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TRANSCRIPT
ADR in the Age of
Crypto-Currencies
29 November 2018
Pinsent Masons LLP
30 Crown Place
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A chartered accountant, solicitor, NY attorney: UK & Gibraltar licensed insolvency practitioner: ADR practitioner, taking arbitration appointments: visiting law professor: CIArb branch, main & audit committees member: & inter alia partner in Simmons Gainsford Gibraltar LLP (‘SGG’) Chartered Accountants.
Gibraltar is a leading ‘blockchain’ (‘BC’) & ‘fintech’ (‘FT’) jurisdiction. SGG accepts cryptocurrency (‘crypto’) as fees & audits the BC space.
The Gibraltar stock exchange specialises in BC & FT.
WhatsApp: +44 (0) 7815 873370.
Email: [email protected]
I have 10 minutes for this seminar, there will be a ticking clock throughout the slides!
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Briefing outline introduction
What is the BC, Distributed-Ledger-Technology (“DLT“), ‘FT, Crypto, an initial currency offering (“ICO“) &/or an initial token offering (“ITO“) (the “whole thing”), etc: how does ‘the whole thing’ come together definitionally?
My presentation focuses on definitions. I will not address how BC, etc, will affect the ADR world. Necessarily it will be fast paced. So please refer back to these notes during the further speakers’ presentations, as necessarily they will have to use BC ‘terms of art’.
Disclaimer. This presentation is based upon my own experience. So it’s highly subjective. However, if anyone has experience of ‘the whole thing’, their experiences are also going to be subjective & probably limited. There is sparse official guidance for the ADR practitioner, even on definitions, let alone on ‘the whole thing’ & this presentation does not fill that void. I like everyone else is feeling my way & creating procedures on the spot. In Gibraltar, like many of you here, I am regulated by the CIArb. I don’t know what they’ll say about my definitions?
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What is the BlockChain (“BC”)?
The BC is a ever growing list of linked, open, verifiable, semi-unmodifiable, semi-permanent,distributed & decentralised, cryptographically secured data blocks, containing a previous block # & atimestamp, managed by a peer-to-peer network abiding to an inter-node (that is ‘web-connected devices’) & new block validation communication protocol.
Data is retroactively unalterable, without the alteration of all subsequent blocks, requiring networkmajority agreement.
Follow the BC throughout the seminar @ https://www.blockchain.com & https://www.blockchain.com/btc/unconfirmed-transactions
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BlockChain (“BC”) – ‘believe the hype’?
Being distributed (i.e. non-server-based) the BC is especially secure & survivable.
Accountants & lawyers like BC: provenance/supply chain management & ‘triple-accounting’.
The BC was created to facilitate ฿ .
Before BC, none of this happened?
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What is a Distributed Ledger (“DL”) & the DL Technology (“DLT”).
A DL (aka a ‘shared ledger’) is a shared, replicated & synchronised, non-centralised (both as tostorage & admin), worldwide & multi-site digitised ledger.
DLT is not an ageing DJ, but the consensus-driven, P2P & algorithm-based, replication-inducingtechnology, supporting DL.
One form of DL is the BC system, as not all DLs operate in a linear, chainlike manner.The DL can be public &/or private.
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Distributed Ledger (“DL”) &/or DL Technology (“DLT”) – ‘believe the hype’?
‘The record of everything’.
Smart Contracts.
What is FinTech: no it’s not hype, PayPal anyone?
FinTech (especially DLT) is the new tech use (especially by new players) to deliver financial services.
Info-based finance is tech-vulnerable. BC reduces transaction costs. FinTechsbiggest hurdle tocustomer cost reduction is pro-bank regulation.
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What is an Initial Coin Offering (“ICO”) &/or Initial Token offering (“ITO“): the terms are ofteninterchangeable & each offering is different, so hard to define.
Usually, unregulated, crypto-currency (“Crypto”) based, seed corn, TechCocrowdfunding.Always lower cost of capital & understandably high risk, but sometimes scam &/or greed prone.Usually TechCo gets cash (aka fiat) or a mainstream Crypto (usually ฿ or Ξ) &
thus TechCo is Cryptocapitalised.
