Choice-of-law aspects of the judgment on the ownership of bitcoins

As I mentioned in my earlier post, the Tokyo District Court in its judgment on 5 August 2015 denied the ownership (more precisely, "shoyûken" in Japanese) of bitcoins. In that post, I have also noted that translating "shoyûken" into the English word "ownership" may be misleading.

In this post, I will look at the choice-of-law aspects. The judgment is based on the assumption that Japanese law was the applicable law without giving any reasons. Nor did either party discuss choice-of-law issues (according to the Court's summary of their arguments).

The scope of the bankruptcy estate of MTGOX is surely a matter for Japanese law since the bankruptcy proceedings opened in Japan. The effect of Japanese bankruptcy proceedings extends to all assets of the bankrupt wherever in the world they are situated. This follows from the repeal in 2000 of the then Article 3(1) of the Bankruptcy Act which provided:

The bankruptcy which is declared in Japan shall only have effect on the asset of the bankrupt situated in Japan.

The bankruptcy estate of MTGOX, therefore, covers all bitcoin units wherever situated. Here, the borderless nature of the blockchain poses no problem.

On the other hand, it is not as obvious that Japanese law was the governing law of the plaintiff's ownership-based claim to recover the bitcoin units. On the face of it, the application of Japanese law may seem uncontroversial since there were no strong foreign elements in that case: the plaintiff was an individual residing in Kyoto and the defendant was the bankruptcy representative of the bankrupt MTGOX, a Tokyo-based company, appointed in the Japanese bankruptcy proceedings. But as I noted in my earlier post, choice-of-law rules for determining the ownership of intangible property are not well-established and, depending on the connecting factor to be adopted, the borderless nature of the blockchain may make it difficult to localise bitcoin units in a particular country. If the plaintiff had been a foreigner residing abroad (which would not have been a remote possibility since a majority of the creditors of MTGOX are such persons), the parties and the court might have felt it necessary to address the choice-of-law question.

The judgment on the ownership of bitcoins has been published.

As I mentioned in my earlier post, the Tokyo District Court in its judgment on 5 August 2015 denied the ownership (more precisely, "shoyûken" in Japanese) of bitcoins. In that post, I have also noted that translating "shoyuken" into the English word "ownership" may be misleading.
Until recently, the only way to examine the actual text of the judgment was to go in person to the Court pursuant to Article 91(1) of the Code of Civil Procedure. But it is now reported on Westlaw Japan (accessible by subscribers only). Reading it through, I have picked up some noteworthy points from the court's summary of the parties' arguments and its own reasoning. 

1. The plaintiff relied on Article 62 of the Bankruptcy Act which provides: 

The commencement of bankruptcy proceedings shall not affect the right to recover, from the bankruptcy estate, property that does not belong to the bankrupt. 

2. The plaintiff claimed the return of bitcoin units as appearing in his or her account with MTGOX. The plaintiff admitted that MTGOX had merged those with units from other customers and held them in addresses which were not associated with any specific customers and for which only MTGOX kept private keys. But the plaintiff argued that those units constituted a commingled deposit (“konzô kitaku”) over which each depositor retained “shoyûken” in proportion to his or her share. 

3. The court reasoned deductively from the following provisions of the Japanese Civil Code to reach its conclusion that bitcoin, being intangible, could not be an object of shoyûken. 

Article 85 The term "thing" (“butsu”) as used in this Code shall mean tangible property. 

Article 206 The shoyûken holder of a thing (“butsu”) shall have the right to freely use, profit from and dispose of it, subject to the restrictions prescribed by law. 

My comment: This conclusion is hardly controversial, as noted in my earlier post. 

4. The court disposed of the case, holding that the plaintiff could not obtain recovery, under Article 62 of the Bankruptcy Act, of the bitcoin units based on his or her shoyûken over them. 

My comment: It is true that most claims under Article 62 in practice are for the recovery of tangible property and are based on shoyûken. It is, however, also possible to recover intangible property, such as chose in action and intellectual property right, under this provision. In such cases, shoyûken, by definition, cannot be the basis of the claim. But the claim can be based on the proof that the property belongs to the claimant. Thus, “ownership” in its usual sense of the English word, as opposed to a narrower concept of “shoyûken” under Japanese law (See my earlier post), can be the basis of a claim under Article 62. The Court did not consider the possibility of recovery of the bitcoin units under that provision based on the argument that they were owned by (namely, belonged to, rather than an object of "shoyûken" of) the claimant. Nor did the plaintiff’s submission (as summarized by the Court) contain this argument. The consideration of this argument would have made it necessary for the Court to step into a theoretically difficult territory: it would have had to determine who owned the bitcoin units which were deposited and commingled with other units.

