Introduction

Blockchain technology was created to provide a technical infrastructure for bitcoins in 2009.¹ At the time, blockchain technology itself was considered to be a by-product of the cryptocurrency, and the term blockchain was not even relevant in Satoshi Nakamoto’s White Paper. It was not until the bitcoin was created that the capacity of the blockchain technology, as a distributed ledger’s infrastructure, was noticed. The possibilities raised by this application layer are perceived as inaugurating the third era of the Internet.²

Likewise, the introduction of blockchain technology has given rise to smart contracts technology, which enables the development of complex and decentralized transactions of digital assets.³ In this regard, a lot of the existing material fails to distinguish between the core components of blockchain technology and the various ways in which the technology can apply in the legal sphere. The decentralized terminology⁴ used to describe smart contracts thus, is often unclear or inconsistent.⁵ As a result, in the field of international arbitration, this misunderstanding has raised discussions in relation to the localization of potential smart contracts disputes and the role of the arbitral seat. In a conference given at the University of Oxford (Wolfson College) in 2018, ⁶ Professor Geneviève Helleringer stated that smart contracts contain elaborated cross-border transactions with no precise identifiable parties or location. This inevitably raises the question as to whether the delocalized theory of the arbitral seat could be considered a potential solution to cope with this new data structure of multiple interconnected points of access.

This paper, however, aims to demystify the misconceived association given to the apparent delocalization characteristic in smart contracts and the delocalized theory of the arbitral seat. Indeed, within the framework of blockchain technology it has been repeatedly stated that smart contracts will require a proposal of a new legal and regulatory framework, in order to mitigate any negative impact and facilitate full achievement of their potential.⁷ However, smart contracts can be regulated according to the existing international legal framework, through the current conception of the arbitral seat used for online and offline disputes.

By examining essential characteristics of smart contracts, an identifiable point of access for physical regulation is noted, which could potentially help the existing regulation in international arbitration to cope with new trends in technology without the need to modify the law in accordance with something that is not yet fully developed.

I. Smart contracts: Essential characteristics

Blockchain technology is a database, commonly programmed to track transactions (often referred to as ‘ledgers’). It is a structured collection of information that aims to achieve the requirements of data integrity and identity authentication, where predetermined rules decide how to update a ledger. The data is stored in different nodes (computers) that are connected through a common network via the Internet, where each node keeps an identical copy of the ledger. This network is a peer-to-peer platform, meaning that all nodes connected to the network are independent from each other and do not depend on a centralized server.

In the same manner, smart contracts need to be generated by miners in accordance with a decentralized consensus protocol.⁸ They are automatically executing computer programs that can verify whether a relevant instruction occurred or not by following a sequence of instructions that a miner runs according to an ‘if/then’ relation for wider contextual factors.⁹ Therefore, a smart contract raises questions as to whether they are valid legal contracts to be used in international arbitration, as they are computer programs that establish models for one party and are self-enforceable.

Coding. Smart contracts involve several technical features that raise concerns with regard to the application of online arbitration.

• Smart contracts are built upon an algorithm expressed in a specific programming language, i.e. ‘code’. Consequently, such contracts will need to be agreed under specific operational semantics, all agreed by the parties, which ultimately require technical language and legal advice.¹⁰
• Blockchain technology, as explained previously, is a consensus-based system where each node on the blockchain has to be executed in accordance with its instructions in order to avoid the need for each separate node to download and verify external data.¹¹ Thus, one important challenge with regard to arbitration is the necessity to codify every possible scenario that could arise, which leaves no ambiguity or flexibility for the parties involved in a contract for further modification if one scenario was not previously agreed. Hence, an arbitration agreement, as a separate contract, would also need to contemplate all possible scenarios and their consequences on an ‘if/then’ database.
• The rigidity of the blockchain software means that it reduces scope for the flexibility required to understand ambiguous language of terms such as ‘good faith’ or ‘force majeure’. Once the code is executed, there is little or no discretion as to how obligations are performed as smart contracts generally cannot be modified.¹²
• Codifying in a blockchain requires distributed ledgers; however, today’s technology is recognized as generally insufficient with regard to the ledgers required for the functioning of smart contracts. In this view, only few people have the complex skills required to develop and deploy smart contract systems.¹³

Irrevocability. Another characteristic of a smart contract – and a significant challenge for online arbitration – is its irrevocability. A smart contract becomes irrevocable once the coded agreement has been deployed on a distributed ledger. In this context, ‘smart contracts benefit from the tamper-proof nature of the underlying blockchain infrastructure and thus cannot be stopped by a single party’.¹⁴ The Institute of International Finance, in this regard, has noted that the rigidity of the smart contracts’ coding could hinder the possibility for law to amend a contract when mutually desired or when deemed legally necessary.¹⁵

In other words, the software that blockchain technology requires cannot be rolled back; once the agreement is made, changes cannot be made to it. Thus, legal issues such as a lack of capacity of one of the parties could not be solved at an early stage. As a result, parties may prefer the flexibility afforded by legal contracts over the rigidity of an automated software. As noted by M. Finck,¹⁶ whereas the role of the law is to fill in gaps in agreements, smart contracts’ infrastructure requires a complete coding with no gaps.

