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.
Wednesday, 18 September 2019
Saturday, 23 March 2019
Symposium on MLETR and blockchains
I gave a paper in a symposium on the UNCITRAL MLETR (Model Law on Electronic Transferable Records) and blockchains (Here is link to the program) on 16 March 2019 at the Waseda University in Tokyo.
The proceedings were conducted in Japanese except the presentation by Luca Castellani, the legal officer of the UNCITRAL Secretariat who was responsible for this Model Law. So my powerpoint slides and handout (below) are also in Japanese.
I have underscored the potential of public blockchains for disrupting the society and considered whether they meet the requirements of the MLETR. Throughout the analysis, I have compared public blochains with permissioned blockchains and central registries. Each of the requirements of the MLETR poses an analytical challenge with respect to public blockchains.
I will try to write an English version of the paper once I have cleared a backlog of work on my desk.
The proceedings were conducted in Japanese except the presentation by Luca Castellani, the legal officer of the UNCITRAL Secretariat who was responsible for this Model Law. So my powerpoint slides and handout (below) are also in Japanese.
I have underscored the potential of public blockchains for disrupting the society and considered whether they meet the requirements of the MLETR. Throughout the analysis, I have compared public blochains with permissioned blockchains and central registries. Each of the requirements of the MLETR poses an analytical challenge with respect to public blockchains.
I will try to write an English version of the paper once I have cleared a backlog of work on my desk.
Thursday, 21 March 2019
"Prescriptive Jurisdiction in Securities Regulations and ICOs (Initial Coin Offerings)"
My article "Prescriptive Jurisdiction in Securities Regulations and ICOs (Initial Coin Offerings)" has been published ((2019) 117-4 Journal of International Law and Diplomacy pp. 1-25). It is based on my presentation in Japan and written in Japanese. The original title and citation are: 高橋宏司「証券関係法規の規律管轄権とICO (Initial Coin Offering)」国際法外交雑誌117巻4号(2019年) 1-25頁. Here is an English abstract.
The ICO is a new method of fund raising using the blockchain technology. It enables tokens to be issued on a blockchain in return for the contribution of funds in either fiat or crypto currencies. It is in vogue in recent years but has generated concern over fraud in a large number of cases. This has kindled the interests of regulators around the globe, who have been watching the space closely. While some countries have introduced an outright ban on ICOs, others have begun to see certain types of ICO tokens as securities with a view to protecting the investors. There is, however, much uncertainty as to the geographical reach of securities regulations as applicable to ICOs. As it is a question of prescriptive jurisdiction, this article begins by examining in the context of securities regulations the various principles underpinning prescriptive jurisdiction, such as the protective principle, universality principle, personality principle and territoriality principle. Since the territoriality principle is the cornerstone of prescriptive jurisdiction in securities regulations, this article proceeds to examine the various tests for the operation of the territoriality principle, such as the conduct and effects test and the transactional test to see how well they suit the regulation of securities of the traditional type. This article concludes by considering whether those tests are also fit to be applied to ICOs. Throughout this article, an intense analysis is conducted on the way the internet has affected the prescriptive jurisdiction in securities regulations and how the blockchain technology may affect it in the future.
The ICO is a new method of fund raising using the blockchain technology. It enables tokens to be issued on a blockchain in return for the contribution of funds in either fiat or crypto currencies. It is in vogue in recent years but has generated concern over fraud in a large number of cases. This has kindled the interests of regulators around the globe, who have been watching the space closely. While some countries have introduced an outright ban on ICOs, others have begun to see certain types of ICO tokens as securities with a view to protecting the investors. There is, however, much uncertainty as to the geographical reach of securities regulations as applicable to ICOs. As it is a question of prescriptive jurisdiction, this article begins by examining in the context of securities regulations the various principles underpinning prescriptive jurisdiction, such as the protective principle, universality principle, personality principle and territoriality principle. Since the territoriality principle is the cornerstone of prescriptive jurisdiction in securities regulations, this article proceeds to examine the various tests for the operation of the territoriality principle, such as the conduct and effects test and the transactional test to see how well they suit the regulation of securities of the traditional type. This article concludes by considering whether those tests are also fit to be applied to ICOs. Throughout this article, an intense analysis is conducted on the way the internet has affected the prescriptive jurisdiction in securities regulations and how the blockchain technology may affect it in the future.
Bahraini legislation based on the UNCITRAL MLETR
(This entry was originally posted at https://wordpress.com/view/blockchaincryptolaw.wordpress.com on 12 February 2019.)
Bahrain became the first to enact a statute based on the UNCITRAL Model Law on Electronic Transferable Records. I have been provided with an English translation of the statute by Jameel Al Alawi, Senior Legal Adviser for the Bahrain Economic Development Board, who was in charge of drafting the statute. With his permission, I post it below.
