BL4SG Special Edition:Blockchain Litigation Update – Improving Access to Justice?
This is the second post in a series of eight about the discussions, leadership and community created at the first inaugural Blockchain Law for Social Good Conference held on October 20-21, 2022.
The session entitled “Blockchain Litigation Update – Improving Access to Justice?” provided conference attendees with a robust discussion on the nuances and issues that they see coming up in the realm of litigation relating to crypto assets. Lyndsey C. Heaton of Sideman and Bancroft LLP, Jeffrey L. Steinfeld of Winston & Strawn LLP, and Professor Spencer Williams of Golden Gate University School of Law joined by moderator Michael Hewitt of Sideman and Bancroft LLP, discussed the current issues and future issues that they see arising in blockchain litigation.
Professor Williams began by discussing his research in edge contracts, contracts that sit in between the digital and physical world which are effectuated in part by, or on a, blockchain. He spoke about how oracles, which are software systems that provide data to blockchain based smart contracts, allow the sale or purchase of physical assets to be transacted on the blockchain. Originally, oracles only provided data to smart contracts, now they are allowing the ownership of physical assets to be attached to smart contracts as well. These edge contracts are now creating new issues in the world of smart contracting such as the fact that they are self executing and self enforcing. This, however, becomes tricky when physical assets are referenced in the contract. Professor Williams then discussed a scenario in which there was a sale of a home through a smart contract, and after the contract was executed on the blockchain, the seller decided to back out of the deal. As a result, the buyer of the home cannot gain physical access to the home because the blockchain cannot provide that to them. To resolve such an issue, the buyer would then have to go to a court in the physical world to find some sort of a remedy. This, however, takes away from the self executing, self enforcing, and decentralized function of the smart contract on the blockchain.
Lyndsey C. Heaton discussed how in most scenarios, technology moves faster than laws, making it so that the courts and the laws may not have the right or even accurate framework to apply to such complex and new cases. She discussed how complicated the classification of cryptocurrency is, and how it is still being heavily debated. Even if frameworks from many years ago could apply, until those classifications are defined, it is impossible to know what law or set of laws would apply in cases dealing with crypto assets or cryptocurrency. This is a key issue that courts are struggling with – what is cryptocurrency and how do we value it? Since there are no set guidelines defining crypto assets, it is likely that different courts in different regions of the country will have a different interpretation on how any crypto asset should be classified. This will eventually lead to each jurisdiction having a different analysis on how to approach crypto asset based cases. Another Issue set Ms. Heaton brought up related to jurisdiction and how to know which court should be used for which specific cases? In the United States, this will likely depend on where the assets are, where the defendant is, and even what the value of the assets would be. This led me to conclude that lawyers need more guidance on how to address this issue. How can we make the right decisions for our clients if we are not sure where these cases should take place?
Jeffery J. Steinfeld spoke about the issues he commonly sees with the securities and enforcement side of blockchain asset cases. The most common question that comes up in his practice is whether digital assets are securities, commodities, or currencies. He went on to talk about how the SEC vs. Ripple case will affect how crypto assets are viewed in the eyes of the court. The main issue in that case is what the cryptocurrencies should be considered. The SEC believes that the Howey Test should apply, and Ripple does not agree with that analysis. The outcome of this case will affect many companies in the future and the way that crypto asset litigation will be determined.
The panelists discussed in further detail other issues that they believed were going to be important in future litigation. Lyndsey Heaton addressed additional jurisdictional questions. The discussion left me wondering, where would you prosecute a case if the crime occurred on the internet and the internet is everywhere? This is a big question because in the United States, courts must have jurisdiction to be able to listen to a case. Jeffrey L. Steinfeld brought up the fact that DAOs (decentralized autonomous organizations) are being targeted by the SEC and the CFTC, I wondered how would you hold someone accountable in a decentralized organization? Professor Williams elaborated his discussion regarding how on chain dispute resolution mechanisms, such as the oracle systems, do not work when applied at a large scale. “These networks cannot keep pace and fail to protect transactions involving significant sums of currency,” he stated.
With more and more blockchain litigation cases arising, perhaps the best way to handle litigation disputes would be to include a mediation or arbitration requirement in the terms of service for smart contracts. But one must wonder, would that create a limitation for victims of financial crimes and would these limitations provide an equal opportunity for justice for all victims. After all, even mediation and arbitration can cost significant amounts of money. Maybe there should be a completely new way to deal with such cases.
Clearly blockchain litigation is just at the beginning stages of the jurisprudence. There are so many unknown factors to determine and it is impossible to predict any outcome at the moment. The panelists did an amazing job of discussing what they believed to be the most major issues facing lawyers and litigation today. I will be keeping an eye on these issues and cases in the future.