Self-execution. The automatized execution feature of smart contracts is conceived as the most essential one, as the execution of the contract does not require the involvement of any third party. However, smart contracts are not smart in an artificial intelligence sense,¹⁷ but rather follow an external verification system according to the codes/rules with which they have been programmed. This means that smart contracts are not controlled by a central authority but rather operate autonomously on a decentralized, peer-to-peer network.¹⁸

Smart contracts follow a four-stage cycle.¹⁹ At their creation, smart contracts are coded. A freezing stage then follows while the contract is being added to the blockchain. The execution of smart contracts takes place after the contractual conditions (or program functions) are met, as a smart contract consists of a number of declarative statements with logical connections. When a condition is triggered, the corresponding statement will be automatically executed, with the resulting transactions being stored in the blockchain (finalization stage).²⁰

Smart contracts are self-enforceable, which means that the software allocates digital assets autonomously regardless of trust between the parties.²¹ For instance, receiving a payment for sold goods is no longer dependent on the willingness of the debtor to make the payment nor affected by bankruptcy proceedings that take place after entering the contract.²² Thus, no external monitoring of contractual obligations or enforcement is needed.

Self-regulation. The characteristic of self-regulation raises the following question: to what extent private parties feel the necessity to have their contracts and transactions regulated by national laws, if they can agree on the rules they want with self-execution of the consequences previously agreed? In this sense, ‘isolated self-regulation not only lacks transparency but also fails to account for the interests of external actors’.²³

Consensus is established when the protocol can ensure that each node adds the same new block to its local version of the blockchain. The protocol has pre-determined rules in deciding how to update the ledger to be considered as a trust source for the system.

The essence of consensus mechanisms that parties can have allow them to have confidence on a certain outcome before it is effectively reached. It is in this regard that trust in technology is said to replace trust in humans and/or institutions.²⁴

II. Existing regulation in online arbitration and smart contracts

This section explores the different approaches to understanding the concept of the arbitral seat in international arbitration and the existing regulation for online disputes.

Online dispute resolution (ODR) still suffers from a lack of a uniform definition.²⁵ Some use the term to refer only to organized technology models in dispute resolution, while others include case management. G. Kaufmann-Kohler explains that, nonetheless, they all have in common the application of technology to dispute resolution in order to provide a more efficient conflict management.²⁶

1. The role of the seat in ODR with regard to the validity of digital arbitration agreements and arbitral awards

With regard to the formation, validity and legality of international arbitration agreements, the New York Convention plays a decisive role in the continuous development of the contemporary legal framework for international commercial arbitration. Under the New York Convention, international arbitration agreements are presumptively valid and enforceable.²⁷ Among the requirements under the New York Convention are the need for international arbitration agreements to be in writing and signed by the parties. Presently, due to technological demands, the ‘in writing’ requirement is understood to be met when the agreement is recorded in any form, including by an electronic communication. This incorporates the principle of functional equivalence and technological neutrality for writing and signature requirements, embodied in UNCITRAL texts on electronic commerce.²⁸

In this regard, other international instruments have also recognized new technological demands. For instance, Article 9(2) of the UN Convention on the Use of Electronic Communications in International Contracts (2005) states that handwriting agreements or signatures are no longer a requirement, as long as the provision stated by law is met by a data message, and ‘the information contained therein is accessible so as to be usable for subsequent reference’.²⁹ Further, the UNCITRAL commission issued a Model Law on Electronic Signatures (2001), where it states that, as a general rule, a signature may not be denied legal effect, validity or enforceability solely because it is in electronic form.³⁰ However, even where states have adopted some of the above said instruments in their local arbitration laws, if a national law does not contain specific provisions on electronic communications, these communications may not qualify as ‘written’ forms. Noting this, different local regulations for the signature of the agreement may give rise to problems regarding the validity of electronic signatures. Thus, the procedure for the formal validation of electronic arbitration agreements is currently still subject to the national law on civil procedure, which is not harmonized and differs largely.³¹

The law applicable to the validity of arbitration agreements is also not harmonized; thus, no general determination can be made as to how electronic agreements are concluded in an international digital environment. While party autonomy is generally respected by most jurisdictions as the main principle in contract law; when parties do not agree on the applicable law as to the validity of the arbitration agreement, the applicable law will be the one of the place of the seat.³² This is important to consider as contracts concluded through web applications that require click-wrap declarations could, in some jurisdictions, not be considered as a valid agreement.³³