Work of UNCITRAL on electronic transferable records

Since 2011, the UNCITRAL has been working on legal issues relating to the use of electronic transferable records. From the beginning, it envisages two approaches to establishing the identity of the person to whom an electronic transferable record is issued or transferred, namely the token model which identifies the person in the record itself and the registry model which identifies the person in a separate registry (A/CN.9/WG.IV/WP.115 (hereafter "the 2011 document") at para. 48). Like its previous works on electronic commerce, the UNCITRAL is adhering to the principle of technology neutrality (Id. at para. 35) and nowhere in the official documents published to date could I find any mention of blockchain, cryptocurrency or bitcoin. But I think the work should be pursued with the blockchain technology in mind so as to facilitate its applications to replace paper-based transferable documents such as bills of lading.
In the current draft of a model law (A/CN.9/WG.IV/WP.135/Add.1, August 2015), the exclusive control of an electronic transferable record is treated as functionally equivalent to the possession of a paper-based transferable document. Thus Draft Article 17(1) provides:

Where the law requires the possession of a paper-based transferable document or instrument, that requirement is met with respect to an electronic transferable record if:
(a) A method is used to establish exclusive control of that electronic transferable record by a person and to reliably [identify] [establish] that person as the person in control; and
(b) The method used is either:
(i) As reliable as appropriate for the purpose for which the electronic transferable record was generated, in light of all the relevant circumstances, including any relevant agreement; or
(ii) Proven in fact to have fulfilled the functions described in subparagraph (a) above, by itself or together with further evidence.

In the Remarks which accompany this provision, the Secretariat makes some noteworthy comments. It says, "the electronic transferable record in itself does not necessarily identify the person in control, but rather the method or system employed to establish control as a whole performs that function" (Id. at para. 22.). This understanding may simply be intended to cater for the registry model as described in the 2011 document. But it may also open the door to blockchain-based electronic records which may be seen as ill-fitted with the description in the 2011 document of the token model. 

The Secretariat goes on to say, "identification should not be understood as implying an obligation to name the person in control, as the draft Model Law allows for the issuance of electronic transferable records to bearer, which implies anonymity" (Ibid.). This view will also ease the way for the blockchain technology as the latter permits the holders of electronic records to remain anonymous. 

The Secretariat also notes, "reference to the person in control of the electronic transferable record does not imply that that person is also the rightful person in control of that record as this is for substantive law to determine" (Id. at para. 21). In other words, the exclusive control of an electronic transferable record is only equivalent to the possession of a paper-based transferable document. Put in the context of the blockchain technology, this view seems consistent with my opinion that the ownership of a blockchain-based electronic record cannot be determined simply by reference to who has the exclusive control of it (See my earlier post).

The Secretariat proceeds to say, "reference to the person in control does not exclude the possibility of having more than one person in control." It is not easy to see what this observation means for a blockchain-based electronic record. The latter is under the exclusive control of the person holding the private key for the address in which the record is kept. It is, on the other hand, possible for one private key to be known by a number of persons.

Is a blockchain-based bill of lading a "negotiable electronic transport record" under the Rotterdam Rules?

In my earlier post, I have suggested that one of the most promising use cases of the blockchain technology is electronic bill of lading: a token on a blockchain issued by the carrier of goods which represents the right to demand the delivery of the goods. As noted in another of my earlier post, I stressed the importance of the legal infrastructure supporting a blockchain-based electronic bill of lading. The Rotterdam Rules embrace electronic bill of lading, calling it a "negotiable electronic transport record" (See Articles 8, 50 and 51(4)). Though not yet in force, if the Rotterdam Rules come to form part of the legal infrastructure, the question will arise whether they are applicable to a blockchain-based electronic bill of lading as well as the existing registry-based electronic bill of lading. 

