Cryptocurrency and Arbitration: Exploring the Frontiers of Arbitrability in India

By: Colin Cherian (School of Law, CHRIST, Bangalore)


INTRODUCTION

A number of cryptocurrency platforms stipulate arbitration as the method for adjudicating cryptocurrency disputes. Although in the international setting, arbitration of cryptocurrency disputes is common, such disputes are nearly unheard of in India. Moreover, no legislation or precedent in India has provided for or determined arbitrability of cryptocurrency disputes. This article attempts to explore the impediments to the arbitrability of cryptocurrency disputes if any, in the Indian context.

The kernels of confidentiality, minimal State interference and control over the process make arbitration a suitable dispute resolution method for cryptocurrency disputes. Due to these and other advantages, most cryptocurrency platforms prescribe arbitration as the method of dispute settlement between the parties. As evident from a Supreme Court’s recent judgment, Indians have a sizable interest in these virtual currencies (“VCs”). However, the lack of provisions for arbitrability would undoubtedly prevent cryptocurrency disputes from being settled by way of arbitration. It is in this light that the post explores and attempts to reconcile arbitrability and cryptocurrency disputes in an India-seated arbitration.

ARBITRABILITY IN INDIA

Not all disputes capable of being settled in courts may be submitted to arbitration. Arbitrability or the question of whether the disputes are capable of adjudication and settlement by arbitration rests on three facets; (i) whether the disputes are capable of adjudication and settlement by arbitration; (ii) whether the disputes are covered by the arbitration agreement; (iii) whether the parties have referred the disputes to arbitration. For our perusal, we limit our queries to whether the cryptocurrency disputes, by virtue of their nature, are capable of adjudication and settlement by arbitration.

India’s Arbitration and Conciliation Act 1996 (“the Act”) is silent on the kind of disputes which may be termed inarbitrable. Judicial innovations, the foremost being the decision in Booz-Allen & Hamilton Inc v SBI Home Finance Ltd, has enumerated six categories of disputes that are inarbitrable. Inter-alia, it has been established that a dispute is non arbitrable if it involves a “right in rem”.

THE QUALMS OF ARBITRABILITY OF CRYPTOCURRENCY DISPUTES

Cryptocurrency eludes a universally agreed definition. Although most institutions (see IMF, ECB, SEC) and courts agree that cryptocurrencies are intangible mediums of exchange with no public authority overseeing its issuance and distribution, the central problem is that these institutions cannot unanimously agree on settled categorisation of VCs as money or goods. Even the Supreme Court acknowledged the multiple definitions as not exhaustive and compared the present dilemma to the Jain tale of four men describing an elephant but end up describing only one physical feature of the elephant.

There is, however, little disagreement that both cryptocurrencies and shares bear a strong resemblance to each other. They are both intangible and like shares which are issued by IPOs, VCs also are issued through an ICO.  Further, both their price depends on demand and supply and are also purchased through an intermediary. Essentially, cryptocurrency transactions can be likened to stock-trading. If securities transactions are held to be arbitrable, then it should be subsequently considered to mean that cryptocurrency transactions are arbitrable too. Despite of NCLAT having jurisdiction, the SEBI encourages arbitration for security disputes. Consequently, an inference can be drawn here that as long as the dispute involves rights in personam, the arbitrability of the dispute is positive. Alternately, even if it is argued that cryptocurrencies are more commodities than shares, a SEBI circular prescribes arbitration as the dispute resolution process for commodity disputes. Hence, the Indian setting allows and even encourages settlement of security/ commodity disputes as long as it involves “rights in personam.

Owing to its digital presence, decentralized functioning and lack of regulatory mechanisms, cryptocurrency disputes range from fraud, privacy concerns, IP disputes, payment issues, money laundering links amongst other potential violations. As evident from above, while cryptocurrency disputes should be arbitrable by virtue of their nature, the cause of action would further determine arbitrability.

Relying on its characteristics of intangibility and mobility, cryptocurrencies are likely to fall in the ambit of goods as under the Consumer Protection Act 2019 (“CPA 2019”). Thus, any issues relating to unfair or restrictive trade practices would be submitted before the Indian Consumer Forum. However, courts are likely to hold CPA 2019 to be inapplicable to cryptocurrency disputes based on the reasoning that users of the cryptocurrencies are not ‘consumers’ as required under it. In other words, although cryptocurrency may be associated to goods, its users are not consumers under the CPA 2019 since consumers are defined as persons buying goods and services to the extent the purpose is not for resale or commercial use. Buyers of VCs either sell it at a higher price for profit in the future or to use it as a medium of exchange. Along the same vein of rationale, multiple precedents (See Praveen Gupta v Star Share & Stock Brokers Ltd) have concluded that disputes arising from share-trading-transactions between the parties do not fall under the ambit of consumer disputes due to their commercial nature. Thus, cryptocurrency disputes are not consumer disputes and consequently, their arbitrability is unhindered to that extent.

In the Indian setting, disputes involving ‘serious fraud’ or criminal offences (see A Ayyasamy v A Paramasivam & Ors) have limited arbitrability. While what constitutes a ‘serious fraud’ was left to the determination of the parties, the decisions in Rashid Raza v Sadaf Akhtar and Avitel Post Studioz Ltd v HSBC PI Holdings (Mauritius) Ltd elaborated on the subject. The Court girdled arbitrability in fraud cases to the extent that firstly, allegations of fraud must attack the existence of the arbitration clause or the agreement and secondly, the issue falls in the public domain. Furthermore, it is established that concurrent criminal proceedings carried along with the arbitration proceedings shall not vitiate the arbitrability of the dispute. These decisions would entail that cryptocurrency disputes involving fraud would be susceptible to arbitration in India.

CONCLUSION

As it stands, cryptocurrency disputes are arbitrable, owing to its characteristic similarity to shares and the kinds of the disputes involved. However, India does not recognise the blanket arbitration prescribed by cryptocurrency platforms. Furthermore, Cryptocurrency disputes involving criminal offences or disputes affecting rights in rem cannot be submitted to arbitration. Without a doubt, if a cryptocurrency dispute is referred to an India-seated arbitration involving one of the above non-arbitrable subjects, such a reference may be challenged in a civil court and any award by a foreign-seated arbitration is certainly liable to be put aside if it involves one of the above. Nevertheless, drawing cogent parallels with shares-commodities, in all other matters excluding disputes associated with “rights in rem” or conflicting with public policy, cryptocurrency disputes may be referred to arbitration.

However, a progressive holding such as above is likely to pose an uneven playing field for the many Indian users. Most arbitrations, being seated in foreign jurisdictions, are likely to limit access to judicial forums, increase costs and deter potential claims. Seemingly, these benefits, which bolster arbitration as the preferred method of dispute resolution for cryptocurrency disputes in the international paradigm, would at the same time call for an intervention to protect the many credulous Indian buyers of VCs.

(The author is an outgoing student at School of Law, CHRIST, Bengaluru.)

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