In this context, the relevance of the arbitral seat is crucial as it determines the flexibility or hard regulation for electronic arbitration agreements that will vary in each jurisdiction. Therefore, if the UN Convention on the Use of Electronic Communications in International Contracts can enable the New York Convention to operate effectively in an electronic environment, an autonomous interpretation should be pursued by states.³⁴

Following the same analysis, it can be argued that arbitral awards also raise issues as to the applicable form requirements, according to the seat of the arbitration, and the form of the delivery to the parties for further submission to national courts. Most arbitration laws require written and signed awards, however, in some cases, such as the United States, electronic signatures by the arbitrators are allowed.³⁵ Here, R. Wolff explains that some authorities consider that the New York Convention defines the form requirements for the arbitral awards, while others consider that each national law will follow the Convention but further regulate the requirements or that completely rely on the applicable lex arbitri.³⁶ In this line, the adoption of the UN Convention on the Use of Electronic Communications in International Contracts also provides for the substitution of written form by data messages (Article 6) and signatures by electronic signatures (Article 7).³⁷ However, international arbitration is still considered to be attached to national law, thus applicable laws that regulate and allow electronic awards will differ for each jurisdiction (e.g. while German law requires the qualified electronic signatures of arbitrators recognized under German law, the United States’ law consider that simple reproductions of the arbitrators’ names suffice).³⁸

In this context, digital arbitration agreements and awards in online arbitration for e-commerce disputes are currently still being regulated by national laws. However, international instruments tend to harmonize form requirements for electronic arbitration agreements and awards. In 2011, the United Nations attempted to create an international instrument for online disputes, titled ‘UNCITRAL: Online Dispute Resolution for cross-border electronic commerce transactions’. This attempt failed as it required more delocalized regulation. The regulation of e-commerce disputes is for now still being solved by the traditional legal framework of international arbitration, though the necessity to develop a new system based on delocalized theory remains clear.³⁹

2. Smart contracts and international arbitration

The rise of electronic commerce, or e-commerce, has allowed sellers in one part of the world to instantly connect to customers thousand of miles away by a single click.⁴⁰

In the near future, the electronic market place is expected to fundamentally modify the existing global economic and business structures.⁴¹ In this context, it has been recognized that smart contracts have the potential to transform international commercial agreements to facilitate compliance and accelerated securities settlements.⁴² In a recent publication, it is considered that distributed ledger technology has the future potential in the electronic market to revolutionize everything from the operation of the finance industry to the trade of precious gems.⁴³ In this sense, where there is potential future for smart contracts, there is also potential for international arbitration to participate in the disputes that may arise from these platforms. Blockchain technology is based on a decision-making process which relies on a peer-to-peer network that no single party can control. Artificial intelligence ‘is a field of computer science that includes machine learning, natural language processing, speech processing, expert systems, robotics, and machine vision’.⁴⁴ The decision-making process of blockchain technology is a subset of ‘artificial intelligence’, programmed to automate the decision by following pre-set ‘if-then’ decision trees by algorithms that create a predictive model.

Unlike traditional databases, which are administrated by a central entity, a blockchain is a decentralized record of transactions stored in a permanent way by using cryptographic techniques. Thus, the authentication of transactions is achieved through a cryptographic consensus protocol, allowing the easy tracking of transactions. It has been suggested that blockchain technology encompasses two characteristics: a decentralized way of tracking ownership of property, and the ability to directly transfer property from peer to peer.⁴⁵

Smart contracts, which rely on the blockchain technology, are e-instructions drafted in a self-executed program when specified conditions are fulfilled. They store the obligations, benefits and penalties that the parties agreed, and execute them automatically according to the performance of the parties. Thus, smart contracts are computer programs that automatically enforce themselves, without the intervention of a third party.⁴⁶

It is to be noted that a Senior Analyst at the World Trade Organisation, E. Ganne, explained that the blockchain technology is only able to work fully if all aspects of cross-border trade transactions are digitalized (transportation, customs, finances, data elements, banks, insurances, etc.). As requiring a complex conducive regulatory environment and standardization, blockchain technology could well become the future of trade infrastructure and the biggest disruptor to international trade.⁴⁷

The approach to smart contracts is still unclear; there is little legal literature on them, the case law is non-existent and even an exact definition of smart contracts is lacking. The terminology dates back to 1994 when Nick Szabo defined a smart contract as ‘a set of promises, specified in digital form, including protocols within which the parties perform on these promises’.⁴⁸

Thus, a smart contract is an automated software program built on a blockchain protocol; in other words, they are programmable contractual tools. They can contain the contractual agreement itself, the governance of the preconditions necessary for the contractual obligations to take place and the execution of the contract.

