals for creating Decentralized Arbitration Organizations (“DAOs”) that may serve as arbitration bodies, utilizing collective voting mechanisms to resolve disputes. Kleros can be given as an example to these DAOs.[4]
Although the aforementioned developments and innovations in cryptocurrency arbitration are welcomed, since the arbitration mainly depends on party autonomy and the consent of the parties to solve their dispute through a specific arbitration mechanism we are in the view that it may take some time for the stakeholders in cryptocurrency to bring their disputes to these not very well known institutions due to the concerns such as fair trial and more importantly enforceability of the awards issued by these institutions which is directly subject to rules and regulations of each state. Hence, we discuss the arbitrability of the disputes arising from cryptocurrency transactions in the section below.
The Former Vice President of the ICC International Court of Arbitration Teresa Cheng asks these two questions as to the arbitrability of cryptocurrency-related disputes (1) if trading and circulation of the relevant cryptocurrency is prohibited in the relevant jurisdiction under its national law, can we still arbitrate crypto-related disputes in that jurisdiction? (2) if the relevant cryptocurrency exchange has failed to comply with the local regulations, will it affect the legality or arbitrability of those transactions conducted over the exchange? [5]
For instance, in Mainland China, where redemption, trading and circulation of virtual currencies are prohibited, there may be challenges to a crypto-related arbitral award. In 2018, the Shenzhen Intermediate People’s Court set aside an arbitral award compensating the claimant the US dollar equivalent of Bitcoin which was then converted into Renminbi on the ground that awarding damages in US dollars instead of Bitcoin was against the public interest.[6] Therefore, while determining whether a cryptocurrency-related dispute is arbitrable or not in a specific jurisdiction, it would be fair to look at the local regulations of that state regarding the trade of crypto assets. In case where trading and circulation of crypto assets are prohibited in the relevant jurisdiction, then even if the arbitral proceedings were conducted to solve the dispute arising from a crypto asset trading, the award may not be enforced in the relevant state due to the violation of its public policy.
The second important legal issue as to the arbitrability of cryptocurrency disputes seems to be the scope and application of national arbitration laws of the states and the situation of the parties (i.e. on the one hand service provider and on the other hand customer/consumer) who have agreed to submit their disputes to arbitration instead of the local courts. In 2023, both the US Supreme Court and the UK Supreme Court has issued landmark decisions in this regard.
The US Supreme Court’s ruling in Coinbase Inc. v. Bielski (link here) was related to cryptocurrency exchange Coinbase Global Inc’s request to halt customer lawsuits while it pursues appeals to move the disputes out of courts and into private arbitration. Coinbase asserted that its user agreement requires disputes to be resolved through arbitration and that under the Federal Arbitration Act, action in trial courts must stop when a denial of a request to compel arbitration is appealed. Hence, the case before the US Supreme Court in fact was not directly related to the arbitrability of crypto disputes, but regarding the question whether lower courts must stay a trial while an appeal on arbitrability is pending. After its review of the case, the Supreme Court has ruled that a lawsuit initiated by the customers of cryptocurrency exchange should be automatically stayed while the company appeals a ruling rejecting its bid to compel arbitration.[7]
The UK Supreme Court’s ruling in the Chechetkin v Payward LTD & Others (link here) provides significant information as to how the High Court interprets the arbitration awards and agreements between crypto exchanges and their customers as well. In this case, the customer has initiated legal proceedings against Payward alleging that the trading platform’s multiple trades violated the Financial Services and Markets Act 2000, and claimed a compensation of £600,000. On the other hand, Payward has asked the High Court to dismiss the case filed by the customer and also initiated the arbitral proceedings based on the arbitration clause in the contract between the Parties providing for arbitration in San Francisco under the JAMS Rules. The Sole Arbitrator in this arbitration has dismissed the customer’s claims and concluded that the Payward held no obligation towards him. Furthermore, the customer was also ordered not to initiate or to pursue legal action against Payward in any court due to being bound by the arbitration clause. Subsequently, Payward has initiated legal proceedings to enforce this award in the UK.