Rarely punter gets TechCo classical shares or options; usually a non-mainstream TechCo specificcrypto to be used within the TechCo ecosystem, or a token, representing a prepayment of a TechCoservice or product. Mobile TelCos have used tokens before ICOs, to sell & develop airtime networks.
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The IP ITO – the new crypto, introducing ‘WeRcertifiedCo’
A claimed group of well-meaning certificated mediators, understanding that ICOs/ITOs raise billions regularly (why quote detail, it increases every week) wish to digitise the mediator offering.
White Paper: ‘We (“WeRcertifiedCo”) aim to become the MailChimp of mediator communication’: mediators, come join us!
A CIArb member (the ‘Member’) in the privacy of his bedroom & having had a Kik chat with … is enticed with…
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“For every .001 ฿ you’ll receive:
1 share in WeRcertifiedCo, registered in Costa Rica: &/or
1 WeRcertifiedCo token (the “iTocan”) entitling you to:
a future share of WeRcertifiedCo, payable in crypto, &/or;
a future share of WeRcertifiedCo shares, denominated in crypto, &/or;
a future share of WeRcertifiedCo future services, &/or;
1 iTocan, which can used ‘wherever’, &/or exchangeable
for a share of WeRcertifiedCo profits, shares, &/or services.”
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What is Crypto-Currency (“Crypto”)?
Crypto is a digital, cryptographic asset cum exchange medium, that facilitates monetisedtransactions, the creation of further ‘coins’ & verifies asset transfer.
Crypto is a digital currency, a virtual currency or an alternative currency; or is it?
Crypto is controlled decentrally, unlike centralised electronic money & central banking systems.
Crypto decentralisation centres on DLT & BC, allowing for a public financial transaction database.
Crypto ownership provable exclusively via crypto-graphics: transaction statements only issuable byproven, current Crypto-holders, subject to the possibility of ‘simultaneous instructions’.
฿ , the 1st Crypto released in 2009 is going strong & now circa 5k of ฿ variants (aka
“Altcoins”).
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What is Crypto?
Perhaps the easiest way to learn is to get a crypto debit card, like mine.
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Smart Contracts (“SC”): the Blockchain (“BC”): towards an SC definition.
What is an SC?
There are a plethora of pre-BC & post-BC, jurisprudential SC definitions, including those that foresee a future without commercial, contract lawyers.
My KISS definition, focussing on ADR, is: “ordinary, natural language contracts, placed within a block on the BC, which often have the following indicia:
✓ transnational, with absent or exotic choice of law clauses.
✓ Crypto-based.
✓ irreversible.
✓ purportedly, self-executing, often aided by AI, or if not fully self-executing, ADR-centred & the ADR provider maybe AI-centred & in an exotic location, is often pro ADR, but often fails to address calamities, such as insolvency.
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* I’m also happy to answer further questions online, in Gibraltar; whether they be on Gibraltarian ADR &/or the crypto-space.
My object was to ADR normalise the BC & crypto-space. It’s neither a black art, nor a pirate haven. It’s just possibly the financial & commercial future.
Please leave Q&A until the end of all presentations.
CIArb LB Seminar29 November 2018
ADR in the Age of
Cryptocurrencies
Marcus KillickChief Executive Officer ISOLAS LLP
Regulatory issues around blockchain and cryptocurrencies:
• What to regulate (e.g. offerings, platforms, exchanges, wallets, smart contracts?)
• How to regulate? • What attempts have been made to regulate? • Where next?
Two sides to the story: The Thrilling vs The Scary
The Thrilling
• Distributed Ledger Technology (the
Blockchain)• Smart contracts
The Scary
• Crypto currencies (Bit, Ether etc)
• Initial Coin and Token Offerings (ICOs/ITOs)• Crypto funds
• Crypto derivatives
Blockchain
The distributed ledger itself;
Multiple large players
implementing this technology
in some form.