In a recent article, Uríbarri stated that the use of smart contracts in international arbitration is no longer a question of ‘if’ but ‘when’. By now, it has been recognized that technology helps arbitration to reduce its costs and to increase efficiency, and therefore, to offer a more appealing service. As Uríbarri explains, efficiency and cost management have been recognized in many jurisdictions as the objectives for the conduct of arbitration.⁴⁹

Blockchain technology and smart contracts, as has been noted above, are both commonly characterized by decentralization, a lack of intermediaries and automatization, which in conjunction allow the technologies to provide security and immutability.

In this context, international arbitration appears to be the most suitable dispute resolution mechanism to deal with emerging decentralized digital assets, for its neutrality, cross-border enforceability and the flexibility to tailor specific arbitration rules.⁵⁰

Another issue with regards to the regulation of this new technology and international arbitration is the delocalized infrastructure in blockchain technology.⁵¹ Transactions made using blockchain technology are widely distributed, both among actors and jurisdictions. This leads to issues regarding regulation, as it can be difficult, if not impossible, to ascertain the appropriate place for the arbitral proceedings. Blockchain technology leads to issues arising from the multiplicity of overlapping applicable jurisdictions where an activity could be subject to multiple and contradictory regulation, or no regulation whatsoever.⁵²

Further, the usage of old territorial existing law for the regulation of e-commerce disputes is based on territorial rules that assumes the presence of physical objects and localization of ‘human decision-making’.⁵³ Hence, the territorial theory continues to be applied in online arbitration in the present day.⁵⁴

Due to constraints of state sovereignty, there is not yet a global legal instrument for regulating legal issues related to cross-border online disputes. This means that the choice of jurisdiction is determined based on national laws, which may often lead to complicated scenarios.⁵⁵

Smart contracts, on the other hand, are becoming the potential future in electronic commerce, and issues of jurisdiction for electronic disputes are still unclear for blockchain technology. They attempt to be limited by parochial laws, where infrastructure is yet to be developed to recognize and regulate new technologies.

In this regard, the party autonomy principle is at risk of being undermined if an online arbitration that successfully passes all the challenges that a smart contract dispute presents, remains ultimately set aside by national laws with a lack of infrastructure in their jurisdictions.

On this issue, while examining the relationship between blockchain technology and law, K. Yeung noted the importance of determining how law should react to this new technology. Considering the characteristics of smart contracts, legal concepts such as jurisdiction might need to be reexamined.⁵⁶

III. An identifiable point of access for the regulation of the arbitral seat in smart contracts disputes

The section explains how blockchain technology in smart contracts can be tracked, allowing parties and locations to be identifiable.

1. The role of the arbitral seat in smart contracts

Blockchain technology is popularly known for its inherent decentralization platform, which enables the development of smart contracts without the necessity of a trusted institutional third party.⁵⁷ Whereas traditionally a contract operates by the authority of a trusted impartial and independent third party, smart contracts achieve credibility by authenticating the technical protocol in itself.

Blockchain technology can be divided into three distinct categories: cryptographic keys, a distributed network and a network servicing protocol. An example of the first category, bitcoin (a cryptographic digital currency) enables the processing of online transactions without the need to resort to a third-party intermediary.⁵⁸ Thus, bitcoin technology is considered to be a decentralized infrastructure, known as a public blockchain.

However, M. Finck clarifies that a public blockchain is not the only way to build a blockchain. Blockchains can be built to require permission to read the information on the chain, known as permissioned blockchains. This category of blockchain can determine the validator within the chain and build its own nodes, therefore, controlling the locations of said nodes around the world.⁵⁹ Thus, permissioned blockchains are by definition not decentralized, contrary to bitcoin technology, as they have a centralized software and hardware that can be tracked at a consortium level. These are in contrast to public, permission-less blockchains, whose inherent transnationalism can lead to complex questions of jurisdiction.

The confusion between blockchain technology and smart contracts has led to recognizing smart contracts as a delocalized system. A recent article by the Faculty of Law at Oxford University states the difficulties that smart contracts present potentially complex cross-border nature, given that they are generally operated by "computers located in different jurisdictions", creating complications to identify the applicable law or jurisdiction to the contract.⁶⁰

Smart contracts, however, are a network servicing protocol and permissioned blockchain, with a centralized ledger in the hands of identifiable users that are able to store a local copy of the blockchain and control blocks for inclusion, requiring a level of trust from participants. To achieve this, they rely on a network of light nodes to store copies across a peer-to-peer network and miners to propose new blocks. In terms of operation, however, as explained above, a network of light nodes can ultimately be controlled by a full node, thereby allowing these transactions to be inspected and identified by other participants.⁶¹

