Transcript
Speaker: Welcome to the Policy Layer, where we talk about the real decisions shaping crypto, tech, and the future of trust. I am Silvia Sanchez, your host from the Avalanche Policy Coalition. We aim to bridge the gap between the builders of Web3 and the people that are shaping the rules. On our podcast, you'll hear from policymakers, developers, academics, and others working at the edge of tech and regulation.
Speaker: We ask the questions that everyone's actually wondering, and we keep it easy to follow. This is The Policy Lane.
Speaker: Alright, hi everybody. This episode is all about what arbitration looks like in a digital economy. What happens when a contract lives on a blockchain, a transaction executes automatically, and the people involved still disagree about what was supposed to happen. And this is becoming a lot less hypothetical in the reality that we're living in today.
Speaker: And for this episode, we're joining by we're joined by Bridget McCormack, President and CEO of the American Arbitration Association and former Chief Justice of the Michigan Supreme Court.
Speaker: Bridget has spent her career thinking about how legal systems can become more accessible, more efficient, and better equipped for the world we're living in now. So welcome, Bridget. i'm very excited for this one. Me too. I'm so glad to be here. Thank you so much for having me. It's going to be a fun conversation.
Speaker: right So before we bring blockchain anywhere near this conversation, because again, this is a very blockchain centric episode, I want to first make sure that everybody listening has the basic architecture. So for somebody who's only encountered with arbitration,
Speaker: is clicking, I agree on the terms and conditions. I wanted to hear from you, what what is it really like? How can we understand it? Even if it's a word that we've heard many times, I always like to start with like a a groundwork, ah definition. No, it's super helpful. I do think ah for a lot of folks, that's their main...
Speaker: um understanding of arbitration. It's in those B2C contracts that we all, you know, enter into a million times a year. All right, millions in exaggeration, but you know what I mean. But for the most part, arbitration is really a B2B dispute resolution process. it's um It's private adjudiation adjudication by agreement, an agreement at the front end of ah a contractual relations relationship.
Speaker: So instead of having to file a dispute in a public court and getting whichever judge the system assigns you, the parties agree in advance that if a dispute arises, a neutral decision maker who they select will hear the dispute and issue a binding decision. And the decision, on which we call an award in arbitration, but not that different from a court a court opinion, is enforceable in court and also under the New York Convention, which is a a treaty, arbitration or awards are enforceable in 170 countries. So there's really no equivalent treaty for court judgments. A New York court judgment might be worth very little in Singapore, but a New York arbitration award is
Speaker: enforce of all um And so parties in B2B transactions often choose it for speed, expertise, and enforceability, like I just mentioned, um and the ability to pick a decision maker who really understands the subject matter, which can matter enormously when the evidence is a delegation chain or a transaction log rather than a stack of emails.
Speaker: um It's also a ah faster and more flexible process often, at least the parties get to get to structure it that way. and confidential if the parties want it that way, which they often do. So for cross-border um transactions and contracts, which is a lot of what happens on chain, it's really probably the main way that that that parties can make sure that they produce an outcome that can be enforced anywhere. um and and's those are, I think, most of the reasons why you you see arbitration agreements in lots of B2B contracts. That's a great way they think to to get us started and make sure that we're all on the same page and distinguishing those different things. And now I think we can bring the blockchain crew into the room. um So the American Arbitration Association has launched a Web3 panel specifically for disputes involving blockchain, smart contracts, digital assets and this world of decentralized systems. And the question is,
Speaker: Why now? what What were you seeing that told you, OK, we need a specialized infrastructure for this? Yeah, I mean, we try to always stay ahead of um where the market's going so that we have um neutrals, panelists who can be, you know, really good choices for parties when a dispute arises. And the disputes um in this part of commerce are arriving. I mean, and that you know, for years,
Speaker: We had to think about like who's going to resolve our blockchain disputes and we sort of were able to get away with we'll figure it out. um and And that was tolerable when the stakes were speculative, but um not not anymore. I think tokenized real world assets are in production, you know, stable coin payment volume is is is real and agents are transacting autonomously. I mean, we probably are all even experimenting with that ourselves now. And so when those transactions break down, the questions are familiar commercial questions like contract formation and asset control and governance, but the evidence and the environment are highly technical. So we built this panel, this Web3 panel of arbitrators who can work natively in that environment, people from law practice, technology companies, and academia who understand both the the background doctrine that applies, but also the systems.
