What is blockchain arbitration and can it replace the NY convention?
Arbitration has historically gained ground, inter alia, by enabling international enforcement through the NY convention. However, new digital innovation challenge established routines and working methods. Lise Alm, Head of Business Development at SCC, addresses the subject of blockchain technology and a future possible effect on the process of arbitration and the relevance of the NY convention.
You may have heard of blockchain arbitration. If you’re like me, you might have thought it was just another way to add the word blockchain to a random concept to try to make it sexier, and it kind of is. That said, even if blockchain arbitration still is in early stages, it might enable a ground-breaking change to international arbitration. Blockchain arbitration could remove the need for enforcement and thereby the need to abide by today’s procedural steps and safeguards.
Blockchain is a technology that allows you to store and trace information on a large number of computers at the same time. It also provides you with a trace of everything that happens in the system. This makes it virtually impossible to hack the system or corrupt the information stored since that would require hacking all computers at the same time. This makes the systems good for storing information about for instance ownership or tracing various types of transactions through updating registries.
The blockchains are decentralized and often does not have one central data storage or administrator. They are fully transparent in terms of transactions, but the true identity of the users can be anonymized behind a username. Essentially, you can hide in full daylight.
The values registered on the blockchain sometimes represents a real-world value, like a real estate registry or intellectual property rights, and sometimes it represents something that only exists on the blockchain, like a cryptocurrency.
As with most digital systems, you can automate actions in the system using various if-then rules. For instance, a payment for a shipment could be described as “If the buyer registers the reception of the goods on the blockchain, then a value, eg Bitcoin, shall be transferred to the seller”. This is essentially the description of a “smart contract” – i.e. a contract or software that auto-enforces via blockchain when certain conditions are met.
The step to apply this on arbitration instead of contract creation is not far. Imagine instead of a “smart contract” a “smart award”? The judge renders an award on blockchain, which automatically enforces it as soon as it is rendered. I.e., if the award for instance stipulates that the respondent should pay damages to the claimant, the award could be coded to immediately transfer e.g. cryptocurrency on the blockchain, just like a “smart contract”. The asset could of course also be a real-world asset, like IP ownership, where the registered ownership is updated on blockchain. No further enforcement process would be needed and no need for a national institution to assist in the enforcement with an unwilling loosing party.
Today, arguably not enough assets are traded on blockchain for this to be relevant in practice, but this will almost certainly change. Over time, more and more assets will be traceable or tradeable on blockchain, making blockchain enforcement more and more relevant. A report from WTO already in 2017 states that “if the projects that are under development succeed, Blockchain could well become the future of trade infrastructure and the biggest disruptor to the shipping industry and to international trade since the invention of the container.”
What will this mean for arbitration?
100 years ago, arbitration gained ground by promising speed and confidentiality. In 1958, the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York convention) provided the grounds for international arbitration by adding international enforcement and the removal of the need for trust in the other party’s national court systems.
The combination of speed, confidentiality, international enforcement and removal of the need of trust in central institutions is the calling card for blockchain. The enforcement is immediate, it provides both transparency and anonymity, it’s by its nature internationally enforceable, and it does not rely on central institutions. The consequences and possibilities are thought provoking.
Blockchain cannot remove the adjudication aspect of arbitration. Until an AI judge comes along, a person needs to decide the dispute and render an award. Today, the arbitrator needs to stay within the procedural safeguards provided by the NY convention and local law to ensure that the award rendered is enforceable. Those safeguards are intended to ensure a fair process and outcome. When you no longer need to stay within the parameters of the NY convention to ensure enforceability, how will that effect the process of arbitration? When blockchain enforcement provides a new possible path to the goal, we need to make sure we still include the procedural safeguards we deem necessary to continue to provide a fair outcome.
Head of Business Developement