Further, C. Reed explains that even though the cyberspace has no physical existence, the concept of an autonomous jurisdiction in which rules do not apply is a fallacy. C. Reed notes that the problem with cyberspace is that its constituent elements are located in different legal jurisdictions. Hence, ‘these corporeal elements of cyberspace are sufficient to give national jurisdictions a justification for claiming jurisdiction over, and the applicability of their laws to, an Internet transaction’.⁶²

Blockchain technology, as a network based on nodes replicated around the globe, provokes problems of territorial competence, which is becoming a new challenge for states’ regulation.⁶³ However, smart contracts used for private and permissioned purposes, that can run on a private network, do not present such territorial problems. Thus, as permissioned systems, parties’ identities are known and controlled, as only parties with specific attributes are admitted to the system.⁶⁴ This system is, therefore, controlled by a determined party or a consortium that whitelists nodes and determines the system’s rules of operation, wherein the consortium or vendor facilitates coordination.⁶⁵ Consequently, smart contracts are not completely delocalized, as, ultimately, it requires the parties involved in the contract to code the rules for the behavior of this technology.⁶⁶ Indeed, the hardware layer may be centralised when there are few nodes or when nodes are owned by a small group of individuals and stored in close geographic proximity. While it is often assumed that nodes are run by individuals in an isolated fashion, in reality they are often clustered in data centers.⁶⁷

Certainly, smart contracts are frequently misunderstood as systems in which technology can replace humans. However, as noted by M. Finck, human input is ultimately used to set the objectives of the program, as humans are behind the codes.⁶⁸ Further, ‘a consortium might rely on a blockchain located on nodes across the globe but the blockchain might be centrally managed by a single entity’.⁶⁹

From the international arbitration perspective, smart contracts can follow the existing theory of territorialism under the current international legal framework with regard to the arbitral seat in international arbitration. Its particular characteristics allow law to track a physical place, enabling territorialism – the current leading theory in international instruments – to regulate smart contracts disputes.

This proposal thus clarifies the misconception given to smart contracts as a decentralized technology and enables international arbitration to avoid exhausting modification of the existing regulation. Indeed, the importance to have an identifiable component of localization within smart contract disputes stems from considering that the existing legal theory of territorialism is feasible to be followed by smart contracts without the need to wait for the delocalized theory to be applied in international instruments.

In this context, during discussions for the establishment of the New York Convention, the drafters adopted a considerable number of suggestions in order to reduce the importance of the place of arbitration. However, even though the international instrument was not yet prepared to follow the delocalized theory of the arbitral seat, it, at least, embraced the idea for the near future.⁷⁰

Many regulators have chosen to observe how technology unfolds while continuing to apply existing legal frameworks, as noted in the treatment for e-commerce disputes. In this context, the European Commission ‘announced in 2017 that it was actively monitoring’ blockchain technology. Similarly, the UK Law Commission has focused work on smart contracts and electronic signatures in order to monitor developments in this field.⁷¹ It seems that this approach enables governments to discern developments without the need to make explicit pronouncements. Likewise, international arbitration institutions should prepare for this possible area of growth when disputes arise and a dispute mechanism is needed.

2. Validity of coded arbitration agreements and recognition of coded arbitral awards

A consensus protocol is a system required to ensure that each node – following the same rules for deciding when to add a new block – adds the same new blocks to their local copy on the blockchain. Here, in order for nodes to accept their blocks, miners need to generate new blocks that accord with a consensus protocol.⁷²

‘Nodes’ are tools to store local copies of the blockchain. ‘Full nodes’ store a copy of the entire blockchain, while ‘light nodes’ hold only a subset of the blockchain in order to verify transactions.⁷³ When a user makes a transaction, this is recorded to nodes across the network; correspondingly, miners assemble transactions into blocks and broadcast those blocks over the network.⁷⁴

‘Miners’ are an additional potential source of regulation for blockchain technology. Miners can be identified relatively easily, as the nature of proof-of-work allows the verification of transactions.⁷⁵ In this sense, international arbitration, as a miner, can relate to smart contracts in order to offer a dispute mechanism suitable for the disputes arising from them. For the validation, ‘miners are already subject to existing legal obligations, and it is possible that additional requirements will be imposed to directly shape the network’,⁷⁶ allowing national courts to regulate the specialized service offered from international arbitration for smart contracts.

However, it is also true that the creation of the said miners requires in the present a lot of expertise in the field in order to be operable. Nonetheless, international arbitration institutions can offer a suitable platform to the smart contract technology in the near future, in order to offer arbitration services for smart contracts, review arbitral agreements, and connect to governmental technology for the supervision of arbitral proceedings.

