JURISDICTION ON THE BLOCKCHAIN

ICBEMM-ICISSS 2020 MARCH (OXFORD)| BEDRETTIN GÜRCAN | 14 8-DZ07-8088 JURISDICTION ON THE BLOCKCHAIN BEDRETTIN GÜRCAN1 ABSTRACT Blockchain is a promising technology since 2008. The legal framework of blockchain has been in discussion the last years. There is insufficient research into the legal side of blockchain technology to draw any firm conclusions about some possibilities of the blockchain jurisdiction. Although there has been relatively little research on blockchain, there are two main parts of our study that can be advanced to discuss blockchain-based dispute resolutions. The first part of our study summarises internet jurisdiction. In the second phase, our aim is to discuss how blockchain can be used as a private dispute resolution platform. Key Words: Blockchain, Law, Jurisdiction, Arbitration, Smart Contract INTERNET JURISDICTION This section is concerned with the issue of the legal framework of the internet, in detail jurisdiction of the internet, and puts forth the discussion of the relatively new technology, blockchain, and its jurisdiction. International internet law is developed by some UN (United Nations) soft law documents besides international law treaties. The coverage of international internet law is civil law (personal rights as data protection, GDPR), administrative law (cross border service requirements, licenses), commercial law (as on e-commerce), criminal law, financial law (as banking solutions on the internet base) and, lastly, international enforcement which we will examine in this study. When we closely examine the internet, the main central authority is ICANN, the Internet Corporation for Assigned Names and Numbers which is a non-profit organisation, registered in California, USA. Every computer or device that goes on the internet needs its own IP address. Regional Internet Registry (RIR) is an organisation that manages and controls internet addresses in the regions and continents. RIR controls assigning and distributing internet IP addresses and domain registrations. There are five RIRs, each one divided by region: ARIN (American Registry for Internet Numbers), RIPE NCC, Reseaux IP Europeens Network Coordination Centre, APNIC (The Asia-Pacific Network Information Centre), LACNIC (Latin American and Caribbean Internet Address Registry) and AfriNIC (The African Network Information Centre). The jurisdiction place of the internet is located by these registries, which help to detect parties ’locations where their IP Address (numbers assigned to every device that connects to the internet) is registered. On these grounds, we can argue on how internet jurisdiction works today. One example of international internet jurisdictions is the Uniform Domain Name Dispute Resolution Process which is a process that sets out the legal framework for the resolution of disputes between a domain name registrant and third parties. This procedure is administered by dispute resolution service providers accredited by ICANN such as WIPO (World Intellectual Property Organisation). Jurisdiction on the internet based on six equal jurisdiction principles recognised in international law results in a situation where each internet user is subject to every national legal Bedrettin Gürcan, Lawyer and P.h.D. Student in the University of Szeged, Faculty of Law and Political Science. He is a partner of international law firm, Gurcan Partners, [email protected] 1 ISBN: 978-1-913016-27-2 (Online) © 2020 The Author | ICBEMM-ICISSS 2020 © 2020 FLE Learning OXFORD CONFERENCE SERIES | MARCH 2020 |CONFERENCE PROCEEDINGS | 15 regime, particularly when they decide to create content and enable it online. (Kulesza, 2012, p 351-364). These principles are territorial jurisdiction, effective jurisdiction, personal jurisdiction, passive personal jurisdiction, protective jurisdiction, and universal jurisdiction. (Para 402) The following of The Hague Conference on Private International Law, Convention of 2005 on Choice of Court Agreements is published. The purpose of the Convention is to promote international trade and investment through enhanced judicial co-operation (2005). The Convention shall apply international transactions on the internet as well. If the parties are natural persons acting primarily for personal, familial or household purposes (a consumer), the Convention does not interject. The Convention is designed for transactions between mostly corporate bodies. It means that this convention shall not be applied to business to consumer (B2C) transactions. Commonly, companies choose the jurisdiction, which only allows commercial issues between parties to be sued in a specific country jurisdiction. Parties can choose between exclusive and non-exclusive or use asymmetric clauses which are partly exclusive and nonexclusive. (Merrett, 2018, p 38) In case of a non-exclusive jurisdiction agreement, parties are free to choose any jurisdiction and do not need to submit to any particular court. Nevertheless, in an exclusive option, parties can choose a particular court which is determined by the agreement. On internet jurisdiction, both options may be chosen. There is no limitation as a commercial or consumer relationship between the parties as Convention of 2005 on Choice of Court Agreements. Nevertheless, these are mainly parts of common law rules and only apply to a jurisdiction agreement in favour of a non-EU member state because Article 25 Brussel I Regulation Recast applies to all cases where courts of member states are chosen regardless of the domicile of