Introduction
In recent years, the world has witnessed an explosive growth in the popularity and value of virtual assets. This “digital gold rush” has been largely driven by the rise of cryptocurrencies and non-fungible tokens (NFTs). The unique nature of these digital assets, authenticated by blockchain technology, has attracted significant investment, transforming the way value and ownership is perceived.
The terms virtual assets (VAs) and crypto-assets are often used interchangeably to describe digital assets that are issued and/or transferred using distributed ledger or blockchain technology. The lack of a universal definition of VAs and crypto-assets complicates their regulation and classification across different jurisdictions. According to the glossary in the IOSCO Final Report on Policy Recommendations for Crypto and Digital Asset Markets,[1] a “crypto-asset” is a type of “digital asset” that is issued and/or transferred using distributed ledger or blockchain technology. Crypto-assets include, among others, so-called “virtual currencies”, “coins”, and “tokens”. To the extent digital assets rely on cryptographic protocols, these types of assets are commonly referred to as “crypto-assets”.
As the crypto-asset industry continues to grow and to integrate further into the financial markets, the potential for disputes increases. When considering arbitration as dispute resolution method for resolving disputes in this space, it is important to bear in mind the fundamental principle that there is no arbitration without a valid arbitration agreement. Disputes that are likely to be arbitrated are therefore disputes that arise either directly out of or in connection with contracts concerning VAs, such as loan/facility agreements secured by VAs, and related technologies, in particular blockchain technology and Web 3.0 technology.[2] Separately, we may see investment treaty claims resulting, for example, from outright bans.
For ease of reference, we’ll refer to these disputes as crypto-disputes. Such disputes can arise from a wide range of transactions. Examples are disputes over investments in VA-trading platforms and other VA businesses, disputes between such businesses and their customers (e.g., over losses resulting from programming errors, inaccessibility, security breach, or unauthorised transfers), disputes relating to Initial Coin Offerings (ICOs), proprietary, contractual and IP disputes related to NFTs, disputes over cryptocurrencies and tokens (e.g., utility, security tokens), and disputes over payments and other cryptocurrency transfers.
Given the unique characteristics and global nature of crypto-assets, arbitration in Hong Kong presents an ideal mechanism for resolving such disputes efficiently and effectively. To adopt it, parties do not need any presence or business dealings in Hong Kong. Nor is it necessary that their contract is governed by Hong Kong law[3] or has any other connection with Hong Kong. Parties simply need to agree on Hong Kong as the arbitral seat which means that (i) their arbitration will be governed by Hong Kong’s modern arbitration law, (ii) it will be supervised by Hong Kong’s pro-arbitration courts, and (ii) Hong Kong will be the place where any arbitral awards will be made.
We first take a brief look at the landscape and regulatory framework in Hong Kong before we explain why arbitration in Hong Kong is ideal for resolving crypto-related disputes.
Landscape and regulatory framework in Hong Kong
Hong Kong has been seeking to position itself as a key digital assets hub. Working with financial regulators, the Government has taken steps to establish a facilitating environment for the sustainable development of the VAs sector, while addressing and mitigating risks.
In October 2022, the Government issued a Policy Statement on Development of Virtual Assets in Hong Kong, setting out the policy stance and commitment to enhancing the regulatory framework for VAs. In June 2023, the Government announced the establishment of a Task Force on Promoting Web3 Development to provide recommendations on the sustainable and responsible development of Web3.
Hong Kong’s approach to VAs focuses on risk-based, prudent regulation. The Securities and Futures Commission has introduced a licensing system for VA trading platform operators, ringing in a new phase in VA regulation. The system commenced operation in June 2023 and is based on the principle of “same activity, same risk, same regulation”.
As part of the Hong Kong Monetary Authority’s efforts in facilitating the sustainable and responsible development of stablecoin ecosystem in Hong Kong, the HKMA launched the stablecoin issuer sandbox in March 2024. Through the sandbox, the HKMA allows participating institutions with plans to issue stablecoin in Hong Kong to conduct testing on their operational plans, and also facilitates the two-way communication on the proposed regulatory requirements, with a view to formulating fit-for-purpose and risk-based regulatory regime.
