From Treaty of Westphalia (start of national sovereignty) to global Blockchain governance to a more practical outcome =  arbitration clauses

Peace_of_Westphalia,_Treaty_of_Osnabrück

People who geek out on code is law and law is code (I plead “guilty as charged your honour”), will love this. Busy entrepreneurs and executives may want to jump to the practical takeaway about international arbitration clauses.

The problem today is summed in the old schoolyard dialogue:

“I am right and you are wrong”

“Yea, who says?”

“I say”

“Yea, you and whose army?”

Law has to be backed up by credible force. Which is an issue when there are 195 countries, each claiming national sovereignty.

The Blockchain borderless alternative is not yet working, as we explore in the chapter of the Blockchain Economy book entitled why non state governance for bitcoin, ethereum and other cryptocurrencies is so hard. Irony aficionados enjoy the fact that about a year later after raising what at the time was record amount for an ICO to solve governance by code, Tezos collapsed into ye olde courtroom battles.

TL:DR. the legacy system is broken and the replacement system is not ready. Fortunately there is a practical hack which is international arbitration.

Treaty of Westphalia.

For historians and international jurisdiction lawyers, the Treaty of Westphalia in 1648 is the seminal event that led to the rise of the Nation State with the principle of Westphalian sovereignty. This is the principle in international law, enshrined in the United Nations Charter, that each nation state has exclusive sovereignty over its territory.

When I used to run an enterprise software company I recall the sometimes heated negotiation about which jurisdiction  was used in the contract. This was not an academic debate. In a dispute, you want to be on your home turf in a language and legal system that you are familiar with. That is a tough enough conversation  between two parties. What on earth do you do when the participants in a Blockchain contract maybe from hundreds of countries and the issuer maybe from an offshore jurisdiction (where there are simply not enough lawyers and judges to cope)?

Binding Arbitration

Our Advisory Services are known for their combination of big picture thinking with pragmatic execution. So, enough of the big picture thinking, lets move onto the pragmatic execution. If the legacy system is broken and the replacement system is not ready, what is the practical hack? The answer is a Binding Arbitration clause. 

Binding Arbitration is is a clause in a contract that requires the parties to resolve their disputes through an arbitration process, outside the courts.

It must be binding. All parties must accept the conclusion of the abitrators. If not, lawyers for one side will find a way to drive the dispute to the courts, making arbitration useless.

That means that the location for arbitration is critical.

Location for Arbitration

The location for Arbitration must meet these criteria:

  1. Big enough economy to have enough lawyers and expert witnesses. The disputes will be at the intersection of Blockchain technology and law and how many people understand enough of both to be part of a credible arbitration process?  Offshore jurisdictions usually fail on this score. The issuer jurisdiction does NOT need to be the same as the Arbitration Location.
  2. A rule of law that is globally respected.
  3. Good airports and plenty of flights (usually goes with 1).
  4. English language. It is the closest we have to a global language of business (much as we may not like the cultural erosion from less use of local languages).
  5. A time zone that works well globally.

Switzerland, where Tezos was adjudicated, met 1,2 & 3 bit not not 4 (although, as a Brit living in Switzerland, I can attest to the fact that English is widely used for global business done within Swiss borders). The Swiss brand around neutrality does help build confidence.

5 is where UK is better than USA, Canada or Australia, but it is a less critical criterium. I am seeing more arbitration clauses set in UK, which will be a boon for UK lawyers and expert witnesses (a smidgeon of good news among all the Brexit turmoil).

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Bernard Lunn is a Fintech deal-maker, investor, entrepreneur and advisor. He is the author of The Blockchain Economy and CEO of Daily Fintech.

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