On 28 April 2023, Singularity conducted an Expert Talk webinar on the topic “Digital Assets Disputes Demystified” as part of its ongoing initiative “Navigating Complex Disputes: A Quarterly Training Series”. The discussion was conducted by a distinguished panel who explored the intricacies, best practices, and solutions for resolving the disputes in digital assets including cryptocurrencies, NFTs, decentralised finance, metaverse, and stablecoins. The panelists also explored unique challenges faced in the industry and practical solutions to tackle them including the application for interim measures and litigation financing. Over 200 professionals across various industries registered for the event.The panel consisted of a diverse set of industry professionals across law firms, litigation funders, forensic experts, and quantum experts:

• Mr. Prateek Bagaria – Partner, Singularity Legal
• Ms. Sinem Mermer – Partner, Boden Law
• Mr. Cemal Araalan – Of Counsel, CBC Law
• Mr. Roman Bieda – Head of Fraud Investigation, Coinfirm Limited
• Mr. Montek Mayal – Partner and Practice Head, Osborne Partners
• Mr. Stuart King – Head of Research & Co-Portfolio Manager, Fulcrum Capital

The discussion was moderated by Ms. Jimisha Dalal (Counsel, Singularity Legal).

DISCUSSION

The panel’s conversation centered around 6 themes.

Overview of digital assets

Ms. Dalal set the ball in motion by discussing the rapidly changing landscape of this industry, including the emergence of new asset classes and the unique challenges they present to the legal sector. She highlighted the volatility of the digital asset industry, using examples such as the sale of Twitter CEO's first tweet for a staggering US$ 2.9 million and the collapse of Silvergate, Terra, and FTX. She also stressed the importance of addressing these challenges effectively and establishing best practices to support the industry's future growth.

From the panel, Mr. Araalan provided an introduction to digital assets in their current form. He presented an engaging infographic that classified crypto assets into coins and tokens. He described how these assets work on distributed ledger technology, where each transaction is recorded and verified. Mr. Araalan then provided a brief overview of each category of crypto assets.

Mr. Bieda noted that the differences in different crypto assets often arise from the underlying technology or the transfer process used. He discussed various services available in the industry, such as custodial and non-custodial services for storing crypto assets, mixing services that obscure the path of money, over-the-counter services that allow for seemingly opaque transactions at high volumes, and the emerging technology of the metaverse. He reckoned that DeFi is a promising financial technology model that aims at eliminating intermediaries and simplifying digital asset transactions and services.

According to Ms. Mermer, the future of digital assets and cryptocurrency is optimistic, despite the crypto winter. She anticipated that the value of these assets would increase, but many investors are waiting for regulatory measures to be put in place to ensure the security of these assets. She cited the recent directive by the EU to protect consumers in the digital asset space as an example of such measures. While she saw potential in the metaverse, she also recognized that its widespread adoption would depend on various factors, including advancements in software and hardware development. This progress will have a direct impact on other assets, such as NFTs.

Disputes

The discussion then moved toward disputes arising out of digital assets.

Mr. Bagaria reflected on his experience handling cryptocurrency disputes since 2013 and identified eight general categories of these disputes. He spoke about the FTX fallout, where a sister concern managed by the same individual on the same board was not caught by the SEC, and how it serves as an example of bad governance. He then emphasized the need to revisit established legal principles to help clients address their disputes effectively.

Ms. Mermer discussed the possible disputes that could arise in the context of NFTs and the metaverse, citing examples such as the Nike v. StockX and Hermès v. Rothschild cases, where disputes arose due to trademark issues. In the metaverse, she noted that potential disputes may emerge among users concerning the terms of use and personal data concerns.

Mr. Araalan discussed potential disputes associated with DeFi and stablecoins. He mentioned issues that may arise from coding errors in smart contracts that automate transactions, leading to disputes in their execution. He also highlighted governance disputes that may arise within Decentralized Autonomous Organizations (DAOs). Regarding stablecoins, he gave examples of Tether's inflated value and the SEC's lawsuit against Kik Interactives Inc. for conducting an illegal securities offering of digital tokens.

Investigation

Ms. Dalal then steered the discussion towards the significance of investigation support to uncover essential information and evidence to reveal relevant facts.

Mr. Bieda provided an outline of the difficulties related to examining blockchain transactions and the varied investigation methods used depending on the type of asset involved. He emphasized the challenge of obtaining data since blockchain users can conceal the identity of asset owners by creating multiple addresses and using them interchangeably. To tackle this obstacle, he described several techniques utilized to pinpoint the owner of a blockchain address, including the use of clustering algorithms to locate the suspect's address. He stressed the significance of tracing assets in real time and the necessity of efficient investigative tools to identify suspects in the blockchain industry.