In July 2024, the Financial Services and the Treasury Bureau and the HKMA jointly issued the consultation conclusions on the legislative proposal to implement a regulatory regime for fiat-referenced stablecoin issuers in Hong Kong. The HKMA envisages that the establishment of a licensing regime for FRS issuers will further strengthen the VA regulatory framework in Hong Kong.
Ten reasons why Hong Kong arbitration is an ideal combination for resolving crypto-disputes
Many advantages of arbitration are specifically attractive for resolving crypto-disputes. To ensure that parties have access to all of these advantages, it is critical that they choose the right arbitral seat. A poor choice of seat may come with interventionist national courts, hostile mandatory arbitration and other laws, inefficiencies and complications, restriction of legal advisors and arbitrators, and other inflexibilities. This can seriously affect the conduct of the arbitration and its outcome, and it can ultimately mean that a favourable award may not be enforceable in some jurisdictions.
Hong Kong is both a prime arbitral seat as well as a sophisticated and internationalised financial market with internationally aligned regulatory regimes. This combination makes Hong Kong an ideal forum for arbitrating crypto-disputes.
While specific statistics are not (yet) publicly available, informal data indicates a noticeable surge in crypto-disputes submitted to arbitration in Hong Kong in the last 3-4 years. This data reflects the growth of crypto-related transactions and the increasing demand for effective dispute resolution of crypto-disputes.
- Hong Kong law recognizes cryptocurrency as property
In Yan Yu Ying,[4] the Court of First Instance granted an interim-interim proprietary injunction for bitcoins in October 2021, and subsequently an interim proprietary injunction June 2022. The CFI confirmed that bitcoins are susceptible to proprietary claims and remedies. The plaintiff sought, among other things, restitution of approximately 1,000 bitcoins. Its claim was based on fraud and internet theft. To secure its claims, the plaintiff applied for these proprietary injunctions restraining the defendant from dealing of and in the subject bitcoins. The CFI granted the interim proprietary injunction for approximately 365 of the subject bitcoins which the defendant had retained. The CFI also explained the features of digital keys, (hot and cold) wallets, and how wallets are initialized.
In a landmark decision in March 2023, the CFI in Re Gatecoin[5] recognized the legal status of cryptocurrency as both property and capable of being held on trust.[6] This means that cryptocurrencies are accepted in Hong Kong as definable, identifiable by third parties, capable in their nature of assumption by third parties, and having some degree of permanence or stability. This position is in line with other major common law jurisdictions. The decision is significant as it provides clarity and legal certainty for the treatment of cryptocurrencies in various legal matters (including insolvency and trust cases) and enables contracting parties to bring enforcement actions (such as interim injunctions) in relation to cryptocurrencies as assets in Hong Kong.
In the context of arbitration, these decisions mean that parties can seek injunctions from the Hong Kong courts in aid of their arbitrations pending the resolution of the dispute and enforce an arbitral award against VAs located, or controlled by persons or entities, in Hong Kong.
- Arbitration provides a single neutral forum for resolving multi-jurisdictional disputes
Arbitration allows parties to resolve all of their multi-jurisdictional disputes arising in respect of a defined legal relationship, whether contractual or not, in a single forum. If properly implemented, this “one-stop shop” advantage avoids the risk of fragmented disputes and parallel proceedings with inconsistent outcomes.
Arbitration further allows parties to choose a neutral forum for resolving their disputes. This removes concerns about a counterparty’s “home court advantage”. In addition, parties can choose a sole arbitrator or a tribunal with at least one member (usually the presiding arbitrator) of neutral nationality.
- Hong Kong awards are enforceable in more than 170 jurisdictions
One of the most important advantages of arbitration iscross-border enforceability of awards.
Hong Kong enjoys signatory status under the New York Convention. This means that Hong Kong awards are enforceable under the New York Convention in more than 170 jurisdictions.
Hong Kong awards are also enforceable in Mainland China and Macau via separate enforcement arrangements. The arrangement between Hong Kong and Mainland China has been highly effective. As a result, Hong Kong awards have a strong enforcement track record in Mainland China.
- Hong Kong has a modern arbitration law
Hong Kong’s arbitration statute, the Arbitration Ordinance, Cap. 609, is one of the most modern and flexible arbitration statutes in the world. It is based on the UNCITRAL Model Law and has either adopted the 2006 amendments to the Model Law or similar provisions adjusted to Hong Kong.