Speaker: um And the panel operates under our existing rules. None of the rules change. We didn't need to and invent any new you know new rules or new law. Not that we get to invent law, but what we needed was decision makers who can read um read read the record that this particular ecosystem produces. and be familiar with it. And so parties are gonna continue to need arbitration agreements in this in in these in these new lines of business, but but they wanna have confidence that when they have a dispute, they're gonna be able to have a person deciding their case who understands what a smart contract does and what an on-chain record proves and you know maybe just as importantly, what it doesn't prove. So that's why.
Speaker: And that's a huge part, which is also, I think, the the thesis for why, for example, projects also like what we're doing exist, in our case regulation, but also in the process of arbitration, making sure that those who are making these decisions or stepping in understand what the technology does, what it is, what it isn't. and these disputes might also be already raising questions around things like governance, cybersecurity, transaction records, and contract formation. And I think that Something that still confuses people or something that we've noticed in the industry is the phrase smart contract. And it somehow sounds like the computer has magically eliminated this disagreement. But unfortunately, the truth is that humanity has found ways to disagree about pretty much everything, despite the technology that that's still around. So if if a smart contract automatically executes exactly the code, exactly as its code instructs, whatever instructions or programs, but one party says that the outcome violates what they believed they had agreed to What does a dispute resolver look at The code, and the written agreement, the party's intent, or a combination of these? Yeah, um the answer is all of the above.
Speaker: um but But I do think your your question goes to the heart of, you know, kind of a category error the industry... made early, the idea that code is law and that execution is the agreement really isn't. A smart contract is an execution layer. It's it's extraordinarily reliable, as you know, at if X then y but an agreement is a lot more than execution. It has it has context and terms and intent and a governing legal you know framework, background, legal doctrine that extends through time
Speaker: um in a way that a transaction doesn't. So ah ah so ah a neutral, an arbitrator, um has to look at what the parties agree to, you know, which may live in a written agreement or in protocol documentation or in the course of dealing between parties and sometimes, yes, in the code itself.
Speaker: um because the code is evidence of that arrangement. But the code is, it's, it's just because it's performing as program, that just doesn't end the the inquiry. It, it, it, you know, contract law has, has dealt with versions of that problem forever, but there are still hard, interesting questions that are just interpretive. What,
Speaker: Was the code the entire agreement or an implementation of an agreement that lives elsewhere? um And when they diverge, what controls? You know, sophisticated parties are going to be learning or already have learned to answer those questions in advance in writing to make the the questions the parties can fight about narrower and narrower. But as you said, humans are always going to find places to to to dispute what's what's what's what happened. and And that's where the neutral comes in.
Speaker: Right, and even though we've seen that, and I think one of the value propositions of blockchain is the traceability that with blockchain you can establish what occurred, that you can go back to it. and Adjudication can still be needed to determine the legal consequences of of what occurred. It might get a bit messier than that. And this brings me to something that the blockchain industry loves to say. you can verify, oh verify. And here I believe that slogan has a very concrete legal application, as we were saying. The blockchain gives us a pristine record of what happened. But how does having this timestamped, tamper-resistant transaction history change the job of an arbitrator? Can the records on chain make certain facts easier to establish already, or do they just create an entirely new set of evidentiary questions? Like, what can a blockchain prove very well
Speaker: And one can it absolutely not tell an arbitrator yet. Yeah, I mean, you you you kind of laid it out. I mean, the the blockchain record does make one part of an arbitrator's job dramatically easier, but it it doesn't it doesn't ah it doesn't solve the problems because because an on-chain record um can beautifully establish that something happened, this transaction at this time, signed by this key, and and the record is tamper evident. So, you know, any alteration would be detectable. And that's great. That's, that's you know, in traditional commercial disputes,
Speaker: Parties can spend a lot of time and money fighting about authentication, whose version of a document is real, whether the log was altered, and, you know, a verifiable on-chain record eliminates that fight. So that's great. But cryto cryptographic, I always have to slow down when I say that word, verification resolves authentication and integrity questions, but not legal questions. Like, that the chain proves a key signed a particular transaction.
Speaker: But it doesn't ah it doesn't really prove who controlled the key and whether the person had authority to bind the entity and what what the parties understood the transaction to mean and what obligations extended you know be beyond the moment of execution. So the evidentiary center of gravity shifts is how I would describe it. Arbitrators can spend a lot less time on did this happen and more time on what did it mean and who's accountable for it.
