Since their introduction in 2009, cryptocurrencies have gained mainstream interest all over the world. While many states, as well as the international community, have yet to address the legal regulation of these new inventions, there are already disputes emerging within the industry in the commercial context. A stark example is the Binance arbitration which emerged after a shutdown of many parts of the Binance online trading platform on 19 May 2021.

As the growth of cryptocurrencies is likely to continue globally, we can expect the emergence of investment disputes in the cryptocurrency industry as well. Indeed, many investors are more invested in cryptocurrency than ever before, which makes the field prone to be affected by state measures. However, the question of whether investors using cryptocurrencies to make investments can enjoy protections under applicable investment treaties is still unsettled.

In this article, we will briefly analyze whether cryptocurrency investments may fall under investment law regulations as well as predict the type of disputes that may arise in this context. Furthermore, cryptocurrency investments will be looked at through the lens of the jurisdictional requirements of the International Centre for Settlement of Investment Disputes (ICSID). At the time of writing this article, there is no publicly available arbitral award discussing jurisdiction on cryptocurrency investments.

Establishing jurisdiction for cryptocurrency disputes

To enjoy the whole gamut of protections under international investment law, a cryptocurrency investment must be qualified as an investment under the applicable investment treaty as well as the ICSID Convention, in case the dispute is submitted to an ICSID tribunal. This gives rise to three potential issues in the context of future cryptocurrency disputes:

• The concept of an investment in investment treaties;
• Territoriality requirements in investment treaties;
• The concept of an investment under the ICSID Convention.

The concept of an investment in investment treaties

The definition of an investment varies between investment treaties. Whether cryptocurrencies can enjoy protections under an investment treaty will depend on the exact wording of the treaty.

In light of the evolving nature of investments, many investment treaties provide a broad definition of an investment. For example, Article 1 of the Austria-Kazakhstan Bilateral Investment Treaty (BIT) refers to investments as “every kind of assets” with a non-exhaustive list of assets such as traditional property rights, participation in companies, money claims and rights to performance, intellectual property rights, concessions, or similar rights.

Cryptocurrencies are likely covered by the scope of protection of investment treaties containing such broad definitions and non-exhaustive lists.

Some states, however, choose to limit the definition of an investment in their investment treaties. For example, some treaties require an investment to be made “in accordance with the laws of the host state”. In light of this limitation, cryptocurrency investors may not be able to sue host states that took a hostile approach to cryptocurrencies by prohibiting them (e.g., China). However, it must be noted that the compliance requirement is limited to the time when the investment was made. Thus, state measures banning cryptocurrencies after cryptocurrency investments have been made will not affect the qualification of cryptocurrencies as investments under these investment treaties.

Other restrictions to the definition of an investment include exhaustive listing, exclusion of specific assets, etc. Whether or not cryptocurrencies fall under the definition of an investment in these cases will be treaty-specific.

Territoriality requirements in investment treaties

Many investment treaties require a territorial link between the investor and the host state. When present, the territoriality requirement prescribes that the investment must have been “made in the territory of the host state.” In the case of cryptocurrencies, which exist in a borderless blockchain, establishing territoriality is a challenge.

It has been suggested that tribunals may rely on the Abaclat v. Argentina test to define the territory of cryptocurrencies. Abaclat v. Argentina concerned a dispute over bonds and introduced a territoriality test for intangible assets. The tribunal held that the “determination of the place of the investment firstly depends on the nature of such investment” and, in the context of disputes over bonds, “the relevant criteria should be where and/or for the benefit of whom the funds were ultimately used, and not the place where the funds were paid out or transferred.”1 Thus, if cryptocurrencies may be equated to financial instruments such as bonds –both do not have an obvious location but may be proven beneficial to the host state – then cryptocurrencies may be subjected to the same test as financial instruments. Having said that, tribunals will evaluate the facts of each case individually and are not obliged to follow the approaches adopted by previous tribunals.

The concept of an investment under the ICSID Convention

Another aspect worth assessing is whether cryptocurrency investments fall under the concept of an investment in the ICSID Convention. As ICSID plays a significant role as an international forum for resolving investment disputes, it is crucial to analyze the definition of an investment through the wording of the ICSID Convention and the ICSID case law.

The ICSID Convention does not define the concept of an investment. Article 25 of the ICSID Convention merely states that “[t]he jurisdiction of the Centre shall extend to any legal dispute arising directly out of an investment”. In determining whether cryptocurrency may qualify as an investment under the ICSID Convention, tribunals may rely on the four-pronged Salini test:

• Contribution of money and assets: When it comes to cryptocurrencies, this requirement is satisfied by means of acquisition. Since cryptocurrencies are naturally exchanged with other assets, some form of monetary contribution will be involved;
• Certain duration: The Salini tribunal held that the investment should be of at least a two-year time frame. However, tribunals after Salini have come to vastly different and seemingly random conclusions with respect to the required duration. For example, the Deutsche Bank v. Sri Lanka tribunal held that the duration criterion was flexible while recognizing a yearlong contract to satisfy the criteria. Thus, in the context of transactions involving cryptocurrencies, shorter durations should not prevent cryptocurrencies from being defined as an investment. 
• Investment risk: Investment risk describes a situation where investors are uncertain of their investment and may not be able to predict the outcome of their transactions. The Salini tribunal recognized that one of the risks assumed by the investor was the potential shifts in Moroccan law, which could have resulted in an increase to the cost of labor. There is a risk of regulatory intervention in relation to cryptocurrencies as well, whether by the introduction of relevant restrictions or the imposition of a complete ban. 
• Contribution to the economic development of the host state: The nature of the blockchain technology where cryptocurrencies operate makes it difficult for them to meet the last requirement. However, a contribution to the economic development of the host state is not always a mandatory requirement, and tribunals have not been consistent in applying it. In fact, the tribunal in Pey stated that economic development is a ‘consequence’ of an investment and should not be treated as a mandatory component in determining the notion of investment. Thus, even if cryptocurrencies do not fulfill the fourth element, they may still constitute an investment. 

What are the possible claims?

If a foreign investor’s cryptocurrencies are determined to be investments under the applicable investment treaty and the ICSID Convention, an arbitral tribunal would have to turn to the legal dispute in question in order to cement its jurisdiction over the investor’s claims. As provided in Article 25(1) of the ICSID Convention, a dispute settlement mechanism is made available for “any legal dispute” arising directly out of an investment. Certain assumptions can be made regarding disputes likely to arise in the cryptocurrency context. For example, many companies are currently investing in the ability to transact in cryptocurrencies. This makes them vulnerable to state actions regarding cryptocurrencies where they operate. Moreover, state regulations may also affect foreign investors as shareholders who might be financing using cryptocurrencies. If the investors suffer losses as a result, there might be ample legitimate expectations or fair and equitable treatment claims against states.

Conclusion

Given the forecast for cryptocurrency investment globally, it seems highly probable that cryptocurrency investment disputes will become a reality. Based on our analysis, we establish that cryptocurrency investments are likely covered by the investment definition of the ICSID Convention and investment treaties with broad definitions of investments. However, investors will likely face significant challenges and limitations in proving crypto investments as protected investments under the investment treaties with a restrictive definition of an investment. Additional challenges arise when determining the location of cryptocurrencies. As cryptocurrencies are operated on borderless technology, it will be difficult to establish that an investment in cryptocurrencies was in fact made in the host state.