The rapid advancement of technology, particularly the internet, has profoundly reshaped our world over the past three decades. The concept of the metaverse is now attracting significant attention and investment, positioning itself as a potential “next big thing” in both technology and everyday life.

As our digital interactions increase, so too do commercial transactions and the likelihood of disputes within the metaverse. Traditional dispute resolution methods like litigation and arbitration, however, may not be well-suited to this decentralised space.

Blockchain-based dispute resolution methods, especially blockchain arbitration, offer a promising alternative. Nevertheless, the distinct characteristics of these mechanisms raises questions about their compatibility with existing national and international arbitration systems, particularly in cases requiring off-chain enforcement under the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention).

What is the metaverse and what are the types of disputes that may arise in relation to it?

In basic terms, the metaverse is a vast and ever-changing online universe where people can interact, explore different environments, participate in activities, and own assets, much like in the physical world, but within a digital space.

The metaverse offers various applications, such as gaming, game development, virtual tourism, remote work, retail and commerce, entertainment and events, and even investment opportunities like digital real estate. Technologies closely related to the metaverse, such as blockchain and smart contracts, are essential in shaping its infrastructure, functionality and user experience.

The metaverse offers individuals the chance to own various digital assets, including wearables, artwork, and virtual land, with some assets commanding very high prices. As commercial transactions increase in the metaverse, so do the chances of disputes. Although only a few metaverse-specific disputes have occurred so far, mainly including intellectual property claims, there have been several notable cases involving digital assets.

Moving forward, a wide range of disputes is expected within the realm of the metaverse, involving issues related to digital asset value, intellectual property, user conduct, coding errors, security breaches and more. As businesses expand into the metaverse, disputes will also likely emerge from contractual and commercial activities.

How can metaverse-related disputes be resolved?

Dispute resolution in the metaverse hinges on the legal relationships established among its users, platforms and businesses. For instance, the manner in which disputes between metaverse platforms and users will be resolved will depend on the platforms’ terms of use, while those between businesses and users will typically depend on the businesses’ terms and conditions.

Challenges are expected to arise mainly in transactions between users, especially where no contract governs the relationship. This is likely to be a prevalent situation considering that metaverse users value efficiency and anonymity, making formal agreements feel intrusive. Issues also occur when smart contracts govern user relationships but do not account for certain disputes.

Reliance on these blockchain mechanisms is expected to grow as commerce in the metaverse expands

Traditional international commercial arbitration is likely to remain the primary method for resolving digital disputes for the time being, as many metaverse platforms, NFT marketplaces and cryptocurrency exchanges include arbitration clauses in their terms of use. However, it may not efficiently address all metaverse-related issues. For small claims, it can be impractical due to costs and procedural demands. The complexity of smart contracts can complicate interpretation, and disputes arising after their self-execution may pose challenges for arbitral tribunals.

Additionally, the anonymity of parties complicates the initiation of arbitration, while enforcing arbitral awards can be lengthy and costly. Ultimately, the centralised nature of traditional arbitration contrasts with the decentralised principles of blockchain and the metaverse, potentially hindering expected efficiency. To address these challenges, new dispute resolution systems based on blockchain technology are being developed.

What are blockchain-based dispute resolution mechanisms?

Several models of blockchain-based dispute resolution mechanisms, including Kleros, Jur, and Aragon, have recently emerged, with Kleros being the most advanced. Kleros operates on the Ethereum blockchain and uses crowdsourced jurors incentivised by game-theoretic principles to resolve disputes anonymously. Decisions arising from the Kleros protocol are then enforced automatically through smart contracts, aiming for fast and cost-effective resolutions.

Reliance on these blockchain mechanisms is expected to grow as commerce in the metaverse expands. These systems align well with the metaverse’s core principles – decentralisation, transparency, anonymity and pseudonymity, and a peer-to-peer ethos – all valued by metaverse users. Blockchain-based dispute resolution mechanisms can effectively address simple, low-value cross-border disputes, delivering quick and satisfactory outcomes, making them a fitting solution for metaverse transactions.

Can decisions arising from blockchain-based dispute resolution mechanisms in metaverse-related disputes benefit from cross-border enforcement under the New York Convention?

