Kirsten Bailey | Associate | mail me |
Max Taylor | Associate | mail me |
| Bowmans |
South Africa has yet to witness a major blockchain-related dispute, but such disputes are bound to occur as interest in cryptocurrencies and smart contracts intensifies and transactions involving them become more common.
In certain other jurisdictions, such as the United States, we have seen a tendency for some investors to get caught up in the novelty and excitement of blockchain transactions to the point of overlooking the checks and balances they would normally insist on in investments. This has contributed to a spate of high-profile international disputes, mostly involving investors and cryptocurrency exchanges or issuers of initial coin offerings (ICOs).
Although blockchain investments are in a class of their own, given their uniquely decentralised characteristics, among other things, basic investment principles apply as much to them as to any conventional high-risk investment. It is vital that investors perform proper due diligences, anticipate potential problems and understand clearly who they are doing business with.
Who and where in the world?
This could turn out to be a hurdle. The blockchain’s major appeal to many people is that it is decentralised and anonymous. However, this means it is that much harder to ascertain who or what the investor is dealing with. Blockchain is a completely different world, one where online traders typically introduce themselves by user name, and it may be difficult to find the real person or entity. The same goes for the physical location of the trader or issuer – they could be anywhere in the world.
This means that should an investment sours, it would be difficult to institute a claim. To do that, you need to know who the other parties are and where to find them.
Another complicating factor is figuring out which country’s laws would apply in the event of a dispute.
In a conventional contract, where the parties have chosen an applicable law or jurisdiction, the courts will as a general rule honour that choice. If the agreement is silent on the applicable law, a court would consider whether a tacit agreement was in place. In all likelihood, the law of the country with the closest and most relevant connection to the transaction would apply.
In South African law, this would normally be the place where the offeror heard that the offer was accepted, at least for agreements concluded by electronic communications (which is the likely method of communication for blockchain contracts). If the place where the contract was concluded differs from the place of performance, the latter takes precedence.
The question is whether a blockchain transaction would fit so neatly into the usual standards. Blockchain transactions are seldom geographically fixed and so a place connected to a transaction may be completely random.
Nevertheless, the prudent investor would make a point of ensuring that the investment agreement not only spells out who the parties are and where they are located, but also the law that will govern the contract. Furthermore, it would be helpful to spell out the parties’ choice of court in the event of a dispute or, if they prefer, arbitration or another form of alternative dispute resolution.
Alternative dispute resolution mechanisms are likely to…
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Read this article by Kirsten Bailey and Max Taylor, Associates, Bowmans, as well as a host of other topical management articles written by professionals, consultants and academics in the April/May 2019 edition of BusinessBrief.
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