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Blockchain and International Arbitration: Opportunities and Challenges

Is the law too slow for rapid technological development—such as blockchain—to ever reach its full potential?


I. Introduction

The arrival of blockchain technology in commercial contexts has seen, and will continue to see, a number of significant developments at all stages of the commercial process, from the drafting of agreements to the implementation of those agreements as well as the resolution of disputes arising out of those agreements.

This paper seeks to explore the role that blockchain technology can have in the dispute resolution process and in particular the role it can play in the sphere of international arbitration. In addition to the analysis, this paper will submit that blockchain’s impact on commercial dealings on the international should not be underestimated and nor should the resulting effect that the realm of international arbitration feels. Blockchain will increase efficiency in a number of ways for the arbitration of international matters. However, this paper will also submit that whilst there is a push towards the globalisation of legal international arbitration, the surety and security of good state-based governance of emerging technologies, especially in such an expansive ecosystem as international arbitration, should not be forgotten.

II. The Basics of Blockchain

First, the question that must be answered: what is blockchain and how does it work? Blockchain consists of an immense number of data packages (blocks), each of which contains a series of transactions. Each time a new block is created, it is added on to the end of the pre-existing chain of other blocks comprising the blockchain. In short, the best way to conceptualise blockchain at its most fundamental level is a long chain where each link in that chain is actually a ‘block’ enclosing a set of data.

This process of stacking blocks in the form of a chain is based on two principle mechanisms: a distributed ledger structure and the consensus process. The combined effect of these mechanisms creates a functionality whereby the functionalities of the entire blockchain network even if particular components, called nodes, break down. This creates a secure network which is capable of being viewed but not capable of being altered. An entirely secure, efficient and transparent digital database. It is difficult to conceptualise an industry where this sort of technology would not be a benefit or, at the very least, a utility.

Despite the apparent usefulness of blockchain, at least at its most fundamental level—that is as a secure and transparent database, its utility has is still to be fully explored. It has been suggested that there is some hesitancy from large corporate and governmental organisations to fully embrace blockchain. This is because whilst blockchain offers the opportunity to rapidly boost the effectiveness and efficiency of systems and processes it is inherently a de-centralising technology and where power is centralised in a particular industry or even within a particular state the utility of blockchain can only be fully explored upon the changing of current centralised models.

It is against this backdrop that we turn now to an observation of the landscape of international arbitration and some of the potential roles that blockchain could play in that landscape.

III. The Realm of International Arbitration

International arbitration, for the purposes of this paper, may be thought of as the process of settling international disputes in relation to international trade and commerce such as the sale of goods, supply of services, carriage of goods by air, sea or land, international financing as well as insurance. Arbitration involves a semi-judicial process whereby parties are allowed the flexibility to choose many aspects of who, how, where, and in respect of what law, a third party is going to resolve their disputes and once those decisions are made those decisions are given effect by relevant laws and the decisions made by the arbitrator will be binding. There are key categories of international dispute: disputes between governments; disputes between governments and private persons (whether natural or legal) and between two or more private persons. Of course, complicating the matter even further is the operation of multiple jurisdictions all over the world, each of which has unique legal foundations, as well as settled treaties, such as the United Nations Convention on Contracts for the International Sale of Goods (CISG) to which many countries around the worlds are signatories. After the Global Financial Crisis in 2008 there has been a substantial increase in international commercial arbitrations generally. This has seen an increased demands for an efficient and fluent arbitration process.

Some have suggested that international commercial arbitration necessarily operates within its most effective form when it can be said to be ‘universal’ and ‘decentralised.’ When one considers the burdensome effect that such a diverse array of differing legal principles, outcomes and also differing legal systems that are in play in the world of international arbitration, one can see merit in such the opinion that decentralisation is optimal. As commerce becomes increasingly globalised, attempts have been made to decentralise the field of international commercial arbitration through the use of uniform and model laws, conventions, regulations and treaties (including the United Nations Commission on International Trade Law Model Law on International Commercial Arbitration. One more such example of the usefulness of a decentralised and universal field of international arbitration is the feature that arbitrators are private individuals, without connection to a state or state judicial system, and who are encouraged to give opinions rather than simply regurgitate precedent.