One of the underlying principles of the Rotterdam Rules is technology neutrality: the law should neither require nor assume the adoption of a particular technology. It follows that a blockchain-based electronic bill of lading is certainly not excluded a priori. But it does not mean that any technology can create a "negotiable electronic transport record" within the meaning of the Rotterdam Rules. According to Article 9, the use of a "negotiable electronic transport record" is subject to the procedure referred to in the contract of carriage which provides for:

• (a) the method for the issuance and the transfer of the record to an intended holder;
• (b) an assurance that the record retains its integrity;
• (c) the manner in which the holder is able to demonstrate that it is the holder; and
• (d) the manner of providing confirmation that delivery to the holder has been effected or that the record has ceased to have any effect or validity.

Is the blockchain technology capable of providing for all those elements? Article 9 is the manifestation of another principle underlying the Rotterdam Rules: the principle of functional equivalence which requires an electronic medium to fulfill the essential functions of the corresponding paper-based system. In this regard, implicit in the two concepts "issuance" and "transfer" in (a) is the "exclusive control" of the record. Article 1 provides their definitions in the following terms:
For the purposes of this Convention:

...

21. The “issuance” of a negotiable electronic transport record means the issuance of the record in accordance with procedures that ensure that the record is subject to exclusive control from its creation until it ceases to have any effect or validity.
22. The “transfer” of a negotiable electronic transport record means the transfer of exclusive control over the record.

The requirement of "exclusive control" fulfills the essential function of a bill of lading as a document of title. The blockchain technology satisfies this requirement since a token on a blockchain is subject to the exclusive control of the holder of the private key corresponding to the address in which the token is kept. Furthermore, since its algorithm makes a double spending impossible, no two persons could claim to hold the same token.
The blockchain technology is also capable of providing for (b), i.e. an assurance that the record retains its integrity. There can be no tampering with records locked in a well-maintained blockchain such as the one for bitcoin. The blockchain technology indeed has an edge over registry systems since the latter rely on the trustworthiness of the entity maintaining the registry: the registry may have to be equipped with, inter alia, activity logs, an offsite backup system and an adequate oversight on its management.

With respect to (c), Sturley et al. in their book, The Rotterdam Rules (2010), observe, "[t]he token system suffers the technical disadvantage that the required security is extremely difficult to achieve. Indeed, it appears that the technology needed for a reliable token system is still not available in the market place" (para. 3.039). It would be safe to say that things have now changed with the advent of the blockchain technology (See also my earlier post). A question remains, however, whether (c) requires the holder to be identified by its name. That would not be possible on an open, permissionless blockchain since the parties are anonymous. Logistically, it seems possible to build a system whereby goods are delivered without the name of the holder of the private key being revealed to the carrier by, for example, allowing the token to activate the key to the container. Then, a blockchain-based bill of lading may be seen as functionally equivalent to a bearer bill of lading and accordingly considered to be sufficient to provide for (c).

The point (d) would be deemed to be provided for if the system is configured in a way that causes the token to be transmitted to the carrier upon the delivery of the goods.

Blockchain-based bill of lading: need for support from the legal infrastructure

In my earlier post, I have suggested that one of the most promising use cases of the blockchain technology is electronic bill of lading: a token on a blockchain issued by the carrier of goods which represents the right to demand the delivery of the goods.

In another of my earlier post, I have pointed out that while many of the proposed applications of the blockchain technology seem to rest on the assumption that the participants could make effective arrangements themselves, they will produce their intended effects only in the sphere of party autonomy as recognised by the applicable law.

That also holds true with a blockchain-based bill of lading. Suppose that the parties to a sale contract have agreed on the use of a blockchain-based bill of lading and the seller has concluded a carriage contract under which the carrier has agreed to issue such a bill of lading. Their arrangement will work among themselves in accordance with their agreements (If not, remedies for breach of contract will be available). But their agreements are not sufficient to defeat the claims of third parties such as a creditor of the seller seizing the goods, the trustee of the seller's bankruptcy estate, another buyer who has bought the same goods from the seller and a person who has bought the goods in good faith from the person who had stolen them.

The applicable law might protect the (original) buyer if he holds a traditional paper bill of lading. Thus, under Japanese law, once a bill of lading has been issued, the disposal of the goods represented by it is not possible otherwise than by means of the bill of lading (Article 573 of the Commercial Code as referred to by Article 10 of the Carriage of Goods by Sea Act). Furthermore, the delivery of a bill of lading to its lawful holder has the same legal effect as the delivery of the goods represented by it (Article 575 of the Commercial Code as referred to by Article 10 of the Carriage of Goods by Sea Act), with the consequence that an erga omnes effect is bestowed on the holder's title in the goods (Article 178 of the Civil Code).

