Choice-of-law Problems with Blockchain-based Negotiable Instruments

I have written a paper on choice-of-law problems with blockchain-based negotiable instruments, with particular reference to bills of lading and investment securities. In this paper, I have examined the emerging substantive rules as well as choice-of-law rules of some legal systems and made suggestions for choice-of-law rules. The information is current as of August 2021. This paper is to be published as a chapter from Andrea Bonomi and Matthias Lehmann (eds) Blockchain & Private International Law (Brill). The text, subject to formatting and copy-editing, may be obtained from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3937664.

The role of law in smart contracts

My article, "スマートコントラクトと法の役割"(The Role of Law in Smart Contracts), came out from a Japanese journal last June. The text is attached to this post.

At the outset, I tried to dispel the confusion of "smart contracts" with legal contracts. That expression came to be used in the blockchain context after it first appeared in the Ethereum white paper. While the use of this catchy phrase seemed successful as a marketing ploy, the author of the white paper, Vitalik Buterin, later regretted adopting that term, saying that he should have used more boring and technical expression like "persistent scripts."

After clarifying the concept of "smart contract", I began my analysis with the private law issues arising from the hacking of a smart contract. Smart contracts are capable of storing crypto-assets and, since their code is open to be inspected, their bugs are also exposed. Due to these characteristics, smart contracts attract many hacking attempts.

I then proceeded to examine the possible criminal liability of the actors surrounding a smart-contract prediction market. A prediction market, though capable of offering socially useful functions, may be seen as a venue for gambling which would constitute a criminal offence under many legal systems.

I concluded this paper with discussions on the regulatory issues of Defi (decentralized finance) in some details. 

Conflict of laws in blockchain and cryptoassets

I gave a paper on the above theme at a meeting of the Study Group of Private International Law of the Kansai Region (Japan) on 23 January 2021.

Conflict of laws is an abstract subject. So I structured my analysis along typical scenarios which are partially taken from real cases. They include the bankruptcy of an exchange provider, the misappropriation of crypto-assets, the mistaken transfer of crypto-assets, the use of crypto-assets to purchase goods or services, the hacking of a smart contract (or decentralized autonomous organization) and the use of crypto-tokens for securitization. I gave detailed considerations to proprietary issues in particular, as these are a theoretically challenging area.  I also gave comments on the works of others including the project of the Hague Conference on Private International Law.

The handout distributed to the audience (in Japanese) is attached here.

Presentation at the conference “UNCITRAL Asia Pacific Day" (4 December 2020 at the University of Macau)

I gave an online presentation on blockchain-based bills of lading under the UNCITRAL Model Law on Electronic Transferable Records in Session III of the conference.

I attach here the slides and the transcript of my presentation as well as the conference timetable. Preparing for this presentation, I built on my Japanese paper given at a symposium in Tokyo one and a half year earlier and published subsequently. This conference was a fitting occasion to convey my thoughts in English and take stock of the latest developments in actual practice.

Work of the Hague Conference on Private International Law

I have been discussing the issues of private international law since this blog was started five years ago (See the posts with labels "choice of law" and "jurisdiction"). The Hague Conference on Private International Law has now turned its attention to the blockchain.

The Council on General Affairs and Policy (CGAP) of the Hague Conference met from 3 to 6 March 2020. According to its report, the Council invited the Permanent Bureau (the secretariat of the Hague Conference) to monitor developments with respect to the private international law implications of distributed ledger technology (para. 15). It is part of the work relating to possible new legislative instruments.

As a preliminary document for the CGAP meeting, the Permanent Bureau had authored (with the assistance of Prof. Matthias Lehmann) and published a proposal for the allocation of resources to this task. It sets out a list of the specific issues to be addressed with some indications of possible solutions.

The list rightly contains proprietary issues, which in my view should receive the greatest attention of any work in this field because of the theoretical difficulties involved (See my previous post here, in particular pp. 6-8 of the attached slides). In this connection, a restitutionary claim arising from a constructive trust should also be addressed. Its significance is illustrated in my paper "Implications of the Blockchain Technology for the UNCITRAL Works" in particular at p. 92 (See the post here). 

The proposal defines the Decentralised Autonomous Organisations (DAO) as "quasi-corporate entities based on the blockchain" and asks whether the DAO should be characterised as a corporation or a contract for the sake of conflict of laws. In my idea, the DAO is nothing but a computer code, albeit of a special kind. The expression "decentralised autonomous organisation" is only an eye-catching phrase that IT people like using (another example being "smart contract"). No useful purpose will be served in legal analysis by accepting it at face value as an organisation. Thus, it would be pointless trying to sue a DAO as hardly any State would grant it locus standi. The legal issues surrounding the DAO could, and should, be resolved by targeting real-life individuals and companies (See pp. 7-8 of my paper "Blockchain and Smart Contract for Contract Management" presented at the APEC meeting).