Speaker: And and you know we're going to see genuinely new questions as well. like How do you handle evidence that's inherently public on a chain in a confidential proceeding?
Speaker: How to trace an AI agent's delegation chain back to a human principle? um and better records move the hard questions up the stack toward you know the the place where we need human judgment, but they're not going to eliminate the questions.
Speaker: Indeed. I think that's a very... Very true statement and I think we're kind of seeing it now with blockchain but i'm I think that some of these still these principles might still apply with whatever technology we we evolved to in a few decades. It's also coming down to the point earlier, like humans will always disagree and there's always going to be like that messy gray area. um And things can get very spicy, especially when it comes to legal parts, because our legal system is very comfortable finding a person, a company or intermediary and asking, OK, who had control, who had a duty, who can fix this? But what happens when the underlying system is genuinely decentralized and there may not necessarily be a single party with the power to reverse a transaction or alter the network? like How does decentralization require us to rethink responsibility?
Speaker: Yeah, I think this is going to be one of the really interesting questions that arbitrators and and judges are going to be, you know, deciding over the next, I don't know how long it's going to take, but we're going to see a lot of interesting decisions in this lane.
Speaker: um I do think it's going to require parties to get more precise, you know, because decentralization, it it doesn't dissolve responsibility. It just distributes the the contact and the legal, the the conduct, excuse me, and the legal question becomes, know,
Speaker: more granular, you know, who deployed the contract, who held the admin keys, who could upgrade the code, who marketed the system, who made representations to who and about what, who profited. you know, a decentralized system is a description of architecture. it's not It's not an answer to questions of liability. And so courts and arbitrators are good at asking, like, who did what and therefore, you know, who's responsibility, who you know, who's responsible for for what.
Speaker: um and And irreversibility is is is worth a little bit of focus because it will change, I predict, what remedies look like. You know, on traditional payment rails, the the chargeback has been a safety net.
Speaker: And on-chain settlement, you guys tell me you're the experts. I'm just here for to learn. But on-chain, settlement is is final in in seconds, and there's no native like mechanism to unwind it, which doesn't make recourse impossible. It just means that recourse runs through you know identifi parties identifiable parties who have pre-agreed ah about process um rather than reversing the transaction. So you can't claw back the transfer, but you can hold accountable a counterparty who breached, as long as you can identify them and you agreed in advance how your disputes would be resolved. I do think all of this makes having an arbitration agreement, a dispute resolution agreement at the front end of any relationship all the more important, right? Because you want to eliminate as many of these as these questions so you can get to like the heart of a dispute as quickly as possible.
Speaker: Indeed, and it can be very nuanced as well because even though it's also a big privilege, it's also a big responsibility, even just interacting with these types of protocols. And yeah, decentralization is just a network characteristic. okay It's involving okay and the distribution of of control of the data integrity, but the regulatory analysis, or in this case, the arbitration, it should still examine the relevant actors, the functions, the risks. and and then shifting the layers a bit more we have to add my favorite complication which is geography because when we're talking about this borderless technology a blockchain transaction can involve parties in three countries code deployed somewhere else with validators scattered around the world and assets that move in and seconds with a really fast time to finality but when something goes wrong
Speaker: whose law would govern and does arbitration have an advantage precisely because Web3 Commerce is so global or would it be more of a double-edged sword? No, I mean, so the so the easy answer, the easy, there's no easy. the the the The um level one answer to your question is the law that governs is the law the parties have selected. and if they didn't select one up front in a dispute resolution or arbitration agreement, then they probably bought themselves an expensive first year in their dispute resolution process before anybody gets to the merits. Because
Speaker: conflict of laws analysis in a transaction with parties in, I'm making this up, three countries and code deployed in a fourth is is you know is a hot mess for a neutral. And that's why parties contract out of it. So at the front end of ah of an agreement, you pick ah the parties pick ah a governing law um as well as a dispute resolution mechanism. and And then suddenly that geographic sprawl of a transaction matters a whole lot less. um And this is another reason why arbitration is it you know is ah is a structural advantage for parties um that i I don't know if the ecosystem fully appreciates yet, but I'm sure they will before long. you know courts derive their authority from territory, but arbitration derives its authority from the party's agreement, which travels with the transaction. And as I said in in answer to an earlier question, an award from an arbitration process is enforceable across borders under the New York convention. So it's it's it's you know another argument why ah parties should be thinking carefully about their dispute resolution agreements at the front end of these transactions. Absolutely. no and I think it's that's a very important point to to clarify and also knowing, okay, when you're protocol or a developer, how are you going into it? What are you agreeing to? What has been chosen? um And now I think that it's inevitable to talk about AI with a AI agents. And when you combine blockchain and AI,
Speaker: that's when basically the the cocktail becomes even more interesting and where things really kick in. Because also when I was reading about your work, the American Arbitration Association has already built an AI-assisted arbitration system with a human arbitrator ultimately issuing the award.