Despite the above; whilst universalism and decentralisation might be said to result in an ideal international commercial arbitration body, the fact is that the field of international commercial arbitration is still deeply rooted in national, domestic law and legal systems. In the realm of international arbitration, an arbitral award—a decision made by an arbitrator in respect of a dispute—must be recognised by local law before it can be recognised internationally. Furthermore, it is common for parties to include ‘choice of jurisdiction’ clauses in the agreements that govern their dealings. As it is open to parties to decide where their disputes are to be arbitrated, most parties regard a choice of local arbitration rules as a submission to the local law and jurisdiction which will govern the entire agreement as those arbitration rules are often part of the local ‘law.’

An observation of the somewhat struggle between the international influence on the shape of jurisprudence in international arbitration and between the prima facie supremacy of domestic law can be viewed through the lens that Australia provides. On one hand, Australia’s International Arbitration Act 1974 (Cth) adopts the United Nations Commission on International Trade Law Model Law on International Commercial Arbitration as the primary law which governs international arbitrations in Australia. On the other hand, Australia has disregarded uniform laws in respect of domestic arbitration and has modeled its laws around United Kingdom legislation which allows for greater scope for judicial intervention in the arbitration process. Whilst these are two separate bodies of law, the discrepancy between the approaches taken by Australia demonstrates two things: first that, if given the choice, Australia prefers an arbitral system which allows for more judicial control. Second, that the appeal of a universal and decentralised international arbitration regime, as well as a desire to be a good ‘global citizen’ has shown to be enough overcome individual state preferences in respect to arbitration generally. As Australia’s arbitration regime mirrors, at least to some extent, that of the UK, the same might be said in respect of the UK.

In light of the above, this paper notes that the internationalisation and decentralisation of the field of international arbitration is central to ensuring the ultimate efficiency and productivity of an international arbitration regime. However, for the reasons that follow, this internationalisation should not be read by private persons, organisations or by states as extending to the use of state-transcendent technologies and mechanisms such as blockchain. Blockchain is of utility in respect of two components of international arbitration, namely enforcement and procedure. But that is only as a result of efficiencies that blockchain creates in the entire commercial process. When it comes strictly to the utility of blockchain in international arbitration, or justice generally, there are some inherent inconsistencies with the operation of the technology and the administration of justice, which are outlines below, that require a bias towards control and surety rather than efficiency and less ‘red-tape.’

IV. The Benefits of Blockchain in International Arbitration

It was noted earlier that blockchain’s capacity to expedite and simplify the entire commercial process will have a flow on benefit to both the enforcement and procedural components of international arbitration. The specific benefits that one might expect to see as a result of the rising prominence of blockchain in international commerce are set out as follows:

Enforcement

But before external arbitration may even be required, blockchain could be utilised to include perpetual terms in agreements between more than just two parties that cover an entire arbitration arrangement and allow parties in that agreement to take enforcement action against parties who neglect their obligations and thus are able to access swift and efficient enforcement. However, as will be noted below, this comes with substantial risks in relation to the role of the state in administering justice.

In addition to ensuring enforcement, this same example can also demonstrate the usefulness of blockchain in facilitating compliance. In heavily regulated industries and where the overlap of laws can be so diverse, as is the case in international trade, blockchain and the distributed ledger technology has the capacity to create certainty and make requirements clear. With efficient, self-administered enforcement capabilities as well as the capacity to ensure compliance, it follows that blockchain may streamline international arbitration by reducing the burden—both in a financial and in a temporal sense—arising from reliance external third parties.

Procedure

The seemingly most apparent use of blockchain technology in order to assist with international arbitration is self-executing contracts or ‘smart contracts.’ Smart contracts can be built to utilise blockchain technology to automatically administer a parties’ obligations immediately on the completion of some prerequisite. On its face this just benefits the commercial world, generally, and therefore has a residual impact on international commercial arbitration. Whilst this is true, the importance of certainty and clarity in contractual rights and obligations, especially in the field of international arbitration, ought not to be undervalued. Blockchain has the capacity to provide an up to date reflection of each parties’ rights and obligations, the extent to which they have been performed, the consequences/damage incurred as a result of them having or not having performed their obligations and can also provide for the logistical details—such as modes of payment—under the agreement. This has the capacity to create a much more efficient arbitral process.

