Blockchain – A Suitable Tool for Arbitration?

The topic of blockchain is on everyone’s lips and represents probably one of the most significant changes in the context of digitization. At the same time, for many the meaning of this term is very difficult to grasp. While most people’s first association with blockchain is likely to be bitcoins and other cryptocurrencies, the concept becomes even more confusing when it is used in other contexts, such as arbitration.

One reason for this are the commonly used definitions that are too technical and, in particular, too application-specific. Financial transactions and cryptocurrencies are merely types of applications built on the blockchain. The frequently found definition of a blockchain as “an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way that records cryptocurrency transactions“ therefore rather describes a specific application, but not the term itself. The (simple) idea of a blockchain, however, is a decentralised platform that stores and distributes digital data across a number of networks in a highly secure manner.

Keeping this in mind, the potential applications for arbitration become more apparent. Arbitration is often chosen and valued for confidentiality reasons. Frequently, high-volume and very sensitive disputes are subject to arbitration. However, at the same time, a vast number of documents are exchanged both with the written pleadings and during the document production phase and almost always, all correspondence – at least also – takes place via e-mail. The danger of being hacked and inadvertently granting third parties access to confidential and sensitive documents is a realistic scenario, as highlighted by the case of the website of the Permanent Court of Arbitration in The Hague which was hacked during a hearing in a sensitive maritime border arbitration in 2015.

In addition, a technology like blockchain that enables the secure transfer of data and allows for the original data to be stored safely without the need of an intermediary also addresses problems that can arise from the fact that parties to arbitral proceedings usually live in different jurisdictions with different data protection regulations in place.

Blockchain arbitration could also pave the way to a more automatized dispute resolution process, in particular in small, standardized cases based on smart contracts. Such contracts are automated contracts that execute when triggered by specific events. The electronic instructions are drafted in computer codes using blockchain technology as a platform. Smart contracts are very useful in facilitating transactions where trust in the intermediary is lacking, e.g. where the performance depends on a government official in a foreign country. In addition, they can save costly services like escrow accounting, in particular when the occurrence of a certain predetermined event will automatically trigger the release of funds. The same is conceivable for a variety of other applications, such as insurance contracts where an automatic payment will be made when the insured event occurs. Blockchain technology creates the ideal conditions for smart contracts, since their execution and control does not require any human involvement is not subject to human influence. In case of disputes, e.g. about the algorithm that was used, the arbitration proceedings could also be integrated into this technology. Either the arbitral decision might be registered on a blockchain permitting a self-executing arbitral decision or the arbitration process would even been integrated within the disputed smart contract so that an algorithm could resolve the dispute.

Of course, this type of dispute resolution raises a lot of questions and many rules do not (yet) fit this new technology. However, this should not prevent legislators and lawyers from adapting the rules to the new technical developments and from promoting the benefits of these technologies in favour of more efficient and cost-effective legal advice.