However, the High Court has refused to enforce this arbitral award on the following grounds:
In addition to aforementioned two landmark decisions rendered by the US Supreme Court and the UK Supreme Court in 2023, recently in April 2024, the Ontario Superior Court, in the case of Lochan v Binance Holdings Limited, 2023 ONSC 6714 (judgment available here), has ruled against Binance Holdings Limited in its attempt to stay a class action lawsuit in favor of arbitration, which all users had previously agreed to use the service.
The Court has determined that the arbitration clause is unenforceable based on public policy considerations, emphasizing its high cost and inaccessibility for Canadian class members to initiate arbitral proceedings in Hong Kong. This decision was guided by the principles established in the Supreme Court of Canada’s ruling in Uber Technologies Inc v Heller, 2020 SCC 16, stating the need for arbitration agreements, especially in “click-through” contracts, to be realistically accessible for users.[9]
In view of the foregoing, even though the decision of the US Supreme Court seems in favor of the arbitrability of cryptocurrency disputes based on the arbitration agreement between the parties, the interpretations of the UK Supreme Court and the Ontario Superior Courts on the arbitrability of the disputes arising from crypto assets are generally based on public policy concerns, especially regarding the parties’ positions and ability to have reasonable access to arbitration.
The Arbitrability of Cryptocurrency Disputes in Türkiye
Before specifically analyzing whether cryptocurrency disputes could be arbitrable in Türkiye, it would be helpful to provide brief information on the legal landscape regarding arbitrability. There are two national laws regulating arbitration in Türkiye. The articles from 407 to 444 of the Civil Procedure Code (the “CPC”) regulate domestic arbitration and the International Arbitration Law (the “IAL”) regulates the arbitral proceedings having a foreign element.
Based on the principle of freedom of contract, most of the legal matters are generally considered arbitrable in Türkiye. The arbitrability issue is addressed both in the CPC and the IAL. Article 408 of the CPC provides that the disputes arising from the rights in rem over the immovable properties or from the matters which are not subject to the consent of the parties are not arbitrable. Similarly, Article 1 of the IAL also states that this Law is not applicable to the disputes arising from the rights in rem over the immovable properties based in Türkiye or from the matters which are not subject to consent of the parties. Therefore, in principle, all disputes which are subject to the consent of the parties and which are not related to the rem in rights over the immovable properties are arbitrable under the relevant legislation of Türkiye.
Therefore, as explained in Section II of this Article, since cryptocurrency disputes generally arise from the transactions based on the contracts between the service providers (i.e. cryptocurrency platforms) and the consumers/customers (i.e. individuals or legal entities) in principle, it seems possible for the parties to submit their disputes to the arbitration in case where there is valid and written arbitration agreement in their contract.[10] Having said this, public policy considerations should also be taken into account while determining the arbitrability of cryptocurrency disputes. In this regard, first, it should be determined whether if the trading and the circulation of crypto assets are allowed and considered legitimate transactions in Türkiye.
Subsequent to long legislation process, the crypto assets were finally regulated by the Turkish Parliament through the Law No. 7518 on the Amendment of the Capital Markets Law No. 6362 which was published in the Official Gazette numbered 32590 and dated 2 July 2024. The Law No. 7518 has introduced definitions of wallet, crypto asset, crypto asset service provider, crypto asset custody service, and platform. By the Law No. 7518, it has become mandatory for crypto asset service providers to obtain authorization from the Capital Markets Board (“Board”) for their establishment, operation, and share transfers. When it is determined that the unauthorized capital market activities are carried out via the internet; the Board shall be entitled to remove content and/or block access regarding broadcasts made via the internet.
As to the content of the contracts to be signed between the service providers and their customers, Article 35/C (1) of the Capital Markets Law No. 6362 amended by the Law No. 7518 provides that the contracts between crypto asset service providers and customers can be made in writing or remotely using remote communication tools. The procedures and principles on making a contract with a service provider are determined by the Board. The Board may also make determinations regarding the regulation, scope, amendment, fees and expenses, expiration and termination of contracts, and the minimum issues that should be included in the content of these contracts between crypto asset service providers and their customers. Any contractual terms that exclude or limit the liability of crypto asset service providers to their customers are void and service providers are obliged to establish internal mechanisms that will effectively resolve customers’ objections and complaints regarding their transactions.