The AO applies to all arbitrations seated in Hong Kong. Its object is to facilitate the fair and speedy resolution of disputes by arbitration without unnecessary expense. It is based on two key principles: maximum party autonomy and minimum court intervention.
The AO has adopted Article 2A of the UNCITRAL Model Law. Accordingly, in the interpretation of Model law provisions adopted under the AO, the courts have regard to the international origin of the Model Law and to the need to promote uniformity in its application and the observance of good faith. Indeed, the Hong Kong courts have clearly recognized that parties arbitrating in Hong Kong have a duty of good faith, or to act bona fide.[7]
- IP disputes are generally arbitrable under Hong Kong law
Intellectual property rights are meant to be enforceable against the world at large, whereas arbitral awards only bind the parties to the arbitration. Therefore, many jurisdictions consider disputes concerning the validity of IP rights as not susceptible to being finally resolved by arbitration, i.e., they consider them not arbitrable.
Arbitrability is an important aspect of the suitability of an arbitral seat for resolving disputes over IP rights, such as disputes concerning cryptocurrencies (e.g., proprietary cryptocurrencies, virtual payment solutions and digital wallets), NFTs and similar assets (e.g., digital art, virtual real estate and collectibles), the metaverse (e.g., virtual worlds, environments, avatar creations, marketplace operations), blockchain and Web3 technologies (e.g., software interoperability, decentralized applications, blockchain protocols and token standards), virtual reality and augmented reality content, and software codes embedded in smart contracts.
In January 2018, the AO was amended to expressly confirm that under Hong Kong law, all disputes relating to IP rights are deemed arbitrable between the parties to a dispute and an award will not be contrary to public policy only because it concerns such a dispute. These principles apply to any type of dispute relating to any IP right, irrespective of whether it is protectable by registration or whether it is registered or subsists in Hong Kong.
Examples are disputes involving the enforceability, infringement, subsistence, validity, ownership, scope or duration of IP rights, a transaction in respect of IP rights, or any compensation payable for IP rights.
- The Hong Kong courts retain their robust pro-arbitration attitude
The Hong Kong courts maintain a very pro-arbitration attitude. They are not interventionist and only get involved as provided for by the law.
Consistent with this attitude, the courts have maintained their robust approach toward enforcing arbitration agreements and awards. They uphold to the extent possible arbitration agreements notwithstanding defects resulting from poor drafting. They do not seek to extend the narrow fundamental grounds under the UNCITRAL Model Law for the setting aside of awards or the grounds for refusing enforcement (which mirror those in the New York Convention).
In considering setting aside and enforcement applications, the courts respect the important principle of finality and do not look into the merits of the dispute or the underlying transaction. It is extremely difficult in Hong Kong to set aside an award or resist enforcement. If a ground for setting aside or refusing enforcement has been made out, the courts have a residual discretion to uphold and enforce the award.
However, where it is justified, the courts will set aside an award or refuse its enforcement. For example, the CFI in the recent case of Song Lihua[8] refused enforcement of a Mainland award in Hong Kong on the ground of public policy although the supervisory Mainland court had denied a setting aside application. The CFI noted that as the enforcement court it had to apply its own standards and law when deciding whether enforcement would be contrary to Hong Kong’s public policy. It concluded that the arbitrator’s conduct in the underlying arbitration lacked due process and fell short of the high standards of a fair and impartial hearing expected by the Hong Kong courts. The decision illustrates the independence of the Hong Kong courts in reaching their own conclusions.
The courts’ pro-arbitration attitude is further reflected in the established principle in Hong Kong that an unsuccessful applicant in arbitration-related court proceedings must bear the other party’s costs on an indemnity basis.
When disposing of setting aside applications or enforcement applications involving PRC SOEs or other PRC or Hong Kong Government entities, the courts adopt the same approach and attitude. There remains an even level playing field.[9]
- Hong Kong offers flexible options for a wide range of interim measures
The term “interim measure” covers a wide range of orders. Most interim measures are granted before or at an early stage in the arbitration, with a view to preserving the status quo, or preventing the dissipation of assets or evidence. They are often requested without notice and usually ordered on a provisional basis, subject to later adjustment or setting aside by the tribunal.
