Clifford Chance

LCAM Launches Blockchain Expedited Arbitration Rules

The London Chamber of Arbitration and Mediation ("LCAM") has introduced a set of new rules designed to resolve digital asset disputes ("Rules"). The Rules contain several blockchain-specific features and aim to be integrated with a blockchain platform to enable "on-chain" enforcements, although precisely how that is intended to work is unclear in some parts of the Rules. The Rules form part of a trend for new rules that are designed specifically to handle small to medium sized disputes.

Background: Why Arbitration is well Suited for Digital Asset Disputes

Arbitration has many features that make it well suited for resolving disputes concerning digital assets. As set out in further detail in our previous briefing, "Arbitration of cryptoasset and smart contract disputes: arbitration unchained?", the flexibility of arbitration means it can be modified to deal with (and take advantage of) some of the unique technical challenges arising from distributed ledger technology.

Arbitration offers several benefits that make it a useful tool to those participating in the digital assets sector: speed, confidentiality (from both third parties and the public but also as between the parties), global enforceability of awards and/or the potential for digital on-chain enforcement and access to expert arbitrators. While established existing arbitration rules are widely used for digital asset disputes, they make no provision for on-chain enforcement and they are not always well suited for small and medium sized disputes.

The Rules build on other attempts to provide arbitration rules for digital assets disputes but provide a more complete procedural framework than, for example, the JAMS Rules Governing Disputes Arising out of Smart Contracts (2018) and Dispute Resolution Rules (2021) ("DDRR").

Key Features of the New LCAM Blockchain Expedited Arbitration Rules

Key features of the Rules include:

1. Expedited Process
   The Rules provide a short but detailed timetable for the delivery of submissions and require a final award to be issued within two weeks of close of submissions and in any event, within four months of appointment of the arbitrator. There is no hearing as default and strict word limits on submissions and evidence and a page limit for bundles.
2. Optional Anonymity
   To reflect that many digital assets transactions are between parties who may not know each others' identity, and also because the Rules envisage being used by the ethical hacker community, the Rules include the option for party anonymity. Where certain conditions are met, the LCAM and the Arbitrator will not disclose the identity of the claimant to the other parties to the dispute. LCAM and the Arbitrator must consider whether disclosure of the identity is necessary for the fair resolution of the dispute, for the enforcement of any award or order, for the protection of the Arbitrator’s own interests, or if required by any law or regulation or court order. Anonymity may be possible where on-chain enforcement is sought, but it is difficult to see how it could be preserved if a claimant needs to go to a national court to enforce an award.
3. Publication of Awards
   In contrast to the anonymity provisions, the Rules provide for the publication of redacted awards by the LCAM Secretariat as default. This has the potential to create a helpful source of jurisprudence for parties and lawyers in a young and fast-growing sector.
4. On-Chain and Off-Chain Enforceability
   The Rules provide that parties have consented to both on-chain and off-chain enforcement, or a combination of both and refer to enforcing awards on the blockchain through the use of the Immunefi Vault system, which we discuss further in detail below.
5. Fixed Fees Based on Claim Size
   The Rules introduce a fixed fee structure based on the size of the claim. Claimant and/or counterclaimant fee is fixed at £7,500 for up to 20 hours work by the arbitrator for claims up to £1 million. The fees increase to £10,000 for up to 40 hours work by the arbitrator for claims above £1 million. In addition, there is a £150 registration fee payable to register the claim or counterclaim with the LCAM.
6. Expertise
   While the Rules make no specific provision for arbitrators to be experts in digital assets, the LCAM has made clear in the notes to the parties that "it may be assumed that the arbitrator is technologically literate and understands complex software concepts." However, the Arbitrator also has the right (following consultation with the parties) to appoint its own expert at the claimant's cost.

Immunefi platform

Immunefi is a platform that provides "whitehat" hackers with bug bounties. Blockchain projects that wish to participate can place digital asset bounties in the Immunefi Vault, which is a multi-sig smart contract (essentially a blockchain escrow account) that can be released by the company or, possibly, an arbitrator.

The Immunefi platform is embedded into certain parts of the Rules. The Rules do not say that the use of Immunefi is mandatory but the precise status of the platform is not explained and clarification by LCAM would be welcome in that regard.

It is also unclear how exactly Immunefi is intended to be used. At present, it is unclear if Immunefi intends to extend the use of its Vault beyond bug bounties. Mitchell Amador, Immunefi's founder and CEO, has been reported as saying:

"While focused on cybersecurity, particularly bug bounty dispute resolutions, the launch of our arbitration system is a groundbreaking step in bridging blockchain technology and traditional legal systems. But the possibilities are really endless."

At present, parties considering using these Rules may wish to exclude Immunefi-specific provisions in their arbitration agreement to ensure the Rules apply effectively.

Notwithstanding the above, the use of the LCAM Rules for bug bounty disputes is an interesting example of on-chain arbitration in action. At present, Immunefi lists 41 bounty programs with collective bounties amounting to over USD 43 million that are subject to LCAM arbitration. The website says that bounties are paid depending on, amongst other things, the severity of the bug found. Disputes may therefore arise as between blockchain project and hacker in relation to that issue or compliance with other rules that are mandated by Immunefi as to how ethical hacks should be conducted.

The Rules say there is no need for an existing agreement to arbitrate between the parties. Instead, a claimant, by submitting a request, accepts the standing offer to arbitrate made by the addressee of the request in its own agreement with Immunefi. The Rules make specific provision for the Arbitrator to request documents (including "Bug Reports") from Immunefi.

The precise mechanics of on-chain enforcement are unclear from the Rules. Whereas the DDRR provide that the tribunal has the power "at any time to operate, modify, sign or cancel any digital asset relevant to the dispute using any digital signature, cryptographic key, password or other digital access or control mechanism available to it", the Rules merely state that the "decision" is enforceable on the blockchain through the use of Immunefi. It is unclear whether that means the arbitrator will have direct access to the Vault or whether Immunefi must take action based on any award. If there are not sufficient assets in the Vault, then the Rules make clear that off-chain enforcement remains appropriate.

The Rules provide that any digital assets in the Vault are to be treated as located in London for the purpose of enforcement. This is an interesting specific example of a choice of "lex situs" for a particular platform (which determines the law applicable to proprietary claims), an approach advocated for by the Financial Markets Law Committee in Distributed Ledger Technology and Governing Law: Issues of Legal Uncertainty and considered further in Digital Assets: Governing Law and Jurisdiction.

If awards are enforced on-chain, and the digital assets moved from Vault to claimant automatically, there is an open question as to what would happen if an award was then challenged under the Arbitration Act or corrected within 28 days as provided for by the Rules.

Conclusion

The development of rules aimed at resolving small and medium sized disputes and tailored to digital assets is welcome. The Rules contain some features that may be of interest to other institutions in future. It will also be interesting to monitor any awards published under the Rules to see whether the system provides the advertised benefits and how difficult issues like anonymity and enforcement are dealt with by arbitrators.