Mr. King commented on the perspective of litigation funders and indicated that a funder usually evaluates the fundamental elements of the dispute, including the type of dispute, the documentation available before disclosure, the potential documentation that may emerge during the disclosure process, the contract or user agreement, and the extent of the damages involved.

Mr. Mayal added that assessing the damages requires the investigation results to request pertinent documents, data related to the particular cryptocurrency, price algorithms, and trades made.

Pursuing Dispute Resolution and Enforcement

Ms. Dalal then invited insights from the panelists regarding the approach for dispute resolution and how well the traditional fora are equipped to these new circumstances.

Ms. Mermer expressed satisfaction with the progress made by traditional fora in adapting to new circumstances and cited the UK Jurisdiction Task Force as an example of this progress, particularly with the issuance of new rules for resolving disputes related to digital assets. She noted that her own experience in finding an arbitrator with expertise in crypto and digital assets was easier now than in 2020.

Mr. Bagaria discussed the metaverse, which has sparked a debate on the limits between public space and private property, potentially resulting in defamation cases akin to those observed on Twitter. He remarked that a transition is underway from the digitalization of information to the digitalization of assets, which he believes will prompt an upsurge in support services for digital assets, such as new banks handling digital currencies, communities focused on digital property, digital infrastructure, and digital lifestyle products. He talked about the evolving regulatory compliance landscape and the non-compliance of cryptocurrency exchanges. He mentioned that parties have obtained interim relief in various jurisdictions, including Mareva injunctions, seizure orders, disclosure of information, and serving orders to unknown named parties. He found the convergence of arbitration and digital assets to be one of the most intriguing developments in the sector, noting that most major players in the industry now prefer arbitration.

Speaking about the government and regulatory action, Mr. Araalan observed that while regulatory agencies in the US have increased action in recent times, some countries have taken a more aggressive approach such as China which has banned cryptocurrency trading altogether. These regulatory actions aim to protect consumers, prevent money laundering and terrorist financing, and implement KYC obligations to create a safer environment.

Mr. Bieda shared his experience working with law enforcement agencies as an investigator, assisting them in taking legal action. He spoke about the real-time tracing services he provided leading to certain Virtual Asset Service Providers (VASPs) being fined. He highlighted an interesting challenge related to Tornado Cash, which is a mixer that was sanctioned. He pointed out that since it is a computer code, one may simply copy this code and make another mixer. Thus, the question remains whether creating another mixer by copying the code would also be covered by the sanction or not.

Mr. King opined on the key points that both the lender and consumer should be mindful of. These usually include knowing the nature of assets and their current market value, affiliates of the company, and the expected time of recovery. The underlying applicable law plays a vital role as well. For example, the US Bankruptcy provides for a 90-day clawback period which may increase the amount of recovery.

The panelists agreed that despite the remedies, the most differentiating aspect of these assets has been with respect to enforcement. Ms. Mermer gave insight into this and noted once assets are traced in a specific jurisdiction, it is important to consider whether it will be possible to enforce any awards in that jurisdiction because certain countries have banned trading in cryptocurrencies such as Turkey, China, and Greece. She provided an example of an interesting case of enforcement in Turkey related to Binance, Turkey.

Mr. Bagaria commented on the unique characteristics of cryptocurrency as having aspects of both cash and bank accounts, with on and off-chain traceability. He emphasized the importance of tracing digital assets' movements for effective enforcement, and noted that blockchain's transparency can aid in tracing and locating cryptocurrency. He also suggested that in some cases, institutional players may be held liable for aiding and abetting or violating regulatory rules, rather than only pursuing fraudsters. He also expects the amalgamation of artificial intelligence and the blockchain in the future.

Assessment of damages

Mr. Mayal noted that the first step in the valuation process is to identify the subject asset and determine its form and function. He then gave a brief methodology for valuation related to each type of crypto asset. For instance, security tokens can be valued using the income approach and the market approach. However, the liquidity of the underlying token and trading volume must be considered. If the token is not traded frequently, comparable tokens can be used as benchmarks for valuation. Utility tokens, can be valued using the market approach, cost approach, or opportunity cost approach. Whereas, NFTs are unique and may require different valuation methods, especially those that provide additional memberships or access.

Litigation finance

With respect to litigation funding of digital asset disputes, Mr. King stated that in this industry, it is crucial to consider who manages the disputes. The approach to diligence involving digital assets is not significantly different from that of conventional assets. Still, there are specific considerations unique to digital assets, such as the merits of the case, the nature of the asset, and the jurisdiction. He also noted that it is essential to understand the counterparties, their ability to pay, and where they are located. While a case may have merit, it still may not be possible to successfully recover damages due to insolvency or questions of creditworthiness.

With that, Ms. Dalal summarized the discussion and concluded the conference.

The videos of the conference can be accessed from the links below.