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Understanding Crypto Fraud, Investigations and Asset Tracing part 2

In continuation of our 3-part series unraveling the complexities of blockchain and cryptocurrency, our second installment will delve into the spectrum of Blockchain and Cryptocurrency Disputes. Building upon the insights gained in our exploration of fraud, this article will navigate the various challenges and conflicts inherent in this dynamic landscape. In the previous article, we reviewed the different types of Blockchain and Cryptocurrency Fraud.

Types of Blockchain and Cryptocurrency Disputes

Aside from clear-cut cases of fraud, the DeFi ecosystem is also prone to disputes. A central tension in the DeFi space is balancing between a system designed to give users freedom from centralised control, and regulating the space so that disputes can be settled when they arise. The following are legal ambiguities that have arisen from the DeFi space:

  • Interpreting Smart Contracts. Smart contracts refer to self-executing pieces of code that perform transactions on the blockchain. While they provide speed and convenience, smart contracts are also exposed to technical vulnerabilities, such as bugs or exploits in the code. To ensure that the smart contract’s code is aligned with the terms established by both parties, developers have to work with lawyers closely when programming these contracts and make adequate provisions to prevent foreseeable disputes. Moreover, traditional contracts have well-established structures and terms of art that allow for flexibility, interpretation and dispute management should a disagreement arise. Smart contracts, on the other hand, lack mutability once executed. Smart contracts over international borders furthermore raise questions of jurisdiction: Which country’s regulation will the smart contract be interpreted under if in dispute?
  • Classifying Digital Assets. When creating a new DeFi product such as a new cryptocurrency ICO (initial coin offering), developers have to write up a white paper detailing the technical specifications and legal structure of the product, including classifying the digital asset as a security, digital currency or asset-backed token. The details in the white paper will later define what regulation applies to the cryptocurrency, which in turn requires a strong understanding of the differing regulations in a given country. Disputes may occur if the initial white paper is inadequately written, or lacking legal footing.
  • Accuracy of Blockchain Transactions. Blockchain transactions are governed by code rather than law. Crucially, this means that human errors are not caught by the scrutiny that applies to traditional contracts. Human fallibility is amplified in the DeFi space, and accidents like mis-keying information, or misunderstood code, may be costly when blockchain transactions are irreversible and without oversight from a central authority.

As we conclude the second installment of our 3-part series on blockchain and cryptocurrency, we’ve navigated through the complex terrain of disputes within this innovative landscape. In our next article, we’ll delve deeper into the various types of blockchain and cryptocurrency disputes. Stay tuned for our final installment, where we’ll explore available legal recourse and effective strategies to mitigate risks in this evolving field.

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