Governments may attempt to participate directly in territorial blockchain governance, while international arbitration should attempt to develop its service and enhance an international regulation by developing a platform for smart contracts disputes.⁷⁷ In this regard, if governments are already looking for the manner to participate in the blockchain technology, online arbitration should not remain behind but also seek for the opportunity to participate in the market as a more suitable service.

The nature of the ‘verification’ system in blockchain technology, known as ‘oracles’, is used to verify external data and embed it in the chain. A private blockchain is carried out by restricted numbers of nodes, that can be more easily be controlled under governmental regulations, allowing a greater efficiency and much faster processing of transactions.⁷⁸

Hence, international arbitration can offer a service to verify arbitral proceedings through an oracle, manipulate the smart contract program according to its dispute resolution mechanism, examine the validity of an arbitration agreement as a coded contract, and deliver an efficient arbitral award to national courts.

Arbitration agreements are the cornerstone of the arbitration process, containing parties’ consent to arbitration and the legal framework of the arbitration proceedings.⁷⁹ The first main concern, thus, is the validation of a coded arbitration agreement formed by smart contracts; it is important to note the necessity of valid evidentiary means of parties’ consent. If smart contracts require coding procedures, it should be in the service of international commercial arbitration to recognize consent, and enhance the recognition of clickwrap agreements.

Likewise, smart contracts can comply with the present regulatory framework to international arbitration of electronic signatures verification. The common identification processes used as an electronic identity authentication are the electronic signatures composed by personal identification numbers (PINS), public key cryptography (PKC), and digitalized signatures.⁸⁰

Accordingly, international instruments in international arbitration have the potential to act as a flexible regulator, with regard to new technologies, including blockchain technology. Distributed technologies, it has been argued, are a significant challenge for law; an implementation of said examples would imply that international arbitration proceedings can be adapted to the necessities of new trends and capabilities in technology.

In this regard, a challenge is presented to national legal systems to acquire the needed infrastructure to verify digital agreements and to avoid obstructing the development of smart contracts.

Arbitral awards, on the other hand, present an advantageous position in smart contracts technology, as instead of needing the recognition of a specific jurisdiction, the automatized program can self-execute the obligation of one party to comply with the agreement. In this context, there would be no need for national court intervention.

Nevertheless, problems arise when the execution of the award requires the recognition of a national court with regard to physical assets or when the final decision of the program needs to be challenged. Here, again, national laws can be an impediment for international arbitration in resolving smart contracts with a, predominantly coded, process to be recognized. Thus, ‘e-enforcement remains a theoretical possibility that requires the development of a fully automated court system that is adequately connected to fully automated governmental portals, where secure and reliable technologies are utilized to transform e-enforcement into a reality’.⁸¹

Therefore, if national laws present an impediment for coded arbitral awards, then, the task for international arbitration is to find an effective solution to adapt to these parochial laws and provide an efficient service. A paper-based format for the award can be re-written by arbitrators, according to the coded solution given by the smart contracts technology, in order to provide a valid award that can comply with the traditional requirements of being written and signed under the New York Convention.⁸² Thus, problems regarding a lack of infrastructure or consensus from some jurisdictions may be resolved by combining technology with the traditional existing regulation. As a result, parties can enjoy the advantages of using smart contracts technology without being hindered by national laws, and ultimately comply with the obligations they impose.⁸³

International arbitration can use the self-execution characteristic of smart contracts to reinforce public regulation, with the ultimate purpose of delivering an efficient arbitral award. For example, as noted by M. Finck, ‘code can also constitute a means of implementing externally imposed regulatory constraints, as illustrated by Airbnb’s tweaking of its code to collect tourist taxes in select jurisdictions’.⁸⁴ In this manner, coded awards can be used as an additional tool to comply with national laws.⁸⁵

a) The New York convention and the self-enforceability characteristic of a smart contract

The New York Convention is arguably one of the most successful international conventions in international commercial arbitration, considered by many as one of the main instruments for the international legal framework of the field. The importance of the Convention focuses on the regulation of the arbitration agreements and the arbitral awards, as well as guidance for the allocation of competence between national courts and the arbitral tribunals.⁸⁶ Likewise, it is uncontested that one of the biggest achievements of the New York Convention in order to facilitate the circulation of awards was to reduce the importance of the seat of arbitration with regard to the enforcement of the award.⁸⁷

In this context, Professor Koulu proposes the possibility to promote direct private enforcement in smart contracts, assessing liability without the need of human-intervention in an automated process.⁸⁸ However, it is suggested that decisions reached in smart contracts, through their self-execution characteristic, enhance a coordinated regulation of arbitral awards, following the principle of pro-enforcement under the New York Convention. Smart contracts can be enforced by themselves with the assistance of online arbitration in order to comply with the regulations of the place of the arbitration, and ultimately, deliver an effective award.