In addition, blockchain technology necessarily has the capacity to transcend states. If the emphasis of international arbitration is on decentralisation and universalism then blockchain provides the ultimate tool. The distributed ledger technology has the capacity to appoint arbitrators, securely store and display information relevant to any and all arbitrations as well as the aforementioned capacity to actually arbitrate the matter. There can be no doubting that blockchain is a tool which can streamline processes. This benefit certainly does have a place in international arbitration, as already mentioned. However, the submission of this paper is that blockchain technology as a primary tool in international arbitration carries too many risks and it too inherently opposed to pre-existing notions of public justice and surety in the law that it should not be relied upon as a primary tool.

V. Why We Should Not Turn to Blockchain in International Arbitration

Whilst blockchain presents a number of opportunities in business, and in turn in arbitration, it also gives rise to a number of challenges which must be considered, and navigated, before embracing blockchain in international arbitration to the fullest extent possible.

Stateless Justice

One risk that has been pointed out as arising from the adoption of blockchain in international arbitration is that of the concept of ‘stateless justice.’ As was noted earlier in this paper, arbitration is only semi-judicial and parties to a dispute have freedom of choice over many components of an arbitration, including who the arbitrator is. Arbitration is, usually, a private dispute resolution method which can be reached without the active reliance on the state. This, on its face, seems to lend itself to the argument that blockchain, being stateless in its nature, is the perfect tool to securely store and manage transactional data in respect of which private arbitrations are being conducted. However, what must not be forgotten is the foundational integrity in enforcing justice that the state plays in international arbitration.

Whilst parties are free to choose whether to abide by their private arbitration order, enforcement can only be attained through the assistance of the state. Further, international enforcement under the New York Convention can only be achieved once the local state has recognised it. What this demonstrates is that the legitimacy that the state provides in enforcing arbitration orders is still central to the doing of justice. Blockchain technology and its self-enforcing capacity has the potential to allow individual parties to take enforcement into their own hands and as such could undermine the legitimacy of state recognition of arbitral orders and as such could undermine entire international accords in relation to arbitration. In the context of business typically campaigning against more government regulation, the introduction of blockchain’s enforcement capabilities could have anarchical implications in the world of international commerce.

Readable Form

One other risk that arises in relation to the integration of blockchain technology as a primary tool in areas of law such as international arbitration was raised by Swinburne University’s Jake Goldenfein and University of Melbourne’s Andrea Leiter by way of a comparison with the medieval practice of issuing writs in law. In their article the authors point out the comparison between blockchain and the effect of legal reality becoming “contingent upon a person’s ability to express it in the required form.” The continued growth in reliance in blockchain in law has the potential to make political questions, such as the types of transactions that are permissible and the modes of dispute resolution that are available on the blockchain, the subject of commercial technological innovation.

This paper submits that cataloguing and structuring the dispute resolution mechanisms on distributed ledger technology neglects the intricacy of international arbitration. International arbitration has been the subject of a great deal of uniformity movements and international cooperation; however, as was noted earlier in this paper, the role of local laws and legal institutions are still foundational. And each state’s own laws and legal systems across the world have their own intricacies. Furthermore, there are social, legal and political consequences of legal outcomes and, if left to be administered by the blockchain the risk of subverting political issues at the hand of the “ideal of efficiency.”

Is it not a lack of efficiency in the first place?