For electronic bill of lading to flourish, it is essential for it to be given a similar support from the legal infrastructure. The lack of it has long afflicted the various projects of electronic bill of lading. Thus, the banking industry has been reluctant to accept this type of bill of lading as adequate collateral. One laudable initiative for embracing electronic bill of lading is the Rotterdam Rules (United Nations Convention on Contracts for the International Carriage of Goods Wholly or Partly by Sea) which contain provisions for "negotiable electronic transport records." Adopted in 2008, the Convention has not entered into force yet.

For a blockchain-based bill of lading to take off, it is also important for it to be given a sufficient support from the legal infrastructure. To start the ball rolling, it may be worth asking whether a blockchain-based bill of lading constitutes a "negotiable electronic transport record" under the Rotterdam Rules, a question I intend to address in my future post.

Jurisdiction in matters relating to a contract for the exchange of cryptocurrency units with traditional currencies

In my earlier post, I have argued that a contract for "the provision of services" within the meaning of Article 7(1)(b) of the Brussels I-bis Regulation should be interpreted as covering both a contract for the exchange of cryptocurrency units and traditional currencies and a contract for the storage of cryptocurrency units. On that reading, the Regulation would give jurisdiction to the courts for the place of provision of the services (For the text of Article 7(1), see my earlier post). This post will consider where that place is in the context of such contracts.
The first thing to note is that this question will not give rise to the same difficulty of localisation as the choice of law for proprietary issues (as to the latter, see my earlier post). This is because the provision of services can be localised in the physical world even if the services deal with cryptocurrencies. Thus, the exchange of cryptocurrency units with traditional currencies does not take place solely on the blockchain. It also involves a transfer of the traditional currency between the account of the user and that of the service provider. Indeed, all necessary operations will have to be conducted at physical location(s). The storage of cryptocurrency units, too, will necessitate crucial operations at physical location(s) such as the safe keeping of the private keys in cold storage.
In the language of Article 7(1)(b), the place of provision of the services is the place "where, under the contract, the services were provided or should have been provided." Interpreting the equivalent phrase for contracts for the sale of goods, the CJEU held that it should be understood to refer to the actual place of performance only where it was impossible to determine it on the basis of the contractual terms (Electrosteel Europe v Edil Centro (Case C-87/10) (2011)). It is hard to see why the same interpretation should not be applied to contracts for the provision of services. In the context of a contract for the exchange of cryptocurrency units with traditional currencies and a contract for the storage of cryptocurrency units, the physical location effecting the necessary operations described above may be indicated in the contract. The mentioning of the place of incorporation of the service provider or its postal contact address may not be sufficient.
Where the services are provided in several Member States, Article 7(1)(b) is to be understood to refer to the place of the main provision of services as it appears from the contractual terms or, in the absence of such terms, the actual performance of the contract. This is the interpretation taken by the CJEU in Wood Floor Solutions v Silva Trade (C-19/09) (2010). That case was concerned with a commercial agency contract and the CJEU added that where the place of the main provision of services could not be identified by either way, it should be deemed to be the place of the agent's domicile. Unlike an agency contract, which may involve various obligations, neither a contract for the exchange of cryptocurrency units with traditional currencies nor a contract for the storage of cryptocurrency units would be likely to cause difficulties in identifying the main provision of services.

Finally, it should be noted that those contracts are likely to contain a choice-of-court agreement. If it is valid and effective under Article 26, it obviates the need to address all the complicated issues of interpretation arising under Article 7(1). A choice-of-court agreement is indeed generally concluded to avoid legal uncertainty. The User Agreement of Coinbase, for example, contains a choice-of-court clause in favour of the English courts. It should further be noted that special rules set forth in Section 4 of the Regulation are applicable if the contract is a consumer contract falling within the scope of their application.

Blockchain technology to dematerialize bills of lading

The article written by José Angelo Estrella Faria, the secretary general of the UNIDROIT, entitled "Uniform Law And Functional Equivalence: Diverting Paths or Stops Along The Same Road? Thoughts on a New International Regime for Transport Documents" 2 Elon L. Rev. 1 is excellent. 

