Wednesday, 25 November 2015

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.

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