The availability of appropriate interim measures can be particularly critical in disputes over VAs as these assets can be dissipated easily and quickly.
Interim measures can generally be granted by the courts, an emergency arbitrator[10] or the arbitral tribunal. Their powers can be concurrent or exclusive and the precise scope of their powers depends on the arbitration agreement, any applicable arbitration rules, the arbitration law of the seat and, if different, of the jurisdiction of the court where the relief is sought.
Hong Kong offers flexible options. Parties can seek interim relief from an emergency arbitrator (if available under the chosen rules), the tribunal once constituted, or the courts. Their powers are concurrent. Further, tribunals are expressly empowered to grant preliminary orders, including orders preventing parties from frustrating any interim measure.
An emergency arbitrator’s decision and a tribunal’s order or direction granting an interim measure can be enforced in Hong Kong via the courts in the same manner as an order or direction of the court.
A specific advantage for parties to Hong Kong arbitrations administered under the rules of certain eligible institutions is that they can apply directly to the Mainland courts for interim measures in aid of their arbitration (e.g., asset freezing orders). These are then enforceable in Mainland China. Hong Kong and Macau are the only seats outside Mainland China that can offer this important benefit. Mainland courts otherwise do not provide interim measures in aid of foreign seated arbitrations or enforce interim measures issued abroad.
The eligible institutions in Hong Kong are:
- Hong Kong International Arbitration Centre
- Hong Kong Maritime Arbitration Group
- South China International Arbitration Center (HK)
- eBRAM International Online Dispute Resolution Centre Limited
- AALCO Hong Kong Regional Arbitration Centre
- China International Economic and Trade Arbitration Commission Hong Kong Arbitration Center
- International Court of Arbitration of the International Chamber of Commerce – Asia Office
- Hong Kong guarantees confidentiality by statute
Confidentiality of arbitrations, including their existence, and of awards is certainly an important advantage for resolving crypto disputes, not least because a strong and untarnished reputation can be an essential contributor to success in this industry.
Hong Kong is one of a few jurisdictions which guarantee confidentiality of arbitrations and of awards by statute. The AO prohibits a party from publishing, disclosing, or communicating any information relating to the arbitral proceedings or an award made in those proceedings.
This prohibition is subject only to specific exceptions that allow publication, disclosure, or communication for legitimate reasons. Examples are disclosure to a government or regulatory body (e.g. a stock exchange), or in court proceedings to enforce or challenge an award.
The confidentiality regime extends to arbitration-related court proceedings. The AO provides that such proceedings are to be heard otherwise than in open court (unless the court is satisfied that they ought to be open to the public) and imposes restrictions on the reporting of such proceeding to ensure that matters which a party reasonable wishes to remain confidential are not published.
- Hong Kong gives parties a free choice of representation and full control over arbitrator appointments
Parties arbitrating in Hong Kong are free to choose their representatives. They can instruct non-legal representatives, or locally qualified or foreign lawyers (whether registered in Hong Kong or not).
Parties also retain full control over arbitrator appointments. They are free to choose the number of arbitrators and the appointment process.
Parties usually decide at the contract drafting stage whether to arbitrate their disputes with one or three arbitrators. If the parties do not specify the number in their arbitration clause, the default position in many jurisdictions and under many rules is that the number is either one or three.
The approach under the AO (and HKIAC Rules) is more flexible. If parties have not specified the number of arbitrators, the HKIAC which acts appointing authority under the AO will determine it.[11] In doing so, HKIAC considers a wide range of factors, such as the amount in dispute, the nature and complexity of the dispute, any relevant customs of the trade, business or profession involved in the dispute, availability of appropriate arbitrators, and urgency. This allows parties to have the number of arbitrators determined by an experienced and diverse Appointments Committee in accordance with the specific circumstances of their dispute.
Full control over arbitrator appointments is important because like arbitrating disputes in other industries and sectors, a specific advantage of arbitrating crypto-disputes is that the parties can choose experts in this field as arbitrators.
Hong Kong is home to a large pool of arbitrators as well as service providers who regularly handle complicated and evolving issues arising from currency and financial markets.
The HKIAC has specific Panels of Arbitrators for Financial Services Disputes who have demonstrated extensive experience in resolving financial services disputes. HKIAC also has a specific Panel for IP Disputes, which can be particularly helpful for arbitrating disputes concerning blockchain or Web3 technologies.
