(As Published in Law360)
These days, the media is full of reports of cryptocurrency millionaires, early investors who bought bitcoin or other digital currencies at an early stage and have seen the value of their holdings multiply. Cryptocurrency markets have grown exponentially in recent years, surpassing $700 billion in market capitalization in January 2018. Even after a recent sell-off, some still predict the market to exceed $1 trillion in value by the end of the year. Inevitably, there will be disputes between market participants, including investors who will no doubt blame a host of others — their advisers, issuers and the platforms on which they trade — when they incur losses. U.S. investors will often not have access to the courts to address these disputes because of predispute arbitration clauses contained in the standard agreements required by major industry providers.
Arbitration in the cryptocurrency world promises to be very different from traditional “securities” arbitrations against broker-dealers. The latter are conducted pursuant to the strict rules and procedures of the Financial Industry Regulatory Authority. In contrast, the parties likely to be involved in cryptocurrency disputes have far greater freedom in determining which disputes are arbitrable, the particular arbitration forum and venue for resolving the disputes, and the applicable procedures and remedies. This article examines the predispute arbitration clauses that certain major digital asset exchanges require customers to agree to as a condition of opening an account, and considers how arbitrations in the cryptocurrency world will differ from traditional securities arbitration and the ramifications for industry participants.
Cryptocurrency trading is generally not occurring through mainstream securities broker-dealers, which have been extremely wary of allowing customers to trade cryptocurrency-based products on their platforms, either banning such investments in their entirety or severely limiting the types of cryptocurrency products available and the types of investors permitted to invest. Until this changes (and presumably it will as cryptocurrency becomes more mainstream), investor disputes will generally not be held before FINRA, which operates the largest securities dispute resolution forum in the United States.
FINRA arbitration is governed by a code setting forth rules and procedures that are subject to approval by the U.S. Securities and Exchange Commission, and have developed over time to provide an investor-friendly forum for customer disputes. Among other things, FINRA rules allow a lengthy six-year eligibility period to bring claims, provide for venue in a forum chosen by or close to the claimant, offer investors the option to select an “all-public” panel (foregoing arbitrators with industry expertise), severely restrict the opportunities for brokerage firms that are sued to move for prehearing dismissals, and permit claimants to request an award of punitive damages.
Under the current landscape where investors are purchasing cryptocurrencies primarily through accounts they are opening and trading on other platforms — digital asset exchanges — investor disputes will be resolved in the particular arbitration forum (if any) specified in the governing user agreements of each platform. From a review of the arbitration clauses in the user agreements of several major digital currency exchanges, it is clear that the arbitration forum will be different in each case and that certain of the exchanges have taken advantage of their ability to specify venue and other limitations. One popular digital currency exchange requires users to enter into an agreement providing that disputes must be resolved in accordance with the American Arbitration Association under its Rules of Arbitration of Consumer-Related Disputes in San Francisco. Another requires arbitration of disputes before JAMS under its Comprehensive Arbitration Rules & Procedures in New York, while yet another provides for arbitration before JAMS in San Francisco. The agreements also differ in other critical ways in imposing limitations on claims and remedies, including in varying cases providing for a one-year time limitation to bring a claim and a bar on the award of punitive damages.
All of these arbitration clauses are undoubtedly enforceable under the Federal Arbitration Act, 9 U.S.C. § 1 et seq., which adopts a liberal federal policy favoring arbitration agreements. Nevertheless, the specific language of an arbitration clause will determine if a particular dispute is arbitrable, as demonstrated by a recent ruling of the U.S. Court of Appeals for the Eleventh Circuit analyzing the arbitration provision of a major digital currency exchange.
