How will digital Dispute Resolution Rules for blockchains and digital assets make an impact?
On 22 April 2021, following an extensive consultation, the UK Jurisdiction Taskforce (UKJT) published new Digital Dispute Resolution Rules (the Rules) designed to be incorporated into blockchain technology and derivatives of such including smart contracts. The Rules are an innovative and novel dispute resolution scheme which seek to provide a quick and cost-effective dispute resolution mechanism, and cement the UK’s place in the ever-growing blockchain industry.
While the use of self-executing smart contracts and other blockchain applications have the potential to decrease the incidence of disputes by reducing human manipulation and error, the risk of disputes that require inputs or outputs external to the applicable blockchain have not altogether been removed. The Rules therefore allow for parties to anchor their digital relationships within a pre-defined dispute resolution framework to ensure that any disputes arising from the use of the blockchain are submitted to arbitration.
As the use of blockchain technology, including for investment purposes (through, for example, investment in cryptocurrencies) and through the use of smart contracts, has expanded significantly in recent years, the need for certainty as to the applicable dispute resolution mechanism has likewise increased. Pinpointing the applicable jurisdiction (and therefore the applicable dispute resolution mechanism) can be difficult, verging on impossible, because blockchains are by their very nature decentralised. Depending on the applicable blockchain, the digital ledger is held on hundreds of thousands, if not millions, of computers (called nodes) worldwide across a range of jurisdictions.
What the Rules provide, therefore, is certainty. They provide that disputes will be resolved through arbitration and in accordance with the Arbitration Act 1996.
The Rules also provide for:
- optional anonymity – parties can remain anonymous, not just to third parties, but also to the other parties to the dispute. Parties may agree to provide details of their identities to the tribunal alone, in which case the tribunal will not disclose them to the other parties (unless required to do so by law);
- experienced arbitrators – the Society for Computers and Law will serve as the default appointment body for arbitrators and experts, and will maintain a list of suitable persons to be appointed in a wide range of digital disputes at short notice;
- automatic decisions – the tribunal’s decision, which will be implemented directly “on chain” by making use of the private key where the system provides for it, will be final and binding on the parties; and
- speed and costs – following initial notice of a claim and any response, the tribunal will have absolute discretion as to the procedure that is adopted. There is no requirement for disclosure or an oral hearing (the dispensing of which will save costs), and evidential requirements can be tailored to suit the circumstances of the case. This is within the confines of the dispute being determined within 30 days (unless the parties agree to specify a different period) which is much quicker than the default timetables under other arbitral rules.
The Rules, which have been drafted as simply as possible to encourage uptake, specify the means of their incorporation, by including the following text in electronic or encoded form: “Any dispute shall be resolved in accordance with the UKJT Digital Dispute Resolution Rules.”
The UKJT’s intention to make English arbitration law the pre-eminent applicable law and mechanism governing the exercise of legal rights in relation to blockchains and digital assets is laudable and the Rules provide for a speedy means of resolving disputes whilst preserving anonymity which is central to the operation of many decentralised blockchains.
The extent to which the Rules will be incorporated into blockchains and digital assets remains to be seen, however, not least because of the principle of decentralisation which lies at the core of the historic and continued development of the technology.
For many, the attraction of developing and using blockchain technology is the decentralised, “peer-to-peer” network, without governmental oversight (and, therefore, regulation). Some blockchain companies will want to ensure governmental oversight (for example, Matterium, which is cited in the UKJT’s marketing material that accompanies the introduction of the Rules). Matterium provides for a blockchain in respect of real-world assets so it stands to reason that it would adopt a state-backed dispute resolution mechanism that bridges the gap between the physical and blockchain world.
For the vast majority of the market at present, however, decentralisation is at its heart. The UKJT will need to encourage those that control the technology to incorporate the Rules in the next iteration of their code. This may prove to be a challenge in circumstances where much of the market, as it currently stands, is likely to avoid what it may perceive as a government-controlled dispute resolution scheme. In addition, for existing (as opposed to newly developed) blockchains, adopting the Rules will require a change in their code/protocol. Depending on the specific blockchain, this is likely to require the agreement of a majority of the nodes constituting the blockchain. This may prove to be an insurmountable requirement in the face of the founding principle of decentralisation.
The scheme is a welcome initiative, however, and a handy tool to manage disputes for those wishing to engage with it.