the parties. (Merrett, 2018)i The Brussels Convention, dated 1978, sets out a system for the allocation of jurisdiction and the reciprocal enforcement of judgments between contracting states of the EU. It has largely been superseded by the 2001 Brussels I Regulation (2001). The latest change is Recast Brussels Regulation, dated 2012. (Also called Brussels I Regulation as shown above (2012)) It is also imported from the Choice of Court Agreements in 2005. The purpose of the Brussels I Regulation is to achieve free movement of judgments, which can be said to be achieved. According to the Brussels I Regulation, the judgment must be rendered by a court of a member state to be recognised and enforced in other EU member states. (Çalışkan 2010, p 15) The Brussels I Regulation has improved the procedural efficacy of jurisdiction agreements because it has enhanced their exclusivity among the bases of jurisdiction. (Forner and Delaygua, 2015, p 379-405 and 404) CYBERCRIME JURISDICTION Even so, as has been discussed above, the Brussels Convention can only be applied for civil and commercial matters. Computer crime, better known as cybercrime, has different jurisdiction approaches. For most cybercrimes, the majority of countries will have jurisdiction to proscribe: most crimes such as hacking and denial-of-service attacks are targeted at specific computers, and in those cases, countries can claim jurisdiction based on the location of the computer, on the effects of the crime or on the nationality of the victim. (Brenner and Koops, 2005, p 40) There are several international organisations involved in measures related to cybercrime. For example, Council of Europe, European Union, including also the European Network and Information Security Agency (ENISA), EUROPOL and EUROJUST, INTERPOL, International Telecommunication Union (ITU), OECD, Organisation of American States www.publications.com ICBEMM-ICISSS 2020 MARCH (OXFORD)| BEDRETTIN GÜRCAN | 16 (OAS), Organisation for Security and Cooperation in Europe (OSCE), United Nations Office on Drugs and Crime (UNODC) and African Union Commission. The Convention on Cybercrime of the Council of Europe is the only binding international instrument on cybercrime. This Convention, also known as the Budapest Convention, serves as a guideline for any country developing comprehensive national legislation against cybercrime and as a framework for international cooperation between state parties to this treaty. (2001) E-COMMERCE JURISDICTION The risks associated with internet jurisdiction uncertainties, should a dispute arise, have important implications that may dissuade businesses and consumers from engaging in ecommerce and impose burdens on regulators. (Kurner, 2009, p 176-193) Much of the current debate revolving around internet jurisdiction indicates that ecommerce should be one of the main fields of legal disputes on the internet. In daily life, a closer look at the data indicates that the number of e-commerce users on the international level increases massively year by year. Undeniable legal concerns of e-commerce are censorship, computer crime, contracts, copyrights, defamation and libel, discrimination, fraud, hacking, harassment, intellectual property, obscenity and pornography, privacy, taxation, trade secrets, and trademark. Ward, Sipior, and Volonino, 2016, p 2). Increasing popularity of e-commerce brings more attention to e-commerce regulations. To give an example, during the term of the Brussels Convention of 1978, the rule of country of origin was chosen. With Brussels I Recast, the rule is changed, and if an e-commerce website targets a consumer, jurisdiction exists over any contract dispute in the consumer’s country. (Michael and Zugelder and Theresa and Flaherty and Irvine 2003, p 20) UNCITRAL Model Law on Electronic Commerce is a model to assist countries in the shaping of e-commerce legislation. Nevertheless, the majority of laws governing the dissemination of information, advertising, contract making, and intellectual property ownership largely remains nationally based. (Michael and Zugelder and Theresa and Flaherty and Irvine 2000, p 253-271) JURISDICTION ON THE BLOCKCHAIN In this section, the discussion will point to jurisdiction preferences through blockchain-based smart contracts. Blockchain was developed through the combination of several technologies including peer-to-peer networks, asymmetric (public key) cryptography, time stamping, and the proof of work consensus mechanism. (Nakamoto, 2018) Blockchain provides an infrastructure for smart contracts to be executed in decentralised, without 3rd party presence. Business transactions on the blockchain are completely independent of the location where parties of the legal entities are located. Some challenges are decentralised storage of large computer networks, the anonymity of the parties, and unspecified values exchanged where it is not sure if these ’‘goods ’’are included in the United Nations Convention on Contracts for the International Sale of Goods. (CISG). (Breu, 2018, p 13). The dramatic rise of international capital flows, in both trade and investment, apparently anticipated a future where multinational companies would operate freely, developing regulatory frameworks of their own and conversely escaping the constraints of state made law. (Strange, 1996). The parties of the transaction seek the best institutional governance method to resolve disputes in regards to solution cost and time in either national courts or private arbitration or perhaps with a blockchain-based