Blockchain: a new frontier for dispute resolution?

This article was co-authored by Isaac Chulu Chinn, Trainee Solicitor, London office.

It is a challenge to find an actor in any commercial sphere who has not heard of blockchain. While most commonly associated with the cryptocurrency Bitcoin developed by the mysterious Satoshi Nakamoto in 2009, the applicability and uses of blockchain have since become far more wide reaching. This is owing to its key tenets - it is decentralised, digital and immutable which makes it a prime tool in a variety of sectors, from insurance to healthcare.

In recent years, blockchain has even incepted dispute resolution. Although still in its infancy, blockchain dispute resolution can provide a quick, cost-effective and efficient method of resolving disputes. However, the use of blockchain technology in dispute resolution is not without its pitfalls – due process and fairness are arguably being sacrificed in the name of efficiency, whilst the online nature of blockchain inevitably carries the risk of cyber-attacks. The fact that the use of blockchain in dispute resolution is largely bereft of regulation is also a barrier to more frequent market engagement.

Multi-signature address

One popular method of blockchain based dispute resolution is a tool known as a ‘multi-signature address’. Here buyer and seller enter into a ‘smart contract’ which is an automatically executing computer program with the terms of the agreement contained in its code. This provides them both with a digital ‘key’ prior to the transaction completing. If buyer and seller are satisfied with the transaction then both keys are used to release cryptocurrency to the seller. However, if there is a disagreement, a third party will adjudicate the dispute, providing a second key to the party who they believe is entitled to the funds. Said party will now have two keys, which will allow them to access the funds.

Crowdsourced dispute resolution 

Similarly, in the last few years a number of start-ups which use blockchain technology to create crowdsourced dispute resolution platforms have popped up. The most popular ones are Smart Justice, Kleros, and CodeLegit. They all operate under roughly the same premise:

  • At the start of the transaction the funds are locked in a smart contract
  • If the buyer is happy the funds are released to the seller
  • If there is a dispute, online jurors are randomly selected
  • The jurors consider both sides of the argument and vote on who the funds should be attributed to. They are incentivised by the fact that those in the majority receive a fee, while those who vote against are penalised.

Blockchain technology can also be used to compliment and streamline more traditional methods of dispute resolution such as litigation or arbitration. For example, blockchain can be used to make disclosure exercises faster and thus more cost-effective by automatically collecting and reviewing relevant documents.

Positives and pitfalls

Blockchain dispute resolution mechanisms have many advantages. Most notably, they can be very cost-effective for parties; they obviate the need for the arduous process of litigating in state courts and decisions are enforced automatically. This circumvents lengthy and often expensive battles to enforce judgments.

It is crucial, however, that the quest for cost efficiency does not compromise due process. Blockchain jurors and arbitrators are rarely qualified lawyers, which can render the use of blockchain dispute resolution mechanisms unsuitable for complex disputes. Naturally, this also raises the question as to whether a fair outcome is being reached – there is good reason jurors are not typically used to resolve commercial disputes in the UK.

Additionally, the self-administering nature of distributed ledger technology robs parties of flexible or innovative settlement terms. Outcomes are therefore typically binary – pay claimant, do not pay claimant etc. - meaning there is not much room for a middle ground, which in some cases may be the most equitable decision. Blockchain dispute resolution also carries an additional threat of corruption. Indeed, no software is bug free, and in the context of traditional dispute resolution this could create an unnecessary cyber security risk.

Currently, the use of blockchain in dispute resolution is largely devoid of regulation. This is mainly due to the decentralised nature of blockchain making it is a difficult to establish jurisdiction. However, as cited by the LawTech Delivery Panel – chaired by Sir Geoffrey Vos, the Chancellor of the High Court and Chair of the UK Jurisdiction Taskforce – smart contracts will likely be enforceable in the same way as traditional contracts. The Law Society’s paper ‘Blockchain: Legal and Regulatory Guidance Report’ calls for authoritative guidance on the matter and it is hoped this will ignite the further regulation of blockchain’s role in dispute resolution.

Comment

It is vital that law firms embrace blockchain dispute resolution as soon as possible. There are clear benefits for clients and it is highly important that lawyers understand and are able to advise on the use and appropriateness of different blockchain dispute resolution mechanisms. Lawyers can contribute beyond their own client base as well. Those with legal expertise and an understanding of the potential benefits and pitfalls of blockchain’s role in dispute resolution will not only increase client engagement but will be well placed to advise consultation groups and regulators alike.

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