The proposal does not mention the blockchain-based negotiable instruments. Whether and in what circumstances tokens on blockchains are deemed in law to be negotiable instruments are vital questions on which depends whether "token economy" will fly or not. In my view, these questions should be determined by the law governing the right embodied in the instrument in question (See p. 9 of the slides attached to my previous post here).

The borderless feature of a blockchain network makes it legitimate to spend resources at an international level. The Hague Conference is the obvious forum for the work on private international law.

Dematerialization of Negotiable Instruments

My article, "Legal Issues Arising From the Use of Blockchains for the Dematerialization of Negotiable Instruments: with a Particular Focus on Bills of Lading and the UNCITRAL Model Law" has just been published. It is in (2020) 5 Yearbook of the Japanese Association of International Business Law 24-39 and is attached to this post.

I wrote this article on the basis of a paper I gave one year ago at the symposium "UNCITRAL Model Law, Cryptocurrency and Blockchain" (Waseda University, 16 March 2019). As the presentation was made in Japanese, this article, too, was written in Japanese. The accompanying English abstract reads as follows:

This article considers the legal challenges which will be encountered when blockchains are used to dematerialize negotiable instruments such as bills of lading. The digitization of negotiable instruments yields a lot of benefits to the society but has been hampered by various technological and legal obstacles. On the technological side, this article examines the advantages and drawbacks of the blockchain as a tool for dematerializing negotiable instruments. On the legal side, there is a lot of uncertainty over the permissibility of, and the legal requisites for, dematerializing negotiable instruments. To improve certainty, the UNCITRAL created the Model Law on Electronic Transferable Records in 2017. The Model Law lays down the attributes which an electronic record needs to possess before it is deemed to be functionally equivalent to the corresponding "transferable instrument," a term broadly synonymous with "negotiable instrument." Thus, the electronic record must, by virtue of a reliable method, be identifiable (which implies the consistency of the record) and amenable to exclusive control. This article considers whether blockchain-based electronic records have these attributes. Among such attributes, the reliability of the method poses a particular challenge to the current law since the latter is not accustomed to evaluate the reliability of blockchains. Prior to the emergence of the blockchain technology, electronic records could only be maintained by an administrator of the database. It follows that under the conventional approach, the reliability of the method would be ensured through the regulation and oversight of the administrator. The blockchain, on the other hand, is a trustless technology which is founded on the notion that a system dispensing with the need for administrators is reliable for the very reason that it is distrustful. Whether the law is ready to embrace this notion will be tested if the society is to harness the full potential of the blockchain.

Prescriptive Jurisdiction in Securities Regulations: Transformation from the ICO (Initial Coin Offering) to the STO (Security Token Offering) and the IEO (Initial Exchange Offering)

As noted previously, I presented a paper on the prescriptive jurisdiction on securities regulations and ICOs at the Konkuk University (South Korea) last year (2019). Subsequently, I was invited to write an article on that theme for the Ilkam Law Review, the journal of the Konkuk University Law School. I submitted my manuscript towards the end of last year. While awaiting publication, let me share the submitted version here.

It contains some illustrations with parts highlighted in red. I have been told that the published version will be printed black and white. So those illustrations would be better understood in the version attached here.

The abstract reads:

This article examines how the ICO (Initial Coin Offering) has been impacted by the States’ assertion of prescriptive jurisdiction in securities regulations and analyzes the STO (Security Token Offering) and the IEO (Initial Exchange Offering) as alternatives to the ICO. The analysis begins with examining the principles underpinning prescriptive jurisdiction such as the territoriality principle. It then proceeds to examine the three tests – the conduct test, the effects test and the transactional test - which support the operation of the territoriality principle. Attention is then turned to the impact of the Internet which has facilitated cross-border fundraising. An analysis is given to the way the effects test is interpreted where the Internet is used for the solicitation of investment. More recently, the blockchain technology has given birth to the ICO. It has enabled borderless fundraising, a feature which contributed to the initial popularity of the ICO. While the ICO is technologically borderless, it is legally not so. To illustrate the point, the article examines the way the aforementioned three tests are to be applied in the ICO. With its borderless feature undermined by the fragmented regulatory regimes, the ICO has lately lost popularity. The article concludes by examining the STO and the IEO to see how they differ from the ICO and whether they fit better with the fragmented regulatory regimes.

A further note (8 April 2020): This paper has come out from (2020) 45 Ilkam Law Review pp.31-50. The document attached below has accordingly been replaced by the published version.