- Hong Kong offers flexible and liberal financing options for arbitrations
Hong Kong has established one of the world’s most modern and flexible financing regimes for arbitrations.
Hong Kong allows third party funding of arbitrations, arbitration-related court proceedings and mediations. Third party funding means that an external funder provides an arbitrating party with financial assistance in relation to the cost of the arbitration. It usually assists a claimant but it can assist a respondent defending a claim, although defence funding is much less common. Funding is not financing in the traditional sense, i.e., unlike a lender, the funder has no recourse to the party’s assets. Instead, the funder receives a financial benefit only if the party’s arbitration is successful. In other words, funding is contingent and the funder takes a risk that the claim will not succeed.
External financing of arbitrations has two key benefits. First, to the extent the costs of arbitration are funded, it helps the funded party to manage its cash flow. A funded party does not have to make provision for the funded costs which improves its balance sheet. Second, the funder conducts a due diligence against its own investment criteria. This provides an early assessment of the claim and its prospects of enforcement because funders only fund cases which meet their criteria and in particular cases with a reasonable to high chance of success.
Since 2022, Hong Kong also allows lawyers in the arbitration to enter into outcome related fee structure arrangements (ORFSA), that is: conditional fee agreements, providing for a success fee payable only in the event of a successful outcome), damages-based agreements, and hybrid damages-based agreements, allowing lawyers to be paid by reference to the financial benefit obtained in the matter, e.g., a percentage of a damages award.
Allowing lawyers to enter into ORFSA was driven by two key factors: market demand and competition. First, clients increasingly demand flexible funding options for arbitration and they want their lawyers to share the risk of bringing a claim in an arbitration. Second, it was considered essential for preserving Hong Kong’s competitiveness as a major arbitral seat because most major seats, such as London, Paris, New York, and since mid-2022 also Singapore, allow some form of ORFSA for arbitrations (e.g., Singapore allows only conditional fee agreements).
If you would like to learn more about the benefits and implications of adopting Hong Kong arbitration, or if you have any other arbitration-related questions, please contact Philipp Hanusch.
[1] See definition of “Crypto-asset” in Annex A.
[2] There is little consensus on the definition of Web3, but it can generally be defined as a decentralized version of the web that aims to re-balance power between users and online platforms, primarily through the use of distributed ledger technologies such as blockchain, well-known as the technology underlying crypto assets, such as Bitcoin: see, e.g., Digital Regulation Cooperation Forum, Insight paper on Web3, January 2023.
[3] Where parties choose to have their contracts governed by a foreign law, their choice will normally be recognized and upheld by a Hong Kong seated tribunal (subject to certain exceptions, such as where a provision of foreign law would be manifestly incompatible with Hong Kong public policy).
[4] Yan Yu Ying v Leung Wing Hei [2021] HKCFI 3160 (October 2021) and Yan Yu Ying v Leung Wing Hei [2022] HKCFI 1660 (June 2022).
[5] Re Gatecoin Limited [2023] HKCFI 914.
[6] For a detailed analysis, see Baker McKenzie’s Client Alert of May 2023: “Hong Kong court decision held cryptocurrencies as property and clarified interests of investors”.
[7] See Hebei Import & Export Corp v Polytek Engineering Co Ltd (1999) 2 HKCFAR 111, pp. 120I, 137B; see also KB v S [2016] 2 HKC 325.
[8] Song Lihua v Lee Chee Hon [2023] HKCFI 2540. For an analysis of this decision, see the Hong Kong Chapter of our International Arbitration Yearbook 2023-2024.
[9] A recent example is CNG v G and Another [2024] HKCFI 575. In this case, the CFI dismissed an application of a PRC SOE to set aside a Hong Kong award rendered in favour of US parties. For an analysis of this decision, see our previous blog post.
[10] HKIAC maintains a Panel of Emergency Arbitrators for arbitrations under the HKIAC Rules, see HKIAC’s website: Panel of Emergency Arbitrators.
[11] Parties who prefer ad hoc arbitration (without an institution administering the case) can choose another appointing authority, such as CIETAC HK in accordance with its Rules as Appointing Authority in Ad Hoc Arbitrations.