Indeed, self-regulation on the Internet has been the subject of a great deal of discussion. It has been claimed that the only way to control information on the web is to rely on users. As noted in the case Reno v. ACLU, it was argued that the power to control information has been placed outside the hands of national courts and into the hands of individuals.⁸⁹ Ultimately, the US Supreme Court dropped the possibility for individuals to be free from rule on the Internet; therefore, co-regulation, which enables ‘the sovereign to retain some control over the outcome of the self-regulatory process as well as some control over the procedure that is being used’, is a more realistic proposal.⁹⁰

Further, as further analyzed by Professor Koulu, private governance is, in itself, nothing new. For instance institutionalized legal regimes are a method of providing soft law instruments (e.g. contractual practices, codes of conduct, methods of conflict management) that aim at reducing the risks of cross-border commerce.⁹¹ Koulu, thus, by highlighting the characteristic of self-execution of the smart contracts, ultimately recognizes its additional assistance to international arbitration to enhance the pro-enforcement principle of arbitral awards stated under the international legal framework for international arbitration.

b) Compliance with mandatory rules and the self-regulation of smart contracts

Self-regulation is another of the main features mentioned of smart contracts. In this context, private enforcement is considered controversial as it can bypass a State’s monopoly on mandatory rules.⁹² Indeed, the self-execution and self-regulation characteristics in the smart contract seem to undermine state control on the fairness of decisions, which has been recognized as the principle of fundamental fairness in process or due process in procedural law. Noting this, enforcement can only be granted through public force mechanism.⁹³

Further, even if coded arbitration agreements in smart contracts were self-executed through blockchain technology, the avoidance of national courts could be considered as undermining mandatory rules.

It has been recognized that the lack of authority in the cyberspace causes a multitude of problems, especially ‘in the fields that should not be left to self-regulation … but rather be covered by a more democratic form of regulation by public law’.⁹⁴

International commercial arbitration, as a service and legal assistance, has as a purpose, to provide a valid and enforceable arbitral award. Blockchain technology, on the other hand, is known as a self-regulatory mechanism.

Thus, smart contracts’ self-execution function can ultimately operate as a prevention system of mandatory rules within potential applicable laws. In other words, depending on the coder and the technology, a dispute mechanism ledger can contain a general data base with all procedural arbitration rules, and activate whenever one jurisdiction is potentially applicable to the case. However, in order to protect mandatory rules and provide an efficient arbitral procedure to the parties, the program can be designed to not continue to the next stage if a mandatory rule is not being complied with.

Following this proposal, considering the eventual growth of regulatory development using blockchain technology, smart contracts can be supported by international arbitration to avoid unlawful schemes, namely criminal content and data protection, and to regulate arbitrator’s conduct.

An issue with blockchain technology, as mentioned above, is the irreversibility of past transactions recorded on the blockchain, as this technology aims to create a persistent record of relevant transactions. However, Bacon et al. explain that nodes can be coordinated to make an effort to correct their local versions of the ledger and undo specific past transactions they considered inappropriate. Nonetheless, the authors further explain that this possibility might be against the general aim of creating a persistent record, noting the exception for circumstances in which unaltered transactions could dramatically affect the success of the platform.⁹⁵

Another characteristic explained above in smart contracts is codifying, allowing individuals to construct their own systems of rules that are automatically enforced by the blockchains’ protocol, creating customized governance solutions.⁹⁶

In ‘Coding Regulation’, L. Asscher et al clarified the common misunderstanding of a metaphorical use of the term ‘code’. They explain that the fact that a code uses a prescriptive language does not make it a set of normative commands. Coding is a former instruction of fact based on the sum total of experiences, that ultimately is based on the intentionality of the human mind.⁹⁷ Therefore, human decision-making cannot be replaced entirely by blockchain protocol. Thus, the process of programming within smart contracts, represented on a code, ultimately contents the volition of the parties. In fact, some authors like De Filippi et al. have now developed the concept of lex cryptographia, predicting the emerging of a new subset of law that consists of self-executing rules in smart contracts.⁹⁸ Hence, the importance of party autonomy becomes relevant within smart contracts agreements to be respected and protected by national laws, in order to not undermine parties’ willingness to try new mechanisms to agree on transactions.

c) Selection of the applicable law

One of the main difficulties for international arbitration, still faced by electronic commerce in the cyberspace, is how to determine the applicable law suitable to electronic contracts, where one common misunderstanding consists of treating the Internet as a separate jurisdiction, detached from state territory.⁹⁹ In this context, Joel Reidenberg, in his publication on the lex informatica, recognizes that even though the cyberspace is a network linked to many national territories which hinders the identification of a sole territory, it is not true that the Internet is completely delocalized and detached, in a utopian world of its own.¹⁰⁰

Smart contracts are capable of being tracked to the jurisdiction of most relevant connection. As explained by Bacon et al., smart contracts operating on online networks often start with physical documents, allowing a determination of the location of the transaction made online. Moreover, permissioned systems as smart contracts use trusted nodes that allow viewing of the entire blockchain infrastructure, potentially stored across multiple nodes.