Decisions arising from blockchain-based dispute resolution mechanisms are often enforced on-chain. However, the execution of awards through smart contracts is limited due to predetermined escrow amounts or accounts with limited funds. If a decision exceeds these limits, if it involves non-monetary or non-digital compensation, or requires interim measures, on-chain enforcement is impossible or ineffective. The New York Convention provides a vital framework for the purpose of off-chain enforcement.

The New York Convention enables the recognition and enforcement of foreign arbitral awards by national courts in more than 170 contracting parties. Considering its scope of applicability, the New York Convention can only be used to enforce decisions arising out of blockchain-based dispute resolution mechanisms if such mechanisms are classified as “arbitration” and the resulting decisions are classified as “arbitral awards”.

The specific features of blockchain arbitration and the metaverse itself raise challenges to enforcement under the New York Convention.

While some commentators contend that blockchain-based dispute resolution mechanisms may not qualify as arbitration, we argue that these systems and resulting decisions possess key characteristics that align with the definitions of “arbitration” and “arbitral awards”. These mechanisms offer a consensual method for resolving disputes, involve non-governmental decision-makers who can be classified as “arbitrators”, lead to final and binding outcomes, and follow adjudicatory procedures that allow both parties to present their cases.

Nonetheless, uncertainties exist regarding whether blockchain awards can meet the enforceability criteria under the New York Convention, given the unique characteristics of blockchain arbitration compared to traditional arbitration.

For instance, traditional arbitration involves written arbitration agreements and arbitral awards and is governed by the law of the seat, which may confer nationality to the award. In contrast, blockchain arbitration is likely to involve arbitration agreements and arbitral awards in electronic or cryptographic form, and functions in a decentralised digital environment where there is no choice of a place of arbitration.

Moreover, while parties in traditional arbitration select arbitrators who must disclose any conflicts of interest, blockchain arbitration randomly assigns jurors based on staked tokens, maintaining their anonymity and potentially involving financial stakes in the case.

In fact, the specific features of blockchain arbitration and the metaverse itself raise challenges to enforcement under the New York Convention relating to the legal seat of the arbitration, the form of arbitration agreements and arbitral awards, the identification of the parties and arbitrators, due process, public policy, and arbitrability. Addressing such challenges varies in complexity.

Some issues, like form requirements and identification, are more easily manageable due to ongoing legal and technological advancements. For instance, the growing acceptance of electronic documents and signatures, along with the pro-enforcement bias of the New York Convention, facilitates the recognition of arbitration agreements and awards in electronic or cryptographic forms.

Additionally, flexibility from national courts and advancements in digital identity verification can resolve concerns about party identification in metaverse contexts. Furthermore, the principle of party autonomy mitigates concerns about the composition of the arbitral tribunal.

Conversely, the absence of a legal seat, public policy and arbitrability considerations, and due process concerns present greater hurdles. The New York Convention’s territorial criterion conflicts with the decentralised nature of blockchain arbitration, necessitating a shift in the way arbitration is traditionally viewed to accommodate delocalisation. Public policy and arbitrability challenges are also complex, as differing interpretations of public policy grounds and regulatory environments across jurisdictions can hinder enforcement.

Achieving enforcement may require distinguishing between domestic and international public policy considerations and limiting refusals to enforce to cases of fundamental breaches of justice and morality, aligning with the New York Convention’s pro-enforcement bias. Finally, due process issues related to arbitrator appointments and the right to present one’s case pose additional uncertainties, with outcomes heavily influenced by the mandatory due process provisions of different jurisdictions and by how enforcing courts interpret these procedural requirements.

Ways to address challenges

The enforcement of metaverse-related blockchain arbitral awards under the New York Convention faces notable challenges; however, there are ways of addressing them. Technological advancements, a liberal interpretation of the convention’s form requirements, a narrow interpretation of grounds for refusal of enforcement, reliance on the convention’s pro-enforcement bias and the principle of party autonomy are crucial strategies for effectively utilising these arbitration mechanisms.

As virtual environments and decentralised spaces continue to grow and attract interest, new questions will arise about their viability as alternatives to traditional systems. By adapting existing legal frameworks to accommodate the unique characteristics of the metaverse and blockchain arbitration, the international arbitration community can lay the groundwork for the future of dispute resolution.

This article is a short summary of some of the issues discussed in the thesis submitted by Yasmine Ellul in partial fulfilment of the Advanced LL.M. in International Dispute Settlement and Arbitration followed at Leiden University, which was carried out following a scholarship and funding awarded under the Tertiary Education Scholarship Scheme (TESS).