dispute resolution mechanism designed as private arbitration. ISBN: 978-1-913016-27-2 (Online) © 2020 The Author | ICBEMM-ICISSS 2020 © 2020 FLE Learning OXFORD CONFERENCE SERIES | MARCH 2020 |CONFERENCE PROCEEDINGS | 17 PRIVATE ARBITRATION ON THE BLOCKCHAIN With the developments of smart contracts, parties can devise a mechanism whereby disputes on an agreement can be resolved by private adjudicators through self-enforcing decisions, the enactment of which does not depend on state-controlled recognition and enforcement procedures. (Ortolani, 2018). To eliminate the uncertainty of smart contracts ’legal effects, some states in the USA like Delaware, Tennessee, Arizona have passed legislation to recognise the legal effects of smart contracts. (Shehata, 2018). The main difference between traditional legal contracts and smart contracts is around the enforcement of contractual terms. (Filippi and Hassan, 2016). In a smart contract, the code is designed to enforce the result of the contract without a third party’s action as a court or enforcement officers. The question is whether or not smart contracts will be recognised and enforced by jurisdiction-based courts. The foregoing discussion implies that non-compliance is a problem in the dispute resolution process. Enforcement is a key factor to get results. The success of the rising popularity of private international arbitrations depends on state recognition. The state retains certain control over private arbitration with recognition and enforcement procedures. Nevertheless, any jurisdiction on the blockchain is not recognised by any central state jurisdiction. Hence, to use private, not-centralised blockchain jurisdiction, the system should offer effective enforcement without any state or centralised enforcement power. With some deposit requirements in digital wallets, the problem can be solved. For instance, in case of a commercial dispute between company A in the US and company B in Europe, based on their smart contract, the system may be designed to evaluate the breach of the contract and calculate the compensation and damages and transfer the calculated amount from the failed party’s wallet to the right party’s wallet. But in case of a change in value of cryptocurrency, the right party would not receive the deserved amount. Hereof, the state jurisdiction will be the option. In this example, one question is raised: during the design of a smart contract, is it possible to designate primarily independent, private jurisdiction on the blockchain smart contract where, firstly, the parties confirm and, secondly, state jurisdiction intervenes in case of non-compliance? Automatic blockage of accounts through the blockchain in case of any suspicious action carried out by the parties on the commercial process can be another option. It can be designed with parties ’intentions in the smart contract. Several financial services can be provided through blockchain and cryptocurrencies, which are already provided by banks. A letter of credit is a good example of how the blockchain system can be used with cryptocurrency wallets to secure international commercial transactions. The point I would like to draw attention to is how possible is it to set groups of clauses in a smart contract and make a jurisdiction choice in some countries or arbitration centers or in another independent blockchain arbitration center? How possible is it to automatise the judgment process for some niche matters with a blockchain arbitration center, where all regulations are set with smart contract codes? There has been an inconclusive debate about whether blockchain private arbitration rules will be recognised by the states chosen by the parties on any contract either traditional or smart. The New York Arbitration Convention (The Convention on the Recognition and Enforcement of Foreign Arbitral Awards) is an important instrument for the recognition and enforcement of foreign arbitral awards. The Convention also applies the referral by a court to arbitration. As of January 2020, the Convention has 161 state parties. According to article II (1), contracting states shall recognise an agreement in writing to arbitrate. (UNCITRAL, 1958) www.publications.com ICBEMM-ICISSS 2020 MARCH (OXFORD)| BEDRETTIN GÜRCAN | 18 If blockchain arbitration center meets with the conditions of the New York Convention (like writing and signature requirements), then, each contracting state of the Convention shall recognise arbitral awards as binding and enforce them under the rules of procedure of the territory where the award is relied upon. Nevertheless, it must be clear on how smart contracts rely upon the conditions of the New Convention. BLOCKCHAIN AND ONLINE DISPUTE RESOLUTION MECHANISMS In practice, there are several online dispute resolution mechanisms. The Online Dispute Resolution (ODR) Platform of the European Commission is one of the examples to help consumers and traders to resolve disputes with their online customers without going to court. It can be used for any contractual dispute arising from online purchases of goods or services where the trader and consumer are both based in the EU or Norway, Iceland and Liechtenstein.(ODR, 2013)S mart contract has also been proposed as an alternative to Online Dispute Resolution.