• Immutable
• Verifiable
• Trackable
• Very difficult to hack
• Vast number of applications
Smart Contracts
A self executing contract made
possible by public blockchain
and enforced by cryptographic
coding.
• Transparent, traceable and
secure
• Think of it as a sophisticated
vending machine
• Concept has been around
since 1993
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The Thrilling
But…
The distributed ledger technology
underlying crypto-assets has
“limited or no formal governance
structure,” and may be subject to
“technological errors and
limitations.”
The Scary
• “The anonymity, speed and global reach of virtual currencies… have madethem attractive to both criminals and terrorists” Marshall Billingslea,President, Financial Action Task Force.
• No regulation means market manipulation is unchecked• “46% of ICOs Launched in 2018 Have No Business Plan” – (ICO Rating)• Out of 372 ICO’s analysed by EY, 30% had lost substantially all their value
and 71% of those who used ICOs to raise money last year had yet torelease a prototype.
BUT
• Crypto-assets do not currently pose a material risk to global financialstability (Financial Stability Forum Oct 2018)
Money has three constituent elements:
• A store of value
• A method of exchange
• A measure of wealth
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Why cryptocurrencies aren’t ‘MONEY’
Store of Value?
The value of crypto-assets is not derived from the value of underlying assets but from speculation. As a result, to date, the prices of crypto-assets have been “highly volatile.”
Volatility is not limited to Bitcoin
Other elements of cash not present in crypto
A medium of exchange• Crypto-asset ownership appears
limited among a few market participants. This limits market depth and diminishes the ability of markets to handle large trading volumes”
• There are over 2000 cryptocurrencies now listed on CoinMarketCap. Many have virtually no liquidity
• Trading and transfer to Fiat is expensive
A measure of value• In the week to 21/11 Eth lost 35%
of its value. Bitcoin lost 29% of its value.
• Extreme and rapid volatility makes a stable measure of value impossible. Even Tether which is supposed to be linked to the US$ was trading at 97.5 cents on the 21/11
But they remain popular
Cryptocurrency ICO Stats 2018 (to mid October)
(according to Coin Schedule
• Total value of ICOs issued: $21,356,115,254
• Total Number of ICOS: 894
2018 Issues by Month and Total Raised
• Jan $2,047,151,944• Feb $1,835,043,613• Mar $4,251,257,251• Apr $1,254,525,341• May $1,982,550,201• Jun $5,798,259,469• Jul $866,675,502• Aug $1,154,962,360• Sep $1,737,270,886• Oct (to 17/10) $428,418,687
And some continue to go up (screen shot
22/11/18)
For a while at least (Screenshot 24/11/18)
So what are they?(for those old enough to remember)
Bottom line
There are now over 2000 “cryptos”. Buying and dealing in crypto in an unregulated marketplace without adequate knowledge can sometimes be
like playing poker. If you don’t know who the sucker at the table is, it’s probably you.
How does one solve a problem like crypto?
Tolerate, Treat, Transfer or Terminate?
There is no internationally accepted approach so jurisdictions have
adopted different solutions
If the answer is to treat
What to regulate?
How to regulate it?
What/Who to regulate?
Multiple choices
• Token/Coin offerings
• Exchanges
• Wallets
• DLT providers
How to regulate
Treat as securities or something new?
• Is this just a new financial product?• Do you focus on restricting to experienced/professional
clients• How do you create an investor protection regime when
the industry is global?• Will a robust regulatory regime encourage or deter
participants?• How do you avoid moral hazard?• Why not treat it as gambling and regulate like a gaming
company?
The role of arbitration in Crypto
As you will have gathered from the above there a number of people out
there nursing losses, at least on paper (or digital code)
As a result disputes are going to be inevitable
Arbitration at ITO level
• Not yet common
• Might be helpful to determine disputes over milestones where payment for tokens is dependent on achieving certain objectives.
Arbitration in DLT itself.
• Use of “Oracles “
• Persons on DLT who decide on disputes based on information provided to them via the blockchain.