Speaker: And with AI, what would be the the main problem? How would it de differ with blockchain? Like where have have you drawn the line between work machines, like they can responsibly perform and judgments that should still belong to to the human aspect? Yeah, so this is a question I think about all the time, and I think we'll all be talking about for some time to come. And my my sort of... um It sounds like a dodge of an answer, but i'm going to give it first, then I'm going to answer like more specifically. But my my my my first level answer is, i think the parties should decide like where they...
Speaker: where they are comfortable with um AI doing work in a dispute resolution process and where they're not. um so And that's what the American Arbitration Association is building. We're building you know brand new options that AI allows us and enables us to build. So parties just have more choices. So you can choose a human-led dispute or human-owned dispute resolution process from beginning to end. You you should be able to choose an AI-led dispute resolution process from beginning to end.
Speaker: For now, our AI arbitrator, which is a series of agents that operate across the arbitration process, has a human in the loop throughout the process. And that's ah that's a reflection of where you know where we think parties are for now and what we think is appropriate in terms of governance for now. But you can imagine um you know just having um almost unlimited options for what that process looks like. So traditional arbitration, you know which has been built for substantial you know substantially for commercial disputes, doesn't really scale down. you know it if you're resolving it If resolving a dispute costs more than the dispute is worse that worth, then there's no real recourse. And so we're going to see you know a growing category of digital commerce that fits in that um in that lane, you know high value high volume, low value, machine generated evidence.
Speaker: And the choice for those disputes um is it it is not gonna be you know AI or human arbitrator, it's gonna be AI assisted resolution um or nothing because you know the the market is not gonna be able to, you know it it won't make sense to pay for an expensive dispute resolution process that just doesn't match.
Speaker: ah the the underlying transaction. you know We need to be able to make sure that the forum fits the fuss. So we need significantly more more options. The way we're thinking about it is we use AI where it's genuinely strong, organizing a record, analyzing evidence, surfacing relevant rules and and relevant and and ah issues that that are in in conflict.
Speaker: And that work can be faster and more consistent when AI is doing it. And the line we're drawing is that judgment belongs to the humans and the award issues from a human arbitrator.
Speaker: um Weighing credibility, exercising discretion, resolving novel legal questions, deciding what's fair when the rules don't have a ah ah black and white answer.
Speaker: that's um That's not a credit... a gap we're waiting for AI to close. We we we think those are decisions to reserve reserve for a human being. But I go back to where I started, which is ultimately, we don't know where the technology is going. I do love that we're just gonna have more and more choices for parties. And at the end, the parties really have to retain um the the ownership and the choice of what their dispute resolution process looks like.
Speaker: I love that. I think that's a more realistic approach because, um yeah, and I don't mean to turn this into, oh, AI good, AI bad, and just go on either side of the pendulum because at the end of the day, it's also this, I imagine, I mean, I was too young back then, like when the internet rolled around and kind of like this reliance or maybe like this fear of adopting this revolutionary a technology, but in this case we're talking about system design, we're talking about guardrails, also the rates of error on the one hand with comparative human fallibility, but also the human judgment for when there's nuance.
Speaker: um So I like that way you synthesize It's like AI-assisted resolution. It's not like this all-or-nothing approach. um Even with things, I think, um like, oh, no, people that use and ai like, if you're a writer, don't use it. If AI can help you proofread, like, you're still the creative soul. You're still the human. It's just about, like, knowing how to optimize it. So, of course, talking about... him these larger scale arbitration processes. I thought it was and super interesting. And now I just would like to put you in the policy makers chair for a second, since a big part of our audience is the policy a making is seen. But when regulators encounter blockchain, we've noticed that there can be a temptation maybe to start with the technology itself. But it is important, as we've said, but also from from your vantage point, resolving disputes, What do policymakers learn when they start instead with the conduct? Like, what happened? Who controlled what? What promises were made? And where was where was the harm? Like, how would that change and approach be be a bit different instead of just starting with technology but going with the conduct and this type of process? I love the question because I think it's really just, like, great advice for policymakers but policymakers because I think...