The author notes that in order to emulate the function of a bill of lading as a document of title in electronic environment, it is necessary to ensure that only the person recognized by a registry as the rightful "holder" is entitled to claim delivery of the goods. Here, he is only restating a widely supported proposition.

What is interesting, though, is that he goes on to observe, "[a]t least in theory, the same result could also be achieved if computer technology were able to create a 'unique' electronic record that could be exclusively held by a holder and transferred to another without replication at some point down the negotiating chain." Later in the same article, the author also states, "[o]ne conceivable model, for instance, might rely on a technical device that would assure the uniqueness of an electronic record to allow the record itself to be 'passed' down a negotiation chain." To this sentence, he attaches a footnote stating "[s]o far, however, computer technology has not yet been able to create such a 'unique' electronic record, which means that electronic negotiability systems continue to rely essentially on electronic registries." The author could hardly be blamed for not mentioning the blockchain technology since this article was published in February 2011, a few years before the technology has come to be widely known outside the circle of computer specialists. Now in 2015, the blockchain technology has been tested enough through the bitcoin to inspire confidence in saying that it is at least as secure as any registry based system (See also my earlier post).

Technical traceability and normative traceability

When we consider whether it is possible in law to obtain the recovery of stolen cryptocurrency units, what matters is normative, rather than technical, traceability of the stolen units. This is so whether the claim for recovery is based on the ownership of the units or the restitution of unjust enrichment.
There may be no technical traceability where stolen units are mixed up with other units in the address they have been forwarded to unless the units had been dyed prior to being stolen. In this sense, Patrick Murck seems right to observe in his presentation that while transactions are traceable, coins are less so. On the other hand, to affirm normative traceability, it might be enough to be able to say that the attacker or the persons further down the line could be deemed to hold all or part of the stolen units or their value.
Let us suppose that Alice had 70 units in her address (i.e. an address for which she holds the private key). Bob has stolen them through a phishing attack and transferred them to his address in which they have been mixed up with the 30 units he had held there. Unless the stolen 70 units had been colored, it may be technically impossible to say which of the now 100 units Bob holds in his address is originally Alice's. It is, however, possible to say that Bob holds the stolen units.
It is true that even a normative tracing becomes harder as the stolen units are forwarded down the line. Thus, let us suppose that Bob has thereafter transferred 40 units to the address of Carol. Again, unless the stolen 70 units had been colored, it may be technically impossible to say which, or even how much, of the 40 units Carol has received is originally Alice's. But it does not foreclose the possibility of a normative assessment that Carol holds part of the stolen units or their value. The normative assessment may take into account the circumstances surrounding Carol's acquisition including how much, if at all, she knew of Bob's theft. It will also be part of the normative assessment how much of the 40 units is deemed to derive from the 70 stolen units: (i) 28 units representing the proportion of the 70 units among the 100 units Bob held in his address or (ii) 10 units on the assumption that all 30 units Bob held legitimately has been transferred to Carol, or (iii) other amounts based on other calculations.
Some legal systems might opt for a simple solution of equating normative traceability with technical traceability. But other legal systems might differentiate them. It is also conceivable that different tests for normative traceability be applied between proprietary recovery and restitutionary recovery. While a test aligned with technical traceability may be preferred for proprietary recovery in order to ensure the specific identification of stolen units, it is not inevitable. Since it is ultimately a matter for legal policy whether to grant recovery merely as restitutionary relief or as proprietary relief (See my earlier post), it is not unimaginable to allow recovery of the stolen value (as opposed to the specific stolen units) as proprietary relief. The blockchain technology being a new invention, I guess that the rules are currently uncertain under most legal systems.

It is needless to say that in the cases where it is considered normatively that the stolen units are traceable, the possibility of recovery will depend on other conditions which the applicable law puts in place to protect legitimate holders in due course.

Legal effect of blockchain-based arrangements

Various proposals have been made to use the blockchain technology for purposes other than to issue and circulate cryptocurrencies. Many of them seem to rest on the assumption that the participants could make effective arrangements themselves. Things will not, however, work according to their plan when disputes arise between them or when third parties get involved unless the applicable law gives effect to their agreements implicit in their arrangements. The law does so only in the sphere of party autonomy. Suppose, for example, that a blockchain-based land registry were created and a plot of land had been registered in the name of one of the participants to the arrangement. That would not be sufficient to confer legal title to the land on the registrant unless the law of the country where that plot of land is situated gives such an effect to such a private arrangement.

