Disputes between crypto exchanges and their customers can arise for a plethora of reasons; including stolen coins, hacked accounts, technical errors, ‘flash crashes’, and trading losses.

However, it is only when a dispute does arise that the implications of the standard customer terms and conditions of many prominent crypto exchanges become apparent - and in particular, the common term that legal disputes are determinable by foreign-based arbitration procedures, rather than in the domestic courts where customers are domiciled.

Recent legal developments provide scope for mandatory arbitration clauses, that are prejudicial to customers, to be challenged.

Kraken’s mandatory arbitration clause held to be ineffective: Chechetkin v Payward Ltd (Kraken) and others [2022] EWHC 3057 (Ch)

One such dispute arose between a London-based lawyer and crypto trader, Mr Chechetkin, and crypto exchange Kraken, arising from a series of trades he made in 2020 which involved the use of margin and resulted in losses of more than £600,000.

In relation to the failed trades, Mr C argued that Kraken was liable for breaches of UK financial services legislation, and that this provided him with actionable claims in English law under sections 26 and 138D(2) of the Financial Services and Markets Act 2000 (‘FSMA’).

To that end, Mr C issued a claim in the London High Court in February 2022, seeking that Kraken reimburse his losses.

Kraken’s standard customer terms and conditions, which Mr C had entered into, provide that claims are to be determined by an arbitration process known as JAMS, which occurs in San Francisco, California - and that customers are prevented from bringing legal proceedings in any other jurisdiction.

Consequently, Kraken referred Mr C’s dispute to arbitration, and made an application for an order that his High Court claim be struck out. In October 2022, the California arbitrator determined that Kraken had no liability to Mr C, and made an award in terms of dismissing his claim.

Kraken’s application for strike-out, however, proved to be a positive turn of events for Mr C, and for UK based crypto exchange customers at large.

At a hearing in October 2022, Mr Justice Miles found that, on the facts of the case, Kraken’s terms and conditions amount to an English law consumer contract under the Civil Jurisdiction and Judgments Act 1982, under which Mr C, the customer, was domiciled in the UK. To Kraken’s dismay, the effect of this was that the mandatory arbitration and exclusive jurisdiction clauses in its terms and conditions were not binding on the English court, or enforceable against Mr C.

The arbitrator’s award does not therefore stand.

Mr C’s claim in the High Court continues.

Foreign-based arbitration as a redress procedure for crypto exchange disputes is prejudicial to claimants

In addition to Kraken, the standard customer terms and conditions of other prominent crypto exchanges provide for disputes to be determined by foreign-based arbitration procedures. For example: Binance terms designate the Hong Kong International Arbitration Centre; and for Huobi, the ICC International Court of Arbitration.

Arbitration differs significantly from court based litigation: the procedure is less formal, and therefore may be considered as less robust. Arbitral awards are very difficult to appeal from. Customers will find that instructing legal representatives with requisite expertise in foreign jurisdictions is more costly and burdensome. Furthermore, arbitral decisions do not set binding legal precedents that other claimants may rely upon.

It is clear that mandatory arbitration clauses tip the scales significantly in favour of crypto exchanges, in circumstances where the sums in issue with their customers may be substantial.

What does the Chechetkin case mean for customers with disputes against crypto exchanges?

The judgment is an extremely positive development for crypto exchange customers in the UK.

In a crypto exchange dispute, the possibility that claimants can avail themselves of the full protections afforded by UK financial services and consumer laws, and have their claims determined by the English court, presents a vastly enhanced prospect of achieving a just outcome.

But notwithstanding this development, crypto exchanges will invariably continue seeking to rely on their standard terms and conditions, and may present reasons why disputes cannot be determined other than by arbitration when challenged. In Chechetkin, Kraken argued, unsuccessfully, that Mr C was a sophisticated person with a banking and finance background who was not dealing as consumer, and therefore that the relevant UK legislation was not applicable.

Do you need help with a crypto exchange dispute?

If you become involved in a dispute with a crypto exchange, it is important to seek specialist legal advice at the earliest opportunity, particularly because standard form arbitration clauses impose strict time limits for bringing claims.

If you wish to discuss a claim, either call us now on +44 7825 987 533, email us at mail@paradgmlegal.com, or use the Contact page on this website.