Cryptography, Blockchain, and International Arbitration: How Fintech Revolution Influences Jurisprudence

12.05.2016

Over the course of the last year, blockchain has become a buzzword not only for startuppers, banks, and technology companies, but also for public entities. It draws more and more attention from lawyers, both as a part of discussions on digital currency’s legal status, and in the search of the technology’s applications in legal operations.

Thus, this March, yet another Ukrainian legal company has used Â bitcoins for its charter capital. Other lawyers from Ukraine consider using EthereumÂ smart contracts in their legal practice.

There is another possible application of blockchain in jurisprudence, namely in arbitration of disputes. ForkLog contacted founders of Cryptonomica, a project synthesizing international laws, distributed ledgers, online services and cryptography, to found out more about how it works.

Cryptonomica’s co-founder Max Baryshnikov told ForkLog about how international arbitration could work within such an unexpected paradigm in interview

FL: Who came up with the idea of creating Cryptonomica? Why needs it, and why?

Max Baryshnikov: Cryptonomica as a startup is an opportunity of settling disputes online in an international arbitration under British jurisdiction, along with an accompanying system of verification of digital signature keys. Execution of documents signed this way is enabled by mechanisms of enforceable international laws (Convention on the Recognition and Enforcement of Foreign Arbitral Awards, New York, 1958)/

Cryptonomica is a project by the Center for The International Arbitration and Cryptography Centre, which is a permanent arbitration court incorporated in London.

The project has been inspired by Viktor Ageyev, lawyer and programmer from Israel. I, Max Baryshnikov, am a Kyiv-based lawyer. I joined the project this year. Earlier Viktor and I had an opportunity to work together in court both in Ukraine and Israel. Presently, Cryptonomica has not raised any investment, so only co-founders’ resources are used for its development. However, both of our basic services are operational, though they are in beta now.

FL: Could you clarify what bitcoin and blockchain have to do with your project? How do you use blockchain, if you do?

Max Baryshnikov: Cryptonomica isn’t a service that directly employs blockchain technology. Generally speaking, most projects currently positioning as blockchain startups are more using a buzzword than actually need the tech. Yes, blockchain may be used as a database, but there are not too many instances requiring this exact kind of database.

However, our technology, I believe, may expand applicability of blockchain and cryptocurrencies in business operations. We’re creating a legal environment and legal tools, which are applicable in operations involving blockchain and cryptocurrencies.

Notably, bitcoin’s anonymity isn’t always a real good thing. For instance, it’s a common practice for international commerce to use Letter of Credit (L/C) as it makes trading operations more secure. Can we do anything like that for bitcoin settlements? In fact, we can, as bitcoin ecosystem has a mechanism of multisignature accounts.

In order to effect a transaction, you put your assets to a multi-key account. For instance, it’s one key for a seller, another for a buyer, and yet another one for an arbitrator. It takes only two keys to operate the account, so the amount can be handled either if there’s a consensus between the buyer and the seller, or with an arbitrator as an intermediary, who adds his or her key to the one held by the dispute’s winning party. That’s a technical part which is ready by now.

So our task is to secure the legal side of the matters: who makes the decision, by which power (that’s where you need our digital keys), and under what kind of procedure they do it (we’ve got a customized Arbitration Rules being developed on GitHub), and finally, how the settlement can be legally recognized beyond the transaction’s parties.

Arbitration as per the New York convention is remarkable because parties may choose not only the arbitrator or arbitrators, but also the laws applicable to their contracts. For online business purposes, we deem it especially interesting to set a rule that legislation of no nation is to be applicable over the course of settlement. It would be only the contract itself and ‘ex aequo et bono’, or the principle of good faith and justice.

The arbitration court’s decision in this case is mandatory in the signing countries of the Convention, as local authorities cannot revise the board’s decision in terms of applicable laws and established facts over the course of recognition and enforcement. There’s only one exclusion for instances of evident contradiction with the constitution of the nation in question.

Here’s another use case. Say, a new company’s founders intend to raise an investment, so they register their company under the jurisdiction of Marshall Islands, Belize, or TheÂ British Virgin Islands. First, there are no government ledgers of shareholders, as such ledgers are to be maintained by the company itself. Second, they recognize our arbitration decisions as per the aforementioned Convention. So, the company’s charter documents shall state the following:

(a) Assignment of interest or change of management are legal only after a respective entry is made on bitcoin’s blockchain.

