Blockchain arbitration: A panorama

Photo courtesy: Traxer on Unsplash

Article by Kwesi Dadzie-Yorke LLB(Lond) MCIArb[1]

The future of the internet remains incredibly bright. It can be seen clearly from the present. Web 3 is leveraging blockchain technology to change how data is stored, shared, and owned. It is going nowhere; it is here to stay. The reader may think of a blockchain as a permanent record of data arranged on a block, and tied to each other using a chain, hence the term blockchain.

Blockchain is a shared, immutable ledger for recording transactions, tracking assets, and building trust. It is a new decentralised method of record keeping, keeping transactions in a ledger as opposed to doing so through a centralised mechanism. A centralised mechanism means one entity looking after the books. However, in the decentralised mechanism, several computers work in concert to produce a shared ledger - often called a distributed ledger - simultaneously by leveraging a consensus algorithm (A set of well-defined instructions or rules that can be followed to solve a problem or task). The computers come to an agreement on what the truth should be/what the actual record of transactions should be, rather than having to rely on one entity and the risks that come with that: the fallibility of the human being, corruption, potential breakdowns, hacking, etc. This is important because record keeping is at the heart of how society goes through the phase of figuring out how to trust each other before entering into an economic exchange. Blockchain enables people to trade directly with each other without relying on an intermediary.[2]

Blockchain improves business as it enables businesses to receive accurate information with speed. A blockchain network can track orders, payments, accounts, production, etc. in a transparent manner - members of the blockchain network share a single view of the truth. Accordingly, all the details of the transaction end to end are shared thus inspiring greater confidence, new efficiencies, and opportunities for all users.

Therefore, it is not surprising that investment in blockchain has seen a significant rise. Global spending on blockchain solutions is tipped to hit $19 billion by 2024.[3] Given the significant investment in blockchain, it is crucial to maintain a sound infrastructure to resolve disputes occurring within the blockchain ecosystem.

One way to resolves such disputes is to commence arbitration proceedings using blockchain technology. In 2017, Datarella - a blockchain solutions provider - conducted an arbitration proceeding using blockchain technology, where the smart contract governing the relationship between the parties contained an arbitration clause referencing the Blockchain Arbitration Rules, which are based on the UNCITRAL Arbitration Rules.[4]

As readers may recall, a smart contract is a conditional transaction referring to logic written in a code that has 'if this then that' conditions. For example, a smart contract that is programmed such that 'IF by 15 September 2023 Ghana Commercial Bank does not receive GHS 15,000.00 from Kwame Prempeh, a customer of the bank, THEN that specified sum be transferred to GCB's account.'

Smart contracts have also been defined as a set of promises specified in digital form, including protocols within which the parties perform these promises.[5]

Smart contracts may be put to several uses in society. Three examples will demonstrate the point. First, financial organisations can leverage smart contracts to record financial data in an accurate and transparent manner. Second, smart contracts can automate the manual process behind a mortgage contract by automatically connecting the different parties involved with mortgage transactions. Mortgages powered by smart contracts allow automated payment processing and release of liens on property. Third, smart contracts provide visibility at every step of the supply chain. Internet of Things devices (physical objects that can connect to the internet or other networks and exchange data) can write to a smart contract as a product moves from the factory floor to the store shelves, providing real time visibility of an enterprise's entire supply chain.

Smart contracts pose several advantages, albeit with some difficulty that may arise – it is difficult to combine the technical code written by computer coders with legal prose drafted by lawyers in a standardised and seamless manner.

The Blockchain Arbitration Rules allow a smart contract to pause execution when arbitration is triggered. All relevant information is stored on the blockchain: details of the contract and any email communications. Under the Rules, an authority is appointed to perform administrative work in connection with the arbitration. The arbitrator then calls an oral hearing in person or via video conference after obtaining all necessary information.

It is recommended that the parties to the smart contract incorporate an arbitration agreement, and a mechanism to allow the arbitrator to automatically enforce any award without the intervention of a third party, into the body of the smart contract. For example, the parties can use the 'multisig' mechanism. Multisig is a short term for multi-signature - a type of digital signature that requires two or more private keys to sign and verify a transaction. It is used to enhance the security and privacy of cryptocurrency transactions, and to enable more complex and flexible scenarios such as shared wallets, escrow services, or voting systems. The multisig mechanism enables parties to a smart contract collectively to nominate an arbitrator who is then able to insert directly on the blockchain a remedial transaction by transferring value via the blockchain in fulfilment of the arbitration award.

It is suggested that the blockchain arbitration under the Blockchain Arbitration Rules offer speed and efficiency. All communication is routed via email or other forms of electronic communication and secured via hashes written in the Bitcoin and the public Ethereum blockchain. The rules attract specialists in both legal and technical matters, giving parties the much-needed assurance that the decision maker is well-versed in the expertise of blockchain and the applicable law.

?

[1] The author is the Legal Manager, West Africa for Yellow Card Financial Inc., a leading cryptocurrency operating in seventeen (17) markets on the African continent.

[2] Michael Casey, MIT Digital Currency Initiative.

[3] Statista Research Department, September 1, 2023 Global spending on blockchain solutions 2024 | Statista

[4] Norton Rose Fulbright, Unlocking the Blockchain.

[5] Nick Szabo, 1996