More importantly, the amendments made by the Law No. 7518 in the Capital Markets Law No. 6362 do not contain any provision that prevents the parties (i.e. service provider or customer) from submitting their disputes to arbitration. Article 35/C (4) of the Capital Markets Law No. 6362 amended by the Law No. 7518 states that the disputes arising from the relations between the parties or from the transactions carried out on the platforms are subject to general provisions. The general provisions are applicable in case where there is no specific provision under the Capital Markets Law No. 6362 and secondary regulations of the Board. On the other hand, as per Article 74 of the Capital Markets Law No. 6362, the Capital Markets Association is also entitled to provide arbitration services to solve any dispute between the service providers and their customers.
In view of the foregoing legal framework, it could be fair to conclude that in case where the crypto assets service providers were duly registered within the Capital Markets Board and they have signed contracts with their customers in accordance with the procedures and principles determined by the Board, the arbitration clauses prescribed under these contracts may be deemed valid and binding for the parties.
In any case, we are at an early stage to see the results of the outcome of this new amendment made in the Capital Markets Law, and to reach a certain conclusion on the arbitrability of cryptocurrency we should wait for the interpretations of the Turkish courts, especially on the issues whether the customers, who have signed contracts with the services providers should be deemed a consumer and if so, whether an arbitration clause in these contracts is considered as an unfair condition which was included without negotiation with the consumer and caused an imbalance in the contractual rights and obligations of the parties to the detriment of the consumer, contrary to the rule of honesty pursuant to Article 5 of the Law on the Protection of Consumer Rights.
Conclusion
In summary, the regulatory environment for cryptocurrencies is still evolving and this can complicate arbitration, as the legal framework may change or be unclear. This is the reason why, while arbitration presents a promising method for resolving disputes in the crypto asset realm, arbitrability of cryptocurrency disputes is currently questioned by several State courts, especially in terms of public policy.
On the other hand, there is no specific law or regulation in Türkiye that explicitly prevents the crypto asset service providers or the customers from bringing their disputes to arbitration. Contrarily, the Turkish legal framework on arbitration, in principle, allows to subject the cryptocurrency disputes to arbitration. Having said this, since there is yet to be a court precedent on this matter, in order to make a certain conclusion, it is necessary to see the approaches of Turkish courts to the arbitrability of the disputes arising from crypto asset deals particularly in terms of public policy considerations.
In any case, when we consider the decisions rendered by the several high courts in the US, the UK and Canada until today on this issue, we understand that if the service providers and the customers have agreed on an arbitration clause with their free wills and if this arbitration mechanism is not considered as unreasonably burdensome for the customers which does not violate the public policy, then the disputes arose from this contract are most likely deemed arbitrable.
[1]https://jusmundi.com/en/document/decision/en-cryptocurrency-traders-v-binance-updated-party-representatives-sunday-1st-january-2023#decision_56675
[2] https://aria.law.columbia.edu/blockchain-arbitration-promises-and-perils/?cn-reloaded=1
[3] https://www.researchgate.net/publication/326733936_Arbitration_and_New_Technologies_Mutual_Benefits
[4] https://docs.kleros.io/kleros-faq
[5] Arbitrating financial disputes—are they different and what lies ahead?, Arbitration International Vol. 38 Issue 1-2, June, 2022
[6] Id.
[7] https://www.linkedin.com/pulse/crypto-disputes-5-us-supreme-court-english-high-rule-future-sievi/?trackingId=y8ws8FDoTbKgLg8o4Ajr3A%3D%3D
[8] https://www.linkedin.com/pulse/crypto-disputes-5-us-supreme-court-english-high-rule-future-sievi/?trackingId=y8ws8FDoTbKgLg8o4Ajr3A%3D%3D
[9] https://www.linkedin.com/pulse/crypto-disputes-10-canadian-court-disregards-clause-binances-sievi-7orrf/?trackingId=5x4orS5pRTSu2ZRj5vTXXA%3D%3D
[10] As per Article 412(3) of the CPC and Article 4 of the IAL, the arbitration agreement should be in the written form
posted 2 days ago
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