Having said that, if there are good reasons why blockchain-based arrangements should be given legal effect, it is the law which should be changed. In some areas, the law might move towards broadening the sphere of party autonomy. It would give rise to a lot of legal debate along the way. In other areas, the law might integrate certain blockchain-based arrangements into the state apparatus. Thus, countries presently having no proper land registry might well adopt a blockchain-based registry as a solution.

Jurisdiction in matters relating to a contract for the exchange of cryptocurrency units with traditional currencies

A court addressing the question whether it has jurisdiction to hear and determine a case in commercial matters decides it by applying its rules of jurisdiction. One of the most influential instruments containing rules of jurisdiction is the EU Regulation No 1215/2012 (a.k.a. Brussels Recast or Brussels I-bis). This post will consider under Article 7(1) of this regulation jurisdiction in matters relating to a contract for the exchange of cryptocurrencies with traditional currencies. Article 7 provides:

A person domiciled in a Member State may be sued in another Member State:
(1) (a) in matters relating to a contract, in the courts for the place of performance of the obligation in question;
(b) for the purpose of this provision and unless otherwise agreed, the place of performance of the obligation in question shall be:
— in the case of the sale of goods, the place in a Member State where, under the contract, the goods were delivered or should have been delivered,
— in the case of the provision of services, the place in a Member State where, under the contract, the services were provided or should have been provided;
(c) if point (b) does not apply then point (a) applies;
(2) ... 

To begin with, a contract for the exchange of cryptocurrencies with traditional currencies is unlikely to be deemed a sale of goods since "goods" are generally understood to mean tangible objects. There is no good reason to deviate from the interpretation of CISG (see my earlier post) in this respect.
In another of my earlier post, I noted that the Court of Justice had observed that a narrower meaning could be given to the concept of "provision of services" than the similar concept of “[s]upply of services” of the VAT Directive (Falco Privatstiftung and Rabitsch (Case C-533/07) (2009)). This observation might be seen as something of significance in view of the Court's recent ruling that the "[s]upply of services" of the VAT Directive covered transactions exchanging traditional currencies for bitcoin units and vice versa. 

My view, however, is that the concept of "provision of services" of Regulation No 1215/2012 is wide enough to cover such transactions. The Court's observation in the Privatstiftung case was made in the context of ruling that licensing an intellectual property right did not fall within that concept. The ground for the ruling was that the concept of service implied that the party who provided the service carried out a particular activity whereas the only obligation which the licensor undertook was not to challenge the use of the intellectual property right by the licensee. On the other hand, a contract for the exchange of cryptocurrencies with traditional currencies certainly imposes obligation to undertake a particular activity, i.e. exchanging the currencies.
It is also worth noting that the Court has held that a contract for the storage of goods constitutes a contract for the provision of services (Krejci Lager & Umschlagbetriebs v Olbrich (C-469/12) (2013)) on the reasoning that the commitment of the warehousekeeper of such a contract entails a specific activity consisting of the reception of goods, their storage in a safe place and their return in an appropriate state. A contract for the storage of cryptocurrency units, too, would constitute a contract for the provision of services on a similar reasoning. Accordingly, a contract concluded with a wallet provider would fall within the second indent of Article 7(1)(b).

The next question which arises is how to identify the place of provision of services under that provision. I intend to discuss it in my future post.

Difficulty of localisation in choice of law in other areas

In my earlier post, I have noted the difficulty of localising cryptocurrency for the purpose of choice of law for proprietary issues.

The difficulty of localisation in choice of law is not unique to blockchain. The high seas and outer space, too, present the same difficulty since no nation exercise sovereignty over such space. The difficulty does not solely concern proprietary issues but could also arise with respect to other issues such as tort, for which the applicable choice-of-law rules may specify the law of the place of the harmful event. I will discuss three approaches to get around this difficulty below.

One approach is to come up with an alternative connecting factor. Thus, where a ship is involved, its flag may be used as a connecting factor. In a case involving a collision of ships on the high seas, the Sendai District Court in its judgment on 19 March 2009 cumulatively applied the laws of the flag states to a tort claim for damages. It is not, however, easy to conceive of similar connecting factors for cryptocurrencies since their units are stateless by nature.

