Cryptocurrency Disputes Need Mediation: Cutting Through the Complexity

Cryptocurrency disputes are unique when compared to other disputes, considering the technology’s complexity, the decentralised nature of blockchain systems, and the evolving regulatory environment in which cryptocurrencies operate in. Cryptocurrency doesn't fit neatly into existing financial, legal, and regulatory frameworks. Many countries are still in the process of developing comprehensive regulations to deal with these challenges.

I. Characteristics of Cryptocurrency Disputes

Unclear Ownership Rights: In traditional banking, financial institutions manage and verify ownership of assets, whereas with cryptocurrencies, the user controls their own assets through private keys. When private keys are lost or stolen, disputes can arise and unlike traditional banking, there is no third-party bank or regulator to step in to help recover lost funds. Existing laws may not clearly cover such cases as they arise.

Smart Contract Failures: Smart contracts are self-executing contracts written in code on a blockchain. When coding errors occur, or if the contract performs in unexpected ways, disputes may arise. Traditional legal systems are often unequipped to deal with such disputes because they do not recognise or understand the code as legally binding as they are not understood as traditional contracts.

Regulatory Arbitrage: Cryptocurrencies can be traded globally, and users often take advantage of countries with lenient or non-existent regulations such as tax havens to avoid taxes or circumvent legal responsibilities. This creates issues when disputes arise, as different jurisdictions may have conflicting laws, and there is no unified regulatory framework for enforcement.

Market Manipulation: Pump-and-dump schemes or market manipulation in crypto markets are harder to regulate due to the pseudonymous nature of cryptocurrency transactions and exchanges. Since traditional securities regulations that provide order and safety may not apply, this leaves gaps in enforcement and investor protection.

II. Why Cryptocurrency disputes need mediation

Alternative dispute resolution (ADR) mechanisms like mediation are particularly useful for resolving disputes involving cryptocurrencies due to several reasons appertaining to the unique features of such disputes, some of which are the following:

Jurisdictional Challenges: Cryptocurrency transactions are often cross-border, making it hard to determine which country’s laws apply. Traditional courts may face jurisdictional issues, but ADR mechanisms like mediation can sidestep this by focusing on mutual agreement, regardless of geography.

Speed and Flexibility: The fast-paced nature of cryptocurrency markets means that prolonged litigation can be damaging. Mediation, on the other hand, is much quicker and allows parties to address issues before the situation escalates. Its informal structure also makes it more adaptable to the complexities of blockchain technology and digital assets.

Technical Complexity: Many disputes in the crypto space involve complex technical aspects that courts may not fully understand. In mediation, parties can choose a mediator with expertise in blockchain and cryptocurrencies, or even an expert in blockchain and cryptocurrencies to support parties in the resolution of the case, allowing for more informed discussions and practical resolutions tailored to the specifics of the technology.

Confidentiality: Mediation offers a private and confidential process, which can be appealing in the cryptocurrency world, where transactions are often pseudonymous. This privacy allows parties to discuss their issues openly without fear of public exposure or reputational damage.

Preserving Ongoing Business Relationships: Crypto-related disputes often involve individuals or businesses with ongoing relationships, such as in decentralised finance (DeFi) projects or blockchain communities. Mediation encourages cooperation and seeks solutions that preserve relationships rather than fuelling adversarial conflict.

Regulatory Gaps: With the evolving and inconsistent nature of cryptocurrency regulations, courts may struggle to apply outdated or unclear laws. Mediation can work within these regulatory gaps by focusing on finding mutually agreeable outcomes, even when clear legal precedents are lacking.

III. Are there any International Authorities Handling Crypto Disputes? Why choose mediation over those?

There isn’t a single global authority for cryptocurrency dispute resolution, but several international organisations and blockchain-based platforms may be open to handling your case. Decentralised arbitration platforms like ‘Kleros’ - a decentralised justice protocol where disputes are settled by a jury of blockchain users and ‘Aragon Court’ - a decentralised platform for handling crypto-related disputes, especially in decentralised autonomous organisations (DAOs). While no single authority governs all crypto disputes, these platforms are part of a growing movement to resolve disputes in a decentralised, blockchain-native way.

Choosing mediation over such decentralised dispute resolution platforms utilizing blockchain technology, however, can be beneficial for several reasons:

• Human Element: Mediation involves a trained mediator who can understand nuances, emotions, and underlying issues in the dispute. This human touch can foster better communication and lead to more satisfying resolutions, whereas such platforms rely on algorithms and jurors who may not fully grasp complex interpersonal dynamics.
• Flexibility: Mediation allows parties to customise the process and explore various solutions that may not be available through Kleros. In contrast, Kleros operates within predefined rules and may limit the scope of resolution options.
• Confidentiality: Mediation typically maintains a level of confidentiality that Kleros might not offer, as disputes in blockchain environments can be transparent and accessible. Parties may prefer to keep their matters private.
• Control over the Process: In mediation, parties have more control over the proceedings, including choosing their mediator and deciding on the process. Kleros participants may have less control over how the dispute is resolved and who decides the outcome.

Ultimately, the choice between mediation and such platforms will depend on the specific circumstances of the dispute, the preferences of those involved, and your goals for resolution.

V. Using mediation in a Cryptocurrency dispute: A Step-by-Step Guide

When individuals or companies wish to use mediation to resolve their disputes relating to cryptocurrencies, it is helpful for them to follow a step-by-step process, as follows:

1.   Approaching a Mediator: Finding a Mediator is quite straightforward and can be undertaken by locating a series of Alternative Dispute Resolution Organisations, whether in a particular jurisdiction or ones that operate globally. In the England & Wales, The Barrister Group and the Civil Mediation Council provide you with a list of mediators to choose from. It is important to look for mediators that specialise in commercial, financial, technology, or crypto-related disputes and operate in an international context.

2.   Approaching the Other Side: Initiate the conversation with the other side and begin by reaching out to the other party in a non-confrontational way. Clearly explain why mediation is beneficial, emphasising the confidentiality, speed, and cost-effectiveness of the process compared to litigation. If you have located a mediator already, they may choose to do this instead on your behalf. This may be the best option, considering their training, experience and skills in dispute resolution. Framing mediation as a neutral, mutually beneficial approach to solving the issue without escalating the conflict is key. You would also need to suggest one or a few mediator options that you have researched or propose using a reputable ADR institution. If the other side is open to it, you can both agree on a neutral mediator and move forward.

3.   Agreeing on Terms: The ADR Organisation or the Mediator you have agreed on will normally be in a position and offer to discuss and agree on the rules of the mediation process you will be engaging in (e.g., confidentiality, timeline, and venue, whether in person or virtual). Having a clear mediation agreement will help the process run smoothly.

4. Preparing for Mediation: Gather all relevant documents and evidence related to the dispute, including transaction records, smart contracts, and communications, so that both parties can address the issue with full transparency.

5. Engaging in Mediation: Work with the mediator to explore solutions, using their expertise to guide negotiations toward a fair settlement. You can represent yourself if the mediator is open to this or alternatively use a mediation advocate, i.e. a litigator/advocate/lawyer that will support you during the process of mediation.

This article was originally published in October 2024.