Technologies such as cryptocurrencies, smart contracts, and blockchain applications have become immensely popular in video gaming. Blockchain and crypto-based games like Axie Infinity are increasing in numbers and a number of gaming and esports organizations even rely on these technologies to manage and run their operations, as is the case with MetaClan. While much has been written about the application of blockchain technologies in video games, there is very little guidance available regarding how to navigate legal disputes that can arise from the use of these technologies. For instance, what happens when parties do not agree on how much Bitcoin was agreed upon as payment or that actually has been paid into a wallet? What redress do family members have for recovering the assets in a deceased loved one’s wallet if they do not have access to their password? These questions could be solved through dispute resolution.
Parties may, for example, dispute the amount of money they have in their wallet, or, as often happens, may lose their password and be unable to access
Companies operating in the digital space should keep in mind several considerations while dealing with blockchain- and crypto-related legal agreements.
Smart Contracts; Roles in Dispute Resolution
The power and characteristics of smart contracts bring with them several advantages that can be applied to resolving blockchain disputes. Smart contracts feature enhanced security, improved efficiencies due to automated execution, and cost reduction in the terms enforcement and dispute process. Further, there is less likelihood of contractual breach and resulting damages when transactions are conducted via smart contracts as compared to traditional contracts. Many experts believe that smart contract code and online tribunals are destined to replace contract law and courtroom adjudication. In the unlikely event this prophecy comes true, smart contracts and blockchain technology in general must overcome several challenges. In fact, the intersection of code and technology is, itself, a breeding ground for more disputes.
The biggest disadvantage of depending on smart contracts to prevent and resolve blockchain disputes is that there are no uniform rules governing the legal process in the United States. Other jurisdictions, notably the United Kingdom, have begun regulating blockchain disputes. Recently, the UK’s Jurisdiction Task Force published the Digital Dispute Resolution Rules to enable faster and more cost-effective resolution of disputes relating to novel technologies such as crypto assets, smart contracts, and blockchain applications, which in turn will foster confidence amongst businesses in the adoption of these technologies.
Important Legal Considerations
National, international, and industry stakeholders are working to build consensus regarding the most pressing issues that block effective resolution of disputes surrounding digital technologies. Until consistent universal regulations are adopted, developers, creators, and investors should look at several factors to protect themselves should a dispute arise:
- Resolution Method
The foremost legal issue to navigate in blockchain related disputes is the method that will be used for resolution. Choices include arbitration, litigation, and mediation. Most blockchain and crypto disputes can be settled through payment of money as compensation for damages incurred, rather than a transfer of digital assets. For parties that wish to avoid potentially lengthy and costly legal disputes, one of these out-of-court methods may be the best option. It is important to select a dispute resolution method that will be respected and upheld by a court should the decision include access to or transfer of one party’s real-world assets by or to the counterparty. Currently, arbitration is the most widely preferred method of dispute resolution, primarily due to the flexibility and specialized nature of arbitral tribunals. Arbitration offers parties an opportunity to agree to bespoke procedures that may address the irrevocable nature of smart contracts. Bespoke procedures also help in navigating the complexities posed due to the anonymity of blockchain transactions. A second advantage of arbitration is that it provides an opportunity to appoint a specialized arbitral tribunal which might not necessarily be the case with mediation and litigation.
- Arbitral Tribunal
Gaming companies should pay careful attention to the appointment and composition of the arbitral tribunal. While this is true for any contract, it is all the more important for smart contracts and blockchain disputes, as the pool of arbitrators who are knowledgeable about the industry may be extremely limited. It is best to conduct due diligence and appoint someone with specialized technical knowledge. For example, someone who understands coding may be able to understand whether lines of code have been lifted from other sources in adjudicating copyright cases. In the near future, the arbitral institutions are likely to develop specialist pools of arbitrators with relevant experience or published blockchain-tailored arbitration rules.
- Jurisdiction and Prevailing Law
The jurisdiction and governing law are subjects of much discussion in the blockchain space. Determining the locus or seat of a blockchain transaction is fraught with legal complexities due to the dispersed nature of blockchain and its distributed ledgers. It is best to hire an attorney experienced in blockchain disputes to draft suitable jurisdiction and governing law contract clauses. It is interesting to note that the jurisdiction and the governing law could emanate from two separate locations. For example, if the parties to a contract are located in California and New York, they may agree to have their disputes resolved before a California arbiter who will base his or her decision based on an interpretation of the laws of New York. Note that some courts will not apply a party’s choice of governing law if that choice is made solely to avoid laws that would otherwise apply to the contract, or if the chosen law would offend public policy or otherwise infringe on human rights.
- Confidentiality and Limited Disclosure
Some smart contract disputes are likely to involve information about proprietary software and/or hardware. Depending on the nature of the information and potential commercial consequences, it is advisable to include a clause in the smart contract stating that the contract will be resolved by confidential arbitration and to limit the disclosure of trade secrets or sensitive financial data.
- Verification of Identity
Blockchain technologies pose special challenges with respect to anti-terrorism, money laundering, and foreign sanction rules. For example, the US Treasury Department’s Office of Foreign Assets Control (OFAC) prohibits American citizens from directly or indirectly engaging in transactions involving individuals, entities, governments, or countries that are on the list of OFAC sanctions. Since smart contracts are designed to be anonymous, self-executing, and autonomous, gaming platforms may need to build in controls that allow them to comply with these laws by verifying identities and blocking unlawful transfers and transactions.
As of the time of writing, blockchain dispute resolution is still in early stages. However, given the pace of developments in the decentralized world, it is likely that decentralized dispute resolution based on blockchain will develop quickly. In fact, it is not far-fetched to say that in the near future, blockchain dispute resolution may complement traditional dispute resolution. Blockchain transactions and disputes are very distinct from usual commercial transactions. Attempting to play by the rules of traditional dispute resolution in this new and evolving space can be very expensive and time consuming, so it is advisable to consult a blockchain attorney specialized in the gaming industry .
Gamma Law is a San Francisco-based firm supporting select clients in cutting-edge business sectors. We provide our clients with the support required to succeed in complex and dynamic business environments, push the boundaries of innovation, and achieve their business objectives, both in the U.S. and internationally. Contact us today to discuss your business needs.