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.

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.

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.

Choice of law issues in crypto-assets

I presented a paper entitled "Conflict of Laws in Blockchain-Based Crypto-Assets" at the Journal of Private International Law Conference on 12 September 2019 in Munich. As the time was limited, I focused on choice of law issues and discussed four broad categories of issues. They were (1) contractual issues, (2) issues of non-contractual obligations, (3) proprietary issues, and (4) issues pertaining to negotiable instruments.
The powerpoint slides prepared for the presentation are attached here. Some takeaways are set out in the last slide. It was meant to make the following points there.

The crypto-assets are unfit to be deemed to be money for the choice-of-law purposes because, inter alia, none of them is currently used as a medium of exchange and it is not possible to draw a line between the crypto-assets which are deemed to be money and those which are not so deemed.

The crypto-assets are difficult to be localised in a single country because they are contained in distributed ledgers on a borderless blockchain. The localisation may exceptionally be possible where all the nodes validating the blocks are by design located in a single country.

The crypto-assets will pose no particular difficulty in relation to the connecting factors which rely principally on real-life facts and events. Thus, for example, the country with which a contract, tort, or unjust enrichment is most closely connected may be ascertained without particular difficulty stemming from the use of crypto-assets. The ascertainment of the country with which a proprietary issue is most closely connected would be more difficult because the relevant events are mostly on-chain facts.

The crypto-assets will pose no particular difficulty in relation to the principle of party autonomy because the only question for the latter is whether to give effect to the parties' own choice. Given the difficulty of finding an appropriate connecting factor for proprietary issues in crypto-assets, it is arguable that the principle of party autonomy should be extended to proprietary issues where there is a uniform network-wide choice of law clause. How a single choice of law can be secured is, however, another question.

"Implications of the Blockchain Technology for the UNCITRAL Works" - published.

It has come to my attention that my article "Implications of the Blockchain Technology for the UNCITRAL Works" had been published from the United Nations in November last year.
The 50th anniversary Congress was a big occasion for UNCITRAL and it was my great honour to be part of it.
Here is my article excerpted from the book.


An additional note: In my original manuscript, there were some references to specific chapter numbers. I have noticed that in the published version, they have been changed to "Ch. 0" due to the editorial work which has removed all the chapter numbers from the headings. To see where those were actually referring to, please consult my original manuscript here.

Implications of the Blockchain Technology for the UNCITRAL Works

I will be presenting my thoughts on the subject above in the upcoming Congress of the UNCITRAL for the celebration of its 50th anniversary (4-6 July 2017).

My paper currently on the Congress website is a version which I sent to the UNCITRAL Secretariat some months ago and which no longer represents my latest thinking in some significant respects. I am asking the Secretariat to replace it with the latest version, to which I make a link from here. 

The paper gives a particular emphasis on the topic of proprietary restitution of blockchain-based tokens as an area which calls for a globally unified solution.

Postscript: As from 16 June, the Congress website carries the latest version. Many thanks to the Secretariat for swiftly acting on my request. 

Why documents of title are an attractive use case of the blockchain technology

In my earlier post, I have noted that there are no fewer than three different functions which an electronic record issued and transferred on a blockchain can fulfill. Each of them has a great potential but needs support from legal infrastructure. Thus, no electronic record can be deemed to embody an entitlement to the performance of obligations unless so treated by the applicable law. It is no different from acknowledging that  a paper-based transferable document would be only a piece of paper without empowering legislation. Accordingly, an electronic transferable record on a blockchain cannot function as a document of title merely by agreement of private parties.

There is, however, one feature of documents of title which make them particularly attractive as a possible use case of the blockchain technology. It is their essential feature, the guarantee of singularity. That feature had been considered to be difficult to emulate in an electronic environment and the only means which had been available was a registry administered by a trusted entity. But the blockchain technology has now made it possible to guarantee singularity in a de-centralised way. The essential feature of documents of title is thus taken care of by technology without need for legal support.

The construction of a supporting legal infrastructure takes time. In the meantime, notwithstanding the risk of unintended legal consequences, entrepreneurs develop business practices to cater for demands on the market. We have been witnessing such phenomena in the bitcoin business. Are there sufficient demands to support experimental documents of title on a blockchain?

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.

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.