(b) Any disputes as to ownership of shares or assignment of managers are to be settled in the arbitration court in London online.

Thus, the company is in fact public. However, in terms of corporate laws, the company is in British jurisdiction. And there’s tax-free status as a bonus. We’re ready to provide legal services to such companies.

FL: How do you estimate blockchain’s perspectives in legal practice?

Max Baryshnikov: We’re not agree that blockchain is going to kill banks. Yes, it will kill some of them. But those banks who learn to use the technology and respectively change will become only more powerful and wealthy (recall R3). The same is applicable to the legal realm.

FL: As far as we can get from the GitHub release, your technology is open source. So it’s like take it and use it. Why did you make such decision? Or you’re not afraid of competition?

Max Baryshnikov: Open source means we’re willing to accept amendments and changes of our technologies, we’re ready to analyze bugs and security issues, be it our web server’s code or our Arbitration Rules. By the way, we’re the world’s only arbitration court where the code and the legal documents are written by the same people.

That’s our collaboration invitation to anyone interested in what we’re doing. It’s flexibility and openness. We think it’s our competitive edge. Arbitration is a trust-based business, it depends on professionalism and reputation. It’s hard to copypaste things like those.

FL: There sure are other solutions for holding a trial online. Could you briefly describe their most outstanding features?

Max Baryshnikov:Â The legal realm in general, and international arbitration in particular, is very conservative. Certainly, there are individual online solutions for dispute settlement. However, in most cases serious lawyers are very cautious about technologies. For instance, recently the American Arbitration Association added an option of online application for arbitration. Serious coders, who have nothing to do with legal practice, also use online solutions.

Israeli startup Bitrated is among the most interesting ones here. We’ve contacted them at Tel Aviv bitcoin meetups. They are a system for creating multisignature bitcoin accounts with arbitrators.

Our idea is to create a system which unites both fields of expertise. Generally speaking, as the technological advancement has allowed for online arbitration only a few years ago, it’s hard to speak about any traditions. It’s more about trends.

FL: Do you have a demo of the arbitration? If you’ve got a scheme for document circulation over the course of a trial, could you also provide it?

Max Baryshnikov: Yes, sure.

It was the world’s first-ever arbitration decision enforced in accordance with the New York Convention, which lacked a hand-written signature of the arbitrator. There was only a digital one, printed and provided with apostille.

FL: Could you tell our readers about what international commercial arbitration is, and how it is regulated?

Max Baryshnikov: Encyclopaedia Britannica defines International commercial arbitration as one of the most convenient methods of dispute settlement for international commerce actors. Many researchers link modern-day arbitration to the 1794 Treaty between the U.S. and Great Britain, so-called Jay Treaty.

International commercial arbitration is a method of settling disputes between parties residing in different countries. It’s an endless number of international arbitration courts, some of which are universalÂ while most of them are dedicated to a particular realm of commerce. Exemplifying that is the International Commercial Arbitration Court of GAFTA, or some other online services offering international commercial arbitration to settle potential disputes.

Activity of an arbitration court is determined by its regulations and provisions on arbitration payments, as well as on provisions agreed by the dispute’s parties in case they comply with international laws, including international conventions. Laws of a country where the arbitration decision would be enforced, are also important.

Cryptonomica is a project with two equally important components:

Provision of a reliable and legally precise method of checking digital signature keys (key owners are identified via Cryptonomica-accredited notaries in different countries);
Provision of legal protection and recognition/enforcement of contracts signed with e-signatures verified by Cryptonomica;
Opportunity to apply to an international arbitration court, whose decisions are recognizable and enforceable under the 1958 New York Convention in most of the world’s countries (currently there are 156 of them).

The fact that the aforementioned International Arbitration Court is also willing to review disputes online using digitally signed documents is a landmark for electronic progress. That’s what the Arbitration Rules, the main document for any arbitration court, read. It was prepared using UNCITRAL regulations as approved by the 1976 UN General Assembly No. 31/98 (actual revision).

FL: How Cryptonomica’s arbitration is regulated?