(Koulu, 2016, P 40-69) Alternative dispute resolution for consumer disputes (ADR, 2013) was adopted by EU Policy Makers in 2013. It was followed by the above mentioned Online Dispute Resolution (ODR, 2013) which has been enforced since January 2016. Both regulations aim to be efficient and fast dispute resolutions for consumers. EU consumers are addressed to ADR to solve their disputes with an EU trader over the purchase of a product or a service on the quality-certified ADR entities. ADR models can be found in four categories: • Trader’s participation is mandated by local legislation; • Trader’s participation is not mandated by rules, but the trader is nonetheless bound to participate in the ADR procedure, • The trader is neither mandated by rules nor otherwise bound to participate in the ADR procedure but incentivised to do so through a specific mechanism The trader has no obligation neither intensive nor bound to participate in the ADR procedure.(Report, 2019) Alternative blockchain resolution may be an option for the last category due to lack of governmental support at the moment. But in case of a successful outcome, then, it can be incentivised to participate. Nevertheless, according to EU data, participation of ADR is still lower than expected. (Report, 2019) However, there are several major problems in using Blockchain Technology for ODR. Ortolani propounds that these problems are related to the secrecy of identities on the blockchain and its potential problems for the institution of state court proceedings, an unclear situation of blockchain in many countries, and the dependence on working with third-party solutions, payment solutions to chargeback as Visa or Mastercard. (Ortolani, 2015, p 595-629)ii These questions may be raised: what happens if the mutual agreement cannot be executed due to unforeseen circumstances; how will judicial impartiality be investigated; what are the potential problems of the interpretation of the smart contract and its coding language? Today, there are two different approaches to dispute resolution for smart contracts. The first approach accepts that smart contracts can operate within the existing contract law framework, and the second one recognises smart contracts as distinct legal tools not as a digital alternative of traditional contracts. (Allen and Lane and Poble, 2019) The company called Aragon claims that they offer digital jurisdiction and a decentralised online court. The platform offers to create a decentralised autonomous organisation (DAO) and has its own rules for these entities. These organisations will operate under their internal rules but within Aragon’s legal framework.(Aragon, 2018) We can state that blockchain-based jurisdiction will take a long time. Nevertheless, it may help state jurisdictions in many ways as an alternative dispute resolution mechanism. ISBN: 978-1-913016-27-2 (Online) © 2020 The Author | ICBEMM-ICISSS 2020 © 2020 FLE Learning OXFORD CONFERENCE SERIES | MARCH 2020 |CONFERENCE PROCEEDINGS | 19 Legal jurisdictions must develop rules on conflicts of laws and codes (Smart Contracts) to define the boundaries of digital jurisdictions, which are based on blockchain-based rules on the two-level as rules of recognition and subjecting the substance of blockchain-based rules to legal scrutiny. (Möslein, 2018) CONCLUSION Smart contracts' popularity will be discussed in the following years. By then, blockchain and its part in the smart contract may bring several advantages to contracting parties in daily life with ease of payments, less risk or low maintenance cost, secrecy and arbitration model, and fast and cheap dispute resolution. Parties have options in their smart contacts to choose binding, private arbitration or territorial courts or non-binding negotiation or mediation. As discussed above, the private, blockchain-based dispute resolution model can be an option in the future. On these grounds, we can argue that the blockchain-based dispute resolution model has some major uncertainties. Based on current uncertainties, it seems fair to state that dispute resolution through the codes, which has been determined in advance, may cause several problems. In existing arbitration, state jurisdictions rely on a case by case assessment. Nevertheless, the lack of flexibility in the smart contract system makes the process of coding in law very responsible. In case of any unforeseen circumstances, these technical rules may damage the interest of the parties. With the development of blockchain, more contractual rules and legal provisions are incorporated into smart contract code, the traditional conception of the law (as a flexible and inherently ambiguous set of rules) might need to evolve into a position that can be better assimilated into code. (Filippi and Hassan, 2016). On the other side, coding existing law into the smart contract has certainty, lower supervision cost by certain conditions and parameters, additional oversights, and increased transparency by the public trial of executed smart contracts on the blockchain for regulators. (Allen and Lane, and Poblet 2019) Although there has been relatively little research on this field, there will be several discussions on the advantages and disadvantages of blockchain jurisdiction. It seems difficult to settle a blockchain-based private arbitration without any 3rd party interference for a wide field of law; nevertheless, studies on the online dispute resolutions show that some particular issues such as flight compensations or customer issues can be solved via smart contracts. The important point is how regulators will evaluate the reliability of the blockchain. REFERENCES: Allen, D., Lane, A. and Poblet, M. (2019). The Governance of Blockchain Dispute Resolution. 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