“Blockchain.” It is a term that is bandied about these days as the next great thing to happen in internet technology. In fact, it is often referred to as “one of the hottest and most intriguing technologies in the market today.” (“Blockchain: A New Type of Internet, Lovenesh Bansal,” Interconnections—The Equinox Blog, Oct. 5, 2017). Yet to many of us, the term remains mostly an enigma. Even if you are aware of blockchain technology, you may not be aware of its complexities or its potential to significantly affect how global business is conducted. This article will briefly explain how blockchain technology works and the critical role arbitration will play as it becomes entrenched in worldwide commerce.
We begin with a basic understanding of what blockchain is. Blockchain is the purposeful public or private record of transactions that is distributed to thousands of chain participants around the world. No one person controls the blockchain. Rather, every person in the chain has immediate access to the data, and computers run complex algorithms to validate the information that has been distributed. Blockchain has been described as instantaneous communication between a massive number of parties. As such, it is claimed that it is a system that provides transparency, security and financial economy. Blockchains can be public, as used for cryptocurrencies, or private, for use by various businesses and corporations. Because there is no centralized distribution system and no central server, it is alleged that blockchain can provide instant verification of data that is free from manipulation and the threat of hacking.
Blockchain technology began in the accounting of bitcoin and cryptocurrency. From there, it has spiraled into almost every sector of business, including all manner of financial transactions, sales and distribution, shipping, transportation, real estate and health care, to name a few.
An excellent example of how blockchain technology works is the creation and use of “smart contracts.” Smart contracts are self-executing with the terms of the agreement written into lines of code. That “block” is then distributed across a decentralized “chain” of, potentially, thousands of users. Once recorded, the data in the block cannot be altered. While anyone can create a “smart contract” in the first instance and add it to the blockchain, once it is there, it will do exactly what it was programmed to do, and no individual or group of individuals can change that. Thus, it is believed that smart contracts cannot be manipulated because, unlike Google and Facebook, the algorithms used are transparent to everyone in the chain. If the parties wish to change the agreement, they must create a completely new “smart contract.” The goal of the “smart contract” is to have trusted transactions and agreements between diversified and, sometimes, anonymous parties. “Smart contracts” are also touted because they eliminate the need for a centralized authority or legal system.
The words of praise used in describing blockchain technology generally and “smart contracts” specifically are “transparence,” “traceable,” “verifiable,” “trustworthy,” “invulnerable” and “economical.” It sounds a bit like a Utopian business arrangement, but as practicing lawyers we know too well that in any human endeavor, even with the assistance of computer technology, disputes are bound to arise. How are these disputes to be handled when there is no corresponding legal system? What is the appropriate jurisdiction for these disputes? What laws will apply? Are “smart contracts” even enforceable under current legal doctrines? If “smart contracts” are enforceable, how far along the “chain” will liability run? Even if enforcement is viable, how will any judgment be enforced? All of these questions remain unanswered. No one is quite sure how the dispute resolution aspects of the blockchain will work.
Enter arbitration. Arbitration may be the perfect mechanism to work with blockchain technology in the resolution of disputes. In the first instance, the industries currently using blockchain technology—finance, sales, real estate, transportation, shipping—are the very same industries in which arbitration has traditionally played a vital role. The natural progression from arbitrating traditional disputes to arbitrating disputes arising in the uncharted world of blockchain technology seems almost intuitive. Secondly, arbitration offers a neutral venue. Arbitration can be ad hoc or through a formal arbitral organization, at the will of the parties. The arbitration tribunal can also be established at the will of the parties. Indeed, there is no reason why the manner and form in which the parties wish to arbitrate cannot be written into a “smart contract” in the first place.
Third, with blockchain technology and “smart contracts,” the level of technical expertise of the arbitrators becomes critical. In arbitration, the parties can choose the arbitrators with the appropriate degree of expertise. Fourth, arbitration has also always provided parties with flexibility. It allows the parties to deviate from traditional legal systems and, to some extent, traditional legal doctrines. Fifth, arbitration offers finality, often in shorter periods of time, and this will be less likely to impede the speed at which the blockchain is intended to work.
Finally, and perhaps most importantly, there is the New York Arbitration Convention on the Recognition and Enforcement of Foreign Arbitral Awards. The convention permits a party to seek enforcement of the award in any country that has signed the convention. There are currently 159 signatories to the convention, including 156 of the 193 United Nations member states. Blockchain technology reaches thousands of chain participants on computers around the world. What better resource than the New York Convention to ensure that the resolution of worldwide disputes can be widely and readily enforced?
Blockchain technology is poised to change every aspect of business as we know it. As the technology evolves, it is clear that arbitration will play a critical role. As arbitrators and lawyers, we need to familiarize ourselves with this new technology; understand the process, the benefits and potential pitfalls; hone our skills and our ability to adapt to continual change and prepare ourselves to become an integral part of this challenging new frontier.
Louise Ann Kelleher is partner of counsel at Weinberg Wheeler Hudgins Gunn & Dial. She has experience in complex commercial litigation and arbitration involving foreign corporations, as well as in manuscript coverage disputes.