• Need careful choice of jurisdiction
• No specific format, reliant on powers in smart contract
An example of how one provider believes it could work
Jur• Jur is a dispute resolution protocol based on the blockchain. • It is a platform of smart legal agreements, to allow anyone to make
agreements, notarize them and have an escrow, with dispute resolution built in.
• The aim is to ensure more efficient, cheaper and faster dispute resolution systems worldwide. industry
• In the upstream contract, the parties may decide that the decision on Jur is preliminary and that there is still the right to appeal before a classical arbitration or ordinary courts.
• The parties could also decide to involve more than one expert, as appropriate. In this case, they may also decide to escrow a larger sum to cover any costs of these parties, with specific logic to compensate the right party for the cost.
The Process
• The creator of the Hub may determine that, in the event of a dispute, selected oracles or a third party shall produce two reasons for the dispute.
• If certain values are exceeded (showing, in this way, an incomplete adhesion on who is right or wrong), a classic arbitration will be activated, composed of 3 persons. In this case, the selection will take place within a special Hub, composed of experts selected by a partner arbitration chamber. The costs will be borne by the tokens staked on the party that is deemed to have been wrong. This solution will be implemented by Jur in advanced stages, as a back-up in case of uncertainty of the classic vote.
• The vote of the Hub oracles will approve these reasons which will constitute a decision. If this is done in accordance with the arbitration clause and English law it will have legal force.
Where next?
• Understand the pinch points where arbitration most likely
• How will smart contracts deal with disputes over physical delivery?
• Ensure ADR built into smart contracts
• Pick jurisdiction of choice for ADR carefully.
ADR in the Age of Crypto-Currencies
Clive Freedman FCIArb, FBCS
Barrister, Chartered Arbitrator, Mediator
29 November 2018
ADR in the Age of Crypto-Currencies
• What sort of disputes could arise in relation to smart
contracts?
• What qualifications are needed for arbitrators in
disputes about smart contracts?
• Disputes about cryptocurrency
Disputes about smart contracts
• The need for a separate agreement written in natural language
• Formation of the contract
• Identifying the terms of the contract
• Applying the terms of the contract
• Interpreting the terms of the contract
• Unexpected circumstances
• Enforcement
The qualifications of the arbitrator
• Defining the required qualifications of the decision-maker
• Expert determination may be more suitable
Disputes about cryptocurrency• Contractual disputes
• Legal issues which might arise:
• can cryptocurrency or a token be property?
Your Response Ltd v Datateam Business Media Ltd [2015] 1 QB 41 at [42]
Fairstar Heavy Transport NV v Adkins [2014] FSR 8 at [48]
tax, divorce, insolvency
• is it money?
• US cases
Hedqvist [2015] EUECJ C-264/14
• remedies following misappropriation
cf carbon credits: Armstrong DLW GmbH v Winnington Networks Ltd [2012]
EWHC 10 (Ch), [2013] Ch 156
Smart Arbitration
29 November 2018
Professor Loukas Mistelis
Why is arbitration suitable for Smart
Contract disputes?
Confidentiality
Procedural flexibility
Enforceability
Tribunal with specialist technical knowledge
Certainty
Speed
Current models of Smart Contract
arbitration
Jury System:
– Kleros
Combined system:
– Juris
Live arbitrators:
– Codelegit
– Confideal
Current models of Smart Contract
arbitration
Challenges for smart arbitration
• Smart arbitration is still to be largely carried out “off the chain”
– Requires real-world lawyers and arbitrators
• Is the award granted at the end of the smart arbitration enforceable?
– Must the arbitral clause itself be in writing?
– Include some major clauses in natural language
• No specialised governing rules or procedures
– Lack of support from major arbitral institutions
Challenges for smart arbitration (cont.)
• Issues under the New York Convention
– If the decision of the arbitrator is an algorithm, can it be enforceable
under the New York Convention?
– Can the appointment of an arbitrator be made by code itself?
– The requirement for a signature on an Award
– How do the parties sign the arbitration agreement?
– Under some models, jurors make their decision based only on
transaction evidence present on the ledger without hearing any
arguments from the parties themselves
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