In Leidel v. Coinbase Inc., the Eleventh Circuit affirmed the district court’s denial of Coinbase’s motion to compel arbitration of claims brought by cryptocurrency investors who did not have a direct account relationship with Coinbase. One of the factors in the court’s analysis was the distinction it drew between “narrow” clauses that required arbitration of claims “arising out of” the contract at issue — like the clause in the Coinbase agreement — versus clauses that required arbitration of claims “arising out of or relating to” the contract, which were deemed “broad” in scope. Ultimately, the court concluded that the plaintiffs’ claims relied on a federal statute, the Bank Secrecy Act and related federal regulations, not the user agreement itself, and thus Coinbase had thus failed to establish that the plaintiffs’ claims fell within the scope of the arbitration clause. The plaintiffs were thus not required to arbitrate their claims.
In contrast to the nonsignatory plaintiffs in Leidel who had an attenuated relationship with the digital asset exchange, investors who enter into the user agreements with digital asset exchanges will be bound by the predispute arbitration clauses contained in those agreements. As Leidel makes clear, however, the precise language of arbitration clauses will determine the scope of the claims that are arbitrable. Indeed, the court’s opinion suggests that the outcome might have been different in that case if the arbitration clause had been a broad one that covered disputes “arising out of or related” to the agreement. Digital asset exchanges and other industry participants who favor arbitration will want to draft arbitration clauses that are as broad in scope as possible to cover the broadest range of disputes.
Moreover, unlike traditional broker-dealers who are bound to arbitrate under the strict, investor-friendly FINRA rules, digital asset exchanges and other industry participants are not so limited. They have flexibility to craft arbitration clauses that specify the particular arbitration forum for resolution of disputes, the location of the evidentiary hearings, and the applicable procedures and available remedies in the arbitration process. Thus far, the digital exchanges have favored arbitration before the AAA and JAMS, well-known private dispute resolution entities that (unlike FINRA) are not regulated by the SEC. They have also inserted language in their arbitration clauses that provide them with significant advantages, including “home court” location for evidentiary hearings and in some cases, limitations on punitive damages and a one-year limitation on the assertion of claims.
Industry participants need to carefully consider the specific language of the arbitration clauses at issue, as they will be determinative of what claims are arbitrable, the specific arbitration forum in which claims will be addressed, and the available rights and remedies when disputes arise.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
 “The Global Cryptocurrency market hit a new record high above $700 billion.” Business Insider, Jan. 3, 2018, available at http://www.businessinsider.com/bitcoin-price-global-cryptocurrency-market-capitalisation-january-3-2018-1.
 “Cryptocurrency Market Will Hit $1 Trillion Valuation This Year, CEO Of Top Exchange Says,” CNBC, Feb. 3, 2018, available at https://www.cnbc.com/2018/02/13/cryptocurrency-market-to-hit-1-trillion-valuation-in-2018-kraken-ceo.html.
 Given the popularity of cryptocurrencies internationally, there will no doubt be extensive disputes involving international investors. This article is limited to addressing claims by U.S. investors.
“Merrill Lynch Bans Clients from Investing in Bitcoin Fund.” Coindesk, Jan. 4, 2018; “Does Your Broker Allow You to Play Bitcoin, Cryptocash Market?” Investor’s Business Daily Jan. 29, 2018.
 FINRA asserts that it handles more than 99 percent of the securities-related arbitrations and mediations in the United States. “Final Report and Recommendations of the FINRA Dispute Resolution Task Force,” p. 1, available at http://www.finra.org/sites/default/files/Final-DR-task-force-report.pdf. Of course, whether some or all of the cryptocurrencies in the marketplace are securities continues to be a hotly contested issue.
 See generally FINRA Code of Arbitration Procedure, Rules 12206, 12213, 12403, 12509.
 Moses H. Cone Mem’l Hosp., 460 U.S. 1, 24-25 (1983). The U.S. Supreme Court has repeatedly confirmed that “any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration.” Id.; FAA § 2 (“A written provision in any ... contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction ... shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”).
 No. 17012728, 2018 WL 1905954 (11th Cir. Apr. 23, 2018) (per curium) (unpublished).
 Id. at *4.
 Id. at *4, 7.