As cryptocurrencies rise in both prominence and use it is important for market players to keep aware of the legal and regulatory frameworks applicable to them. In this post we set out a number of issues that investors will need to consider from a dispute resolution perspective in assessing if their investments are suitably protected.
Freshfields have noted in recent posts that regulatory oversight of cryptocurrencies is increasing (see a recent blog post by Jeremy Barr and a Freshfields survey in November 2018, among others). Even while regulatory scrutiny is increasing, some governments (such Venezuela, Russia, Turkey and India) have begun to look into centrally-issued cryptocurrencies. However there appears to be little consistency as regards the purpose of, or the approach to, government-issued cryptocurrencies.
Investors in cryptocurrencies will need to follow regulatory developments carefully, not only to ensure continued compliance but also because these developments may affect their rights under investment treaties if cryptocurrencies are considered ‘investments’ for the purposes of an applicable treaty. Investors will want to make sure they understand precisely what they are buying into and whether (and, if so, how) their asset will be protected. For now, it remains to be seen how increasing regulation of cryptocurrencies will interact with investor-state protections, and we are unaware of any treaty claims having been brought against states in relation to cryptocurrencies.
Related to this, investors in cryptocurrencies, or parties who conduct cryptocurrency-related business, should carefully consider the dispute resolution mechanisms they include in their agreements. As always, governing law provisions should be given due regard. With respect to forum, arbitration agreements may be particularly well-suited to transactions involving cryptocurrencies, given that, as discussed above, they are inherently borderless and currently undefined in nature. The borderless nature of cryptocurrencies makes arbitration particularly attractive given that arbitral awards are enforceable across borders under the New York Convention.
Furthermore, investors may gain some certainty by specifying arbitration as it offers neutrality vis-à-vis national regulatory systems and permits parties the opportunity to appoint arbitrators who are well-versed in the relevant technical subjects. Arbitration also offers parties greater procedural flexibility, for example in relation to document discovery and protecting the confidentiality of commercial information and/or intellectual property during the course of the proceedings. Arbitration also provides scope for institutional rules to develop and adapt to the unique nature of cryptocurrency disputes.
Cryptocurrencies may offer major investment opportunities. But these opportunities need to be balanced against an uncertain regulatory position and the unclear consequences for investors’ rights under applicable investment treaties.