Max Baryshnikov: Cryptonomica’s Arbitration Rules have several important features, including:

Regulations developed on GitHub: we’re open for any propositions as to changing and supplementing the regulations. We’re willing to provide users and interested lawyers with an opportunity of participating in development of the rules.
Arbitration fee optionally payable in bitcoins.
Arbitration sessions held online via video conference calls.

Commencement of action, correspondence of the parties, and provision of all documents are available in electronic form with e-signature confirmation using keys verified by our arbitration court.

FL: As far as we can get, there are several sets of regulations for international arbitration. Which one did you choose, and why?

Max Baryshnikov: Our regulations are based on UNCITRAL Arbitration Rules, as they are among the most reliable and widespread ones in arbitration practice. However, we’ve introduced some alterations to make it more appropriate for online arbitration.

Arbitration courts and their regulations are so diverse nowadays, it would take numerous pages only to list their basic kinds. Those interested may easily find relevant materials on the web or in dedicated publications.

There are many services for creation and verification of e-signatures, which is mostly caused by lack of unified regulations in nation-state legislation for this purpose. However, Cryptonomica has several competitive edges here, which include:

Usage of OpenPGP, which is the most reliable, user-friendly, and widely implemented/integrated standard.

User keys are generated exclusively by the user themself, which prevents the provider to have a copy of the secret key.

No need to send a document to a server in order to put an e-signature, as opposed to popular services like DocuSign. This certainly enhances confidentiality of the documents being signed. Additionally, our standard allows for encryption of documents.

And the most essential thing: availability of legal recognition and enforcement mechanisms for e-contracts in most countries of the world, regardless of local laws. That’s because any transaction effected with e-documents may be transformed into a traditional arbitration court’s decision, which is recognized in accordance with international laws (if necessary, it may be on paper with apostille).

Currently, both services (digital signature and International Commercial Arbitration) are fully operational. We’ve had several ‘pilot’ arbitration sessions. Currently, we’re interested in cooperating with notaries from around the world, who are willing to use new technologies in jurisprudence.

FL: How do you estimate international commercial arbitration market, and how much could litigants possibly save in an ‘average’ case?

Max Baryshnikov: Cryptonomica links two markets traditionally considered separate: market of alternative dispute resolution (ADR), and e-documents services.

Our arbitration may review disputes not only if the parties are from different countries, but also when they are in the same country. For instance, both parties from Ukraine, or both from Russia – in this case the decision is recognized and enforced both in the country of incorporation/residence, and in another country where the decision is required to be enforced (with some exceptions, such as if both parties are Chinese residents, in which case the decision is not subject to enforcement).

As we offer settlements not only for international, but also for inland parties, and as arbitration courts are usually unwilling to disclose data on their operations (some of which never publish their decisions), it’s very hard to assess the market scope. According to available estimations,Â (1, 2), there are around fifteen international arbitration courts reviewing around 3,500 new cases annually (this amount is steadily growing). Currently it’s an expensive service available mostly to major companies.

FL: What do small and medium businesses do then?

Max Baryshnikov: We’re working on making international arbitration available for wider audiences, including medium and even small businesses.

Using modern technologies drastically reduces both trial time and expenses. A lawyer just opens a laptop, switches a webcam on, and he or she is in the court room. It reduces expenses for flight, accommodation, and other time-consuming issues for a customer. An application submitted via e-mail is delivered at once and for free (minus courier delivery expenses). Additionally, digital signature checks on e-documents is also free and instant, as opposed to traditional expert examination of papers.

We believe it’s important for online businesses using cryptocurrency settlements. We’ve actually reviewed disputes in several weeks, while a typical reviewing plan at an AAA is scheduled to last a year (and even that is thought to be faster than in a governmental court). In our opinion, this slowness is inacceptable for modern-day businesses.

We also see a great demand for using e-documents. Current market leader, U.S.-based DocuSign, claims to have 50 million users, and around 50 thousand new users every day. Unfortunately, proviers of so-called e-signature services are, in most cases, far for practical jurisprudence and dispute settlement, especially if they’re abroad of the U.S.

Test server for keys to play with is available at www.cryptonomica.work, and beta key server is available atÂ www.cryptonomica.net.

Interviewed by Tanya Otter

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Tags: Arbitration, blockchain, Cryptonomica, Max Baryshnikov, regulation