Another reason to approach an adoption of blockchain technology in international arbitration should be taken with some caution is that there is perhaps no certainty that blockchain—in its current state—is solving an inefficiency. A blockchain platform uses immense energy and can take some time to process data. In addition, cloud-based storage providers are increasingly capable of managing large archives of documentation and several arbitration institutions have already introduced systems which take advantage of cloud-based storage in order to create case management systems that allow parties to upload and access documentation on secure site hosted by the arbitral body. With the strength of encryption and privacy requirements imposed on cloud providers, there is some question too as to whether the security of blockchain technology enough of an advantage to move away from the efficiency and ease of cloud-based data management systems. Whilst blockchain presents the opportunity to revolutionise the management of transactional data, the application of discretion, in lieu of the already efficient and secure data management processes in place, it would likely enable the further development of blockchain initiatives in arbitration. In any event, the use by blockchain of the ‘block’ mechanism to secure data is not without risks.

The Lay of the Law

Despite all of the above, with the indulgence of the reader, this paper will turn to outlay some of its own opinions about the being that is the law and how that being prevents legal-technological innovation from reaching maximum potential in international arbitration or in any other field of the law, for that matter.

The law is the very foundation upon which society, politics and the economy rest. Since the Magna Carta under King John in 1215 and the Provisions of Oxford under King Henry III in 1258, the rule of law has underpinned the growth of states as a geographical entity and the growth of nations as socio-political entities. The rule of law is rooted in custom, tradition and, above all, the necessity of utility. The law must be a tool which allows the governance and security of members within a nation-state. With this, the law—subject to certain ideological beliefs—has the capacity to fundamentally shape the entire social, political and economic landscape within a society and within a state. Ends are achieved by the means of the law. One such basic example of this is the use of taxation restrictions or exceptions in order to increase productivity and investment of the money being saved back into the economy. However, despite this, the law is inherently reactive rather than proactive and while the law has the capacity to drive us forward, its focus is simply on maintaining safety, security and order.

Of course there is a role for both proactivity and reactivity in the law. Policy makers have the capacity to introduce forward-thinking laws whilst, at least in common law jurisdictions, judges and other legal decision makers are charged with creating a foundation from which any person can see how the laws will be applied in circumstances. Yet policy makers are driven by re-election and judges are bound by precedent. The law forces compliance and is very little more than a cost factor, an administrative burden and a means of protecting rights.

Whether we like it or not, the law is inextricably bound by conservatism. It maintains tradition, it is reactive and it will not take risks to advance innovation. Blockchain is a radical new technology with the potential to innovate but the law is not the forum in which innovation tends to happen first. Perhaps the age of technology bucks the trend but this paper submits that conservatism and precedent restrict innovation in the law to the confines of surety and security. As such, innovative new means of administering the law, such as blockchain distributed ledger technology, are only a mere possibility for the time being.

VI. A Final World

Blockchain technology is driving innovative thought in a diverse array of fields all across the globe. It has the potential to mitigate a number of inefficiencies and, as we understand the technology more, the practical uses of blockchain can only increase. In theory, this might be said to extend to its application in the legal industry. The potential to reduce the burden on arbitrators by administering contractual entitlements on the fulfillment of obligations automatically as well as keeping a safe and secure record of transactions is a useful tool to streamline the industry. However, this paper has submitted that despite that utility, the international arbitration industry should approach adopting blockchain technology with some caution. There are a number of obstacles and risks which drive wedge between blockchain as a technological innovation and blockchain as a useful tool in the law. The law is inherently conservative and the function that it performs is served by the fundamental reactivity of the drivers of the law: policy makers and judges.

In light of the above, the legal industry should certainty look to the emergence of distributed ledger technology as an opportunity. It will streamline transactions, business processes and will make the management of rights and obligations substantially less convoluted. However, in the field of international arbitration, there are a number of specific risks and challenges that cannot be overlooked. Justice has tended to require the legitimacy of the state, the expression of legal doctrine in a particular form on a ledger carries with it the similar issues to those posed by the writ system in medieval times, there can be no certainty that there is even a problem for blockchain to solve and, indeed, despite the capability to be at the fore of innovation and to drive fundamental change, the law does not provide a particularly fertile breeding ground in which innovation, such as that of blockchain in international arbitration, can prosper. It is therefore the submission of this paper that whilst there are opportunities now, the utility of blockchain in international arbitration will remain unknown until the full extent of the usefulness of distributed ledger technology becomes known and is applied in other contexts first.

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