You don’t need blockchains for arbitration but you need arbitration for blockchains

Blockchain / Monday, May 14th, 2018

The Kluwer Arbitration Blog has an interesting post titled  “Why we don’t need blockchain to manage cases in international arbitration” which you can read here.

While it is difficult to argue that blockchains add much value to the arbitration process (I), arbitration is an essential mechanism for restoring trust between parties transacting on a blockchain (II).

I. You don’t need blockchains for arbitration when databases work just fine

The author of the blog post correctly points out that blockchains are not required where a database can do the job. He also points out that in cases where centralized cloud storage could raise concerns of integrity or confidentiality, technological solutions such as distributed hash table (DHT) technology, which predate blockchains, are slowly gaining currency :

“(…) many arbitral tribunals have been able to effectively manage the filing of a large number of documents by the parties with the assistance of third-party cloud storage providers such as Dropbox, Amazon AWS and Google drives.

The real issue as to whether such a practice should continue to be used in international arbitral proceedings emanates from a concern that such cloud storage providers may not have adequate security protocols which can prevent major cyberattacks in the future. If they do not, it could potentially lead to the unauthorised disclosure of documents in the public domain and thereby undermine the confidential nature of the arbitral process.

In order to obviate this concern, the use of decentralised cloud storage systems is slowly gaining currency. (…) In short, in a decentralised cloud storage system, a document is encrypted and shredded into smaller parts and duplicated. The smaller files are then sent to different computers on a peer-to-peer network. This effectively means that in the event of a cyberattack against one specific computer, it will still not be possible to access the original document. The only way it would be possible is by using a private key to reconstruct and decrypt the original document with the aid of distributed hash table (DHT) technology. DHT technology notably predates blockchain and an earlier version was in fact used by companies (such as Napster and BitTorrent) to infamously share files over their peer-to-peer networks in the early 2000s.

Moreover, it is noteworthy that several arbitral institutions (such as WIPO, JAMS and the Court of Arbitration for Sport) have already introduced their own electronic case management systems, which allow parties and the arbitral tribunal to upload documents in relation to an arbitration reference on a secure website hosted by the arbitral institution. A blockchain platform is neither necessary nor currently used by such institutions to operate their electronic case management systems.”

I have made the same point in a different context, where I argue that most blockchains are not really blockchains and that the term “blockchain” is mostly used as a euphemism for databases.

II. You need arbitration to restore trust between parties transacting on a blockchain

The raison d’être of a blockchain is to allow parties to transact with each other without relying on a trusted third party. As a consequence of such a system, transactions on a blockchain are computationally impracticable or impossible to reverse (for detailed explanations, read the bitcoin whitepaper).

Yet there can be several reasons for parties who require a trusted third party to enforce their contract to want to transact over a blockchain. These reasons could include the need for censorship resistance, the preference for a cryptocurrency over a fiat currency or the very nature of the contract (for example, a contract for exchanging cryptocurrencies).

This is where arbitration adds value by allowing parties to transact over a blockchain while having a trusted third party (ie. the arbitrator) for dispute resolution.

Arbitration allows to not only to restore trust between parties transacting on a blockchain, but also to make the dispute resolution mechanism more efficient by leveraging the advantages of blockchain technology. Thus : 

– by using technologies such as 2-of-3 multisig adresses, the arbitral award can be directly enforced on the blockchain without the need for enforcement proceedings in national courts ;

– arbitration can even take place between anonymous parties, as long as both parties trust the arbitrator. 

Rudimentary forms of arbitration have already been applied for settling disputes in the blockchain ecosystem. A prominent example is the use of arbitration on the p2p exchange network called Bisq.

Arbitration lawyers would therefore be well advised to focus on the legal niceties of applying the age-old technique of arbitration to the brave new world of blockchain based transactions, instead of trying to use “blockchain technology” to conduct standard commercial arbitrations.