The challenges of bringing claims over digital currencies

Shreyas Jayasimha, Co- founder ,Aarna Law, recently spoke at a webinar hosted by the International Centre for Dispute Resolution – American Arbitration Association (“ICDR- AAA”) on “Disputes Involving Blockchain and Crypto Assets: Recent Strides”.

The webinar was moderated by Srikanth Navale, Director, Simha Law. Also speaking were Akshata Namjoshi partner at KARM Legal in the UAE and Thomas Choo, partner at Clyde Co. in Singapore. Among the issues that were discussed were those facing creditors seeking to bring claims over digital assets and how different jurisdictions are treating enforcement. Following is a summary of the discussions.

Disputes centred on digital assets primarily revolve around claims of contractual rights but as a UK Law Commission Consultation Paper has identified, crypto assets can also be thought of as ‘property’. This is important in terms of disputes because an analysis centred on contractual rights may not fully capture the nature of the rights and achieve control over the assets in question. While property rights can be asserted against the whole world, rights under a contract can only be claimed against the contracting counterparty.

A claim lodged in July before an arbitral tribunal at the AAA’s International Centre for Dispute Resolution has highlighted the challenges facing lawyers attempting to enforce rights over digital assets.

Genesis Asia Pacific, the regional arm of the institutional crypto broker, had advanced a loan to Three Arrows Capital (3AC), a Singapore-based hedge fund, on which the latter had defaulted with an outstanding loan balance of USD 1.142 billion.

In its application before an emergency arbitrator, Genesis pointed to an unprecedented implosion of the hedge fund and sought interim relief through (i) a deposit of the outstanding loan amounts under agreed conditions pending the resolution of the arbitration, or; (ii) additional security in the form of cash and shares to be deposited under agreed conditions for safekeeping. Genesis also asked for an order to freeze the sums of money due from 3AC to Genesis pending resolution of the arbitration.

This case exemplifies several of the difficulties that accompany disputes over digital assets.

This case exemplifies several of the difficulties that accompany disputes overdigital assets.

  • The first difficulty is identifying the relevant stakeholders, who are often locatedin different jurisdictions. In the case of Genesis several of the fund’s assets are in Singapore but the liquidation process is taking place in the British Virgin Islands. This multi-jurisdictional spread is likely to be common to such disputes.
  • Decentralized autonomous organisations (DAOs), the entities through which cryto assets are held, raise difficult legal issues. A DAO is an emerging legal structure that has no formal central governing body. Every member of the DAO shares a common goal and is required to act in the best interests of it. Such DAOs raise thorny preliminary issues, such as where jurisdiction will lie and how accountability will be distributed amongst members.
  • Questions of jurisidiction and governing law require a deep examination of the business concerned: where is the digital asset located and where is the act which took place on the ledger located?
  • Issues relating to arbitrability will also crop up (i.e., whether disputes are capable of being resolved by arbitration). In such cases, lawyers will be required to examine both international standards and applicable domestic laws. In some jurisdictions, allegations of fraud could cause the case to be knocked out of arbitration and placed before domestic courts. Traditional tests of arbitrability will be stretched.
  • Lawyers will also face the challenge of communicating technical concepts to judges and arbitrators who will often be unfamiliar with digital assets. Lawyerswill have to be able to do this precisely and with clarity. They will need to be able to craft remedies that build upon traditional civil and equitable relief that will be effective in the context of digital assets. This will require creative but responsible advocacy, a fine and difficult balance.

How India is tackling claims over digital assets

While it may be a while before these disputes arrive at Indian shores, Indianregulatory bodies seem to have approached the blockchain and crypto question with caution and a fair degree of suspicion.

In 2018, the Indian central bank, the Reserve Bank of India (RBI), issued directives to banks to not deal with or provide services to entities dealing with or settling virtual currencies, and to exit any such existing relationships. The Supreme Court set this directive aside by an order in 2020 and reversed the ban. Earlier in February 2022, the RBI governor expressed a view that private cryptocurrencies were threats and would undermine the RBI’s ability to regulate financial stability.

This wariness over private cryptocurrency is balanced by announcements that the RBI is developing its own digital currency. Another signal confusing the waters is that the union budget for 2022 specified that digital assets would be subject to tax. However, the finance minister clarified that this did not automatically grant digital assets legitimacy.

So while the industry remains hopeful so long as there is no explicit ban, entrepreneurs are being cautious aware of the need for strict compliance, following requirements that have been established by foreign regulators such as anti-money laundering and know-your-customer (KYC) policies.

UAE and Singapore adopt a more liberal approach

If cautioncharacterises the Indian approach, Ms. Namjoshiat KARM Legal describes the UAE’s regulators’ approach as ‘open minded’ and geared towards facilitating the issuance of currency and transactions. In the UAEregulators have introduced specific laws to validate electronic contracts and transactions although overall the approach has been to modify existing laws wherever possible to accommodate blockchain and crypto transactions, rather than introduce a raft of new legislation.

In Singapore,  a recent ruling by the High Court (CLM v. CLN & Others) has recognised that cryptocurrency is ‘property’. Clyde & Co partner Thomas Choo said the plaintiff, which had lost millions of dollars of crypto assets, had sought interim relief which raised the question of whether it had a proprietary interest and if so, whether the court had jurisdiction to grant relief against unknown perpetrators. The court decided that the plaintiff did have a proprietary interest in the assets and thatworldwide freezing injunctions against unknown persons could be obtained.

As the Indian government looks to regulate this space and if entrepreneurs are to have more faith in crypto transactions, there are lessons to be learnt from the experiences of the UAE and Singapore.

More broadly, the experiences at an institutional level of ICDR-AAA in the 3AC matter highlight issues of continued interest to the legal community that is keenly watching the developments in this space.