Additionally, within blockchain technology it is also possible to use other methods to localize parties and places, such as by linking public keys to the IP addresses where the transactions were generated. Public key infrastructure (PKI) comprises a function to generate key pairs consisting of a public or private key, which function as a validator to check whether a digital signature is correct.¹⁰¹ Transaction records, correspondingly, are signed before being included in blocks.¹⁰² PKI, thus, can be used to create digital signatures, which enables international arbitration and smart contracts to have identifiable parties. Each party’s private key is a means of access to a blockchain platform; if one of them loses their private key, the platform can no longer authenticate the party and will deny it access. Hence, parties’ identification is strongly related to PKI that work as digital signatures, a technology that is already capable of being regulated by the existing legal framework in international arbitration.

In practice, most cases involve parties not agreeing on an applicable law to the contract and the arbitration agreement, leaving arbitrators to decide the place of the arbitration, and giving them the responsibility to decide the best jurisdiction for the dispute and the technology matter. Arbitrators, with the help of technology, such as a computer program, can carry out an analysis of different potential applicable laws, and select the most suitable and supporting jurisdiction to smart contracts disputes.

Alternatively, traditional means to solve e-commerce disputes can be applied to smart contracts disputes. For instance:

• The UN Convention on the Use of Electronic Communications in International Contracts helps practitioners to determine the location of service providers, by establishing a certain number of presumptions aimed at facilitating a determination of party’s location. In this sense, ‘according to this significant international legal instrument, it is irrelevant for the purposes of the e-commerce (i) where the location of the equipment and technology supporting an information system used by a party is; (ii) where the information system may be accessed; (iii) or whether the domain name or electronic mail address is connected to a specific country’.¹⁰³
• The Europe Directive 2000/31/EC on Electronic Commerce stated that in the case of companies providing services via Internet websites, the actual location attributed to the process is not considered to be the place where the technology is found, nor the place where the company’s website is accessible, but instead, the place where the company pursues its economic activity.¹⁰⁴

As a result, the possibility within smart contracts to have a potential identifiable location facilitates the application of international arbitration instruments in determining the applicable law for these disputes. Indeed, smart contracts’ infrastructure, as explained above, is controlled by a ‘determined party or a consortium that whitelists nodes and determines the system’s rules of operation’.¹⁰⁵ Such technology, considered as a permissioned ledger, is ultimately centrally managed by a single entity. This aspect of smart contracts thus enables the said legal instruments to determine the localization of the applicable law for these contexts.¹⁰⁶

Conclusion

Internet law, like every other branch of law, is constantly evolving in response to new technologies. Blockchain technology’s blurring of national boundaries creates a variety of new legal dilemmas.

However, smart contract technology presents a centralized regulatory point of access which makes the existing theory of the place of the arbitration in international arbitration suitable to regulate this new technology with a territorial perspective.

It has been pointed out previously that electronic commerce disputes have been supported by national courts in the same manner as offline disputes. However, smart contracts involve new characteristics of self-governance and self-execution, providing for blockchain technology to be enforceable without the coercive power of national courts.

To protect mandatory rules, however, a global cooperation is needed. As the Deutsche Bundesbank has affirmed, any regulation of Bitcoin must be global, as ‘the power of nation states is obviously limited’.¹⁰⁷ Likewise, the UK Financial Conduct Authority (FCA) has asserted the need for a global regulatory sandbox to better frame the cross-border operation of innovative technology.¹⁰⁸ In the United States, various states are realizing the benefits of cross-jurisdictional cooperation, as can be evidenced by the American Uniform Law Commission passing a model act for digital currencies.¹⁰⁹

National laws however often prove ineffective at coping with these global decentralized blockchains due to a lack of infrastructure. Yet, a delocalized seat in arbitration with a global legal framework is not a realistic option at this stage. More realistic solutions, considering the natural characteristics of the new technology, should thus be envisaged.

National legislatures are not likely to enact entirely new statutory schemes to adapt to new technologies such as smart contracts. On the opposite, national courts will conversely want to adapt these new technologies into traditional legal rules. Each section of this article confirms the need for global solutions due to the nature of blockchain technology and the Internet’s cross-border environment. Harmonization between the radically different legal cultures connected to the internet is essential to tackle the growing cross-border internet litigation. International arbitration, and indeed, national laws, must become a moving stream rather than an obstacle, to meet the new risks in the present digital age.