Cryptotransaction Dispute Resolution

The increasing separation of physical and virtual identities driven by anonymity in the crypto-economy challenges the existing jurisdictional means over virtual transactions involving blockchain technology and smart contracting. Encrypted distributed smart contracts are removed from otherwise applicable jurisdictional principles that govern virtual transactions. Users and supporters of the crypto-economy are anonymized through public-key encryption and virtual private networks (VPNs). While, technically, personal jurisdiction would still apply to parties transacting in encrypted distributed smart contracts, enforcement is practically impossible given the separation of physical identifiers and encrypted distributed smart contracts. Because the system operates largely autonomously, even if every user and supporter of the blockchain and their location were known, it would still not be possible to exercise jurisdiction in the traditional meaning of the word. Such impracticability calls into question the existing jurisdictional means governing the evolution of distributed ledger technology.

The impossibility of consistently identifying the parties in any dispute in the context of cryptotransactions on the blockchain and the associated problems of applying the existing legal infrastructure make regulatory alternatives for blockchain-based conflict resolution necessary. We cannot conceptualize opportunities in the cryptotransactional universe that could possibly enable and allow a court, in the existing legal infrastructure, to decide and enforce any disputes between cryptotransactional parties. Because of the severity of these challenges for the existing legal and jurisdictional infrastructure, we conclude that the sensible approach for including good governance in cryptotransactions necessitates instituting governance solutions inherent in the blockchain technology itself.

In our recent paper, we suggest an open source platform ecosystem of smart contracting dispute resolution that allows users to opt into the conflict resolution mechanisms that enable more nuanced cryptosolutions and produce greater (legal) certainty in the process. First, an open source platform-based ecosystem for dispute resolution of cryptotransactions facilitates anonymity for transaction parties to opt into the platform.  Second, the platform would allow users to identify the highest possible expertise of their judges and arbitrators by way of reviewing the record of decisions of their judges across different fora and different types of conflicts. The proposed platform ecosystem would significantly boost consumer confidence in the non-arbitrary and fair resolution of their disputes.

For participants in the crypto-economy who wish to minimize the transaction costs of dual integration and retain anonymity, our proposed open source platform ecosystem is more likely than all other available solutions to provide legal equivalence of dispute resolution mechanisms. For legacy businesses that desire to participate in the growth of cryptobusiness opportunities, hope to avoid legacy system intermediation and the associated transaction costs, but require legal legacy system assurances and crypto dispute resolution equivalence, our proposed system offers a preferable and indispensable solution. By attracting legacy businesses and instilling confidence in the legal equivalency of dispute resolution in cryptotransactions, our proposed solution makes an indispensable contribution to the evolution and significant growth of the crypto-economy.

Wulf A. Kaal is an Associate Professor and Director of the Private Investment Fund Institute at the University of St. Thomas School of Law.

Craig Calcaterra is an Associate Professor at the Metropolitan State University.