Speaker: it if they start there, they will see that most of it is already is already kind of covered and the genuinely new questions are narrower and more tractable tractable than they might um they might seem. So when when regulation starts from the technology, you get frameworks that are simultaneously overbroad on the one hand and instantly outdated on the other hand. And they sweep in things that were never a problem and they miss things that um the next ah the next architecture um like makes makes extremely relevant. But when you start from like what happened and from the conduct and you know who controlled what, what promises were made, um where did the harm occur?
Speaker: you know Fraud is fraud, whether it runs through a bank wire or a smart contract. um And a misrepresentation doesn't become something else because it was, you know, made about a a technology or or a token. You know, I spent 10 years as ah as a judge, and the discipline of the courtroom is is is kind of exactly this. you're not You're not answering questions about technology. You're answering questions about conduct. And that discipline, I think, would serve policymakers quite well as we're like you know moving so quickly into this this future that not everybody not everybody's human brain can fully like appreciate or understand. um So I do think it's ah it's a wonderful like piece of advice for policymakers, and I hope they all listen to your podcast because I think you you have a lot to do with. Love that. And just for our last question, since we're almost out time, i would like to pull the camera all the way back, because as we've seen, not just throughout this discussion, but pretty much the headlines and being involved in the industry, we are inevitably moving toward a world where assets scale. can be tokenized or anything can be tokenized and represented on the blockchain, where agreements can execute through code and ai agents can transact on our behalf and business can happen across borders almost instantly. But what does the dispute resolution system have to eventually become so that trust and accountability can keep pace with with that kind of commerce? Like if we were to have this conversation again, maybe in 10 years,
Speaker: What change would make you say, okay, yeah, this is the system that I was trying to help build? So I love this question. And I do, you know, I wish i i wish everybody in the world was focused on it because, you know, at the end of at the end of the day, the rule of law is what makes commerce possible. And so if you don't have a dispute resolution system that can kind of keep pace ah with with the with the with the with the technology and the way the market is moving, I do think you have an enormous problem ahead of you. And i my my my top line answer your question is the dispute resolution system choices, processes, they have to become infrastructure. You know, for for a century now, dispute resolution has been something you reach for after a relationship breaks down. You find a lawyer, you find the forum, you reconstruct what happened. And that model is not going to serve commerce that executes in seconds.
Speaker: that crosses borders by default, that increasingly happens, like you said, between autonomous AI agents rather than people. so we're going to have to figure out how to build recourse into the transaction at formation.
Speaker: And I think concretely that means like three different things. Agreements have to be provable. You know, we need an independently verifiable record of what was agreed to and by whom and under what terms um because you can't resolve a dispute about an agreement that no one can prove existed.
Speaker: I think dispute resolution has to be machine-reable and pre-agreed so that an agent forming an agreement can designate the mechanism and the way it designates the payment method. method excuse me And then I think the process has to be proportional. So we're going to need to have automated resolution for micropayment disputes all the way up through full institutional arbitration for complex cases with hard you know, with new novel questions, um so that recourse exists at every scale of transaction. And that will be genuinely new, but I also think it will be a wonderful um way to grow confidence in the rule of law, if we can make it infrastructure.
Speaker: That's a great vision and it's i think it's a good way to it close us out on an exciting note also with expectation of what's to come. and So just to conclude, we've seen that better technology doesn't necessarily eliminate disagreement. It changes the context in which it happens. the evidence we have, and sometimes even the actors involved. So I just wanted to say once again, thank you so much, Bridget, for joining us. um I also want to invite our listeners to check out the work that the American Arbitration Association is doing at ADR.org.
Speaker: And just saying that that's all for today. Thanks all for tuning in, and we'll see you all next time.
Speaker: We hope you enjoyed this episode of the Policy Layer. If you want to learn more, check out avalanchepolicy.com for free educational resources. And also follow us on social media at avalanchepolicy to stay updated.