Another approach is to apply the law of the country with which the issue in question is most closely connected. This approach was taken by the Tokyo High Court in its judgment on 28 February 2013 when it determined the law applicable to a tort claim for damages caused by dangerous cargoes on board a ship while the ship was in transit on the high seas. Since a major (if not the most important) goal of choice of law rules is to ascertain the law of the country with which the issue is most closely connected, this approach pursues this goal directly without relying on other more concrete concept as a connecting factor. This approach could also be taken to determine the proprietary issues of cryptocurrency. But a drawback of this approach is the lack of certainty and predictability since all the relevant factors must be taken into account on a case-by-case basis.
A third approach is to unify the substantive rules of national legal systems. The unification of substantive rules, to the extent it is achieved, dispenses with the need for choice of law. The Cape Town Convention and its Space Protocol would offer many lessons when we consider proprietary issues of cryptocurrencies.

Right of conversion

In some legal systems, a debtor has the right to discharge its debt by paying in a currency other than the currency of account (i.e. the currency in which the debt is denominated). This option is sometimes called the right of conversion. Thus, Article 403 of the Japanese Civil Code provides:

Where a debt is denominated in a foreign currency, the debtor may make the payment in the Japanese currency in accordance with the exchange rate of the place of payment.

Where a debt is denominated in a cryptocurrency, the question whether the debtor has the right of conversion may arise. To fully consider this question, the following issues would need to be addressed:
1. what is the rationale of the right of conversion;
2. whether cryptocurrencies should be equated with foreign currencies in this context; and
3. what should be the law governing the right of conversion (More specifically, whether it should be the law applicable to the debt or the law of the place of payment and, if it is the latter, where is the place of payment of cryptocurrencies).

A separate question is whether the creditor has the right to demand payment in a currency other than the currency of account. This question, too, could arise where the debt is denominated in a cryptocurrency.

I intend to discuss these issues in my future posts.

Applicability of CISG

The CISG (UN Convention on Contracts for the International Sale of Goods) does not expressly define what constitutes a "contract of sale." 

There can be little doubt, however, that the Convention will have no application to contracts to buy cryptocurrencies with traditional currencies since the Convention is only applicable to sales of "goods" which are generally understood to mean tangible objects (e.g. Schlechtriem, Commentary on the UN Convention on the International Sale of Goods (1998) p. 23 [Herber]).
A separate question is whether the CISG is applicable to contracts to buy goods with cryptocurrencies. In the language of the Convention, the question is whether payment of cryptocurrencies should be interpreted as constituting "payment of the price." If not, such contracts would be barter contracts and accordingly fall outside the scope of the Convention (For barter contracts, see e.g. Schlechtriem.)
In this connection, it is worth recalling that the CJEU observed in its VAT judgment that bitcoins had no purpose other than to be a means of payment (para. 24). In other legal contexts, other purposes such as speculative investment purposes may be relevant. But in the context of CISG, a better interpretation seems to be that payment of bitcoins or other cryptocurrencies constitutes "payment of the price," since they have no intrinsic value of their own.

Technical feasibility of tracking stolen cryptocurrencies and legal response

Arvind Narayanan writes in his blog post that since banks can reverse fraudulent transactions and law enforcement of digital financial crimes is relatively competent, the risk of getting caught combined with the diminished ability to cash in on attacks skew the economics against attackers. He contrasts this with bitcoin whose design puts the entire onus on preventive measures. This insightful observation is based on the assumption (in his words) that "[i]f an attacker breaks into a server containing private keys, he can steal the bitcoins ... irreversibly." This assumption seems widely accepted. It seems to rest largely on technical grounds but I think it also depends on legal issues which are unsettled yet. Narayanan comments on the technical aspect saying, "[w]hile there’s been talk of taint-tracking mechanisms to prevent thieves from cashing out, these haven’t materialized and there are fundamental technical and political difficulties with such proposals." But he also adds a footnote referring to a paper which argues that it currently is difficult for thieves to launder large sums of bitcoins.
I do not have expertise to comment on the technical feasibility of tracking. But the point I want to make here is that should there be cases in which it is possible to trace the movement of stolen bitcoins, it will raise a legal question whether a recovery should be granted to the original owner. This question has not been tested before courts under any legal system to my knowledge. It would not be inconceivable that thieves and third parties who have acquired stolen bitcoins in bad faith are denied legal ownership and held liable to make restitution of the stolen bitcoins or their value in fiat currencies.