The Model Law sets out the conditions which must be met for an electronic record to be treated as a "transferable document" (Article 10). The latter is defined as a document that entitles the holder to claim the performance of the obligation indicated in the document and to transfer the right to performance by means of the transfer of that document (Article 2). Bills of lading and warehouse receipts, for example, are covered.
The Model Law adheres to the principle of technology neutrality, which means that the law should neither require nor assume the use of a particular technology for communicating or storing information electronically. Thus, the blockchain technology is not excluded from the Model Law's scope of application. It is in fact a technology well suited for creating and managing electronic records which purport to replicate transferable documents because it is capable of guaranteeing that there is a single true version of electronic records.
The Model Law requires the use of a reliable method to establish an exclusive control of an electronic record that replicates a transferable document (Articles 10(1)(b)(i)(ii) and 11(1)(a)). In my previous work, I noted:
The reliability of the above-mentioned methods will be assessed by adjudicators on an ex post (i.e. after the occurrence of a dispute) basis. It would, however, be unfortunate if there were no foreseeability as to which methods would pass the reliability test since the use of such methods would then be deterred. A thought should, therefore, be given to the possibility of compiling a list of reliable methods on an ex ante basis. Such a list would need to be reviewed from time to time because neither the configuration of a central registry nor the algorithm of a blockchain is permanently fixed.
The Model Law lists a number of circumstances by reference to which to evaluate the reliability of a method, including the existence of a declaration by an accreditation body (Article 12(a)(vi)). But it leaves the details to the national laws.
What is interesting about the Bahraini legislation is that it provides for the accreditation of an "operator", the latter being defined as a person who operates an information system for managing electronic transferable records (Article 1(l)). It sets forth the procedure and conditions for accreditation (Articles 15 and 16), though it delegates to the competent authority to lay out the details of the conditions by means of a regulation. It also provides for the withdrawal of an accreditation. Once an operator is accredited, the reliability of the method used by the operator is to be presumed unless evidence to the contrary is adduced (Article 8(2)). Furthermore, where reliance on an electronic transferable record has caused damage and the electronic record is managed by an accredited operator, it is to be presumed that the damage was due to the operator’s intention or negligence unless otherwise proven (Article 17).
The Bahraini legislation is applicable to electronic transferable records "whether or not an operator is used in respect of these records" (Article 2(1)). Accordingly, it seems applicable to electronic transferable records managed with the use of the blockchain technology. In view of the definition of an "operator" (Article 1(l)), it seems unlikely that any accreditation will be issued with respect to public blockchains. But the administrator of a private blockchain may fall within that definition. It will be interesting to see whether the conditions for accreditation issued by the competent authority will actually cover private blockchains as well as central registries.
Postscript (15 Feb. 2019): Jameel has informed me that the Bahraini statute entered into force on 1 February 2019 but the regulation is still being debated.
Bahrain became the first to enact a statute based on the UNCITRAL Model Law on Electronic Transferable Records. I have been provided with an English translation of the statute by Jameel Al Alawi, Senior Legal Adviser for the Bahrain Economic Development Board, who was in charge of drafting the statute. With his permission, I post it below.
The Model Law sets out the conditions which must be met for an electronic record to be treated as a "transferable document" (Article 10). The latter is defined as a document that entitles the holder to claim the performance of the obligation indicated in the document and to transfer the right to performance by means of the transfer of that document (Article 2). Bills of lading and warehouse receipts, for example, are covered.
The Model Law adheres to the principle of technology neutrality, which means that the law should neither require nor assume the use of a particular technology for communicating or storing information electronically. Thus, the blockchain technology is not excluded from the Model Law's scope of application. It is in fact a technology well suited for creating and managing electronic records which purport to replicate transferable documents because it is capable of guaranteeing that there is a single true version of electronic records.
The Model Law requires the use of a reliable method to establish an exclusive control of an electronic record that replicates a transferable document (Articles 10(1)(b)(i)(ii) and 11(1)(a)). In my previous work, I noted:
The reliability of the above-mentioned methods will be assessed by adjudicators on an ex post (i.e. after the occurrence of a dispute) basis. It would, however, be unfortunate if there were no foreseeability as to which methods would pass the reliability test since the use of such methods would then be deterred. A thought should, therefore, be given to the possibility of compiling a list of reliable methods on an ex ante basis. Such a list would need to be reviewed from time to time because neither the configuration of a central registry nor the algorithm of a blockchain is permanently fixed.
The Model Law lists a number of circumstances by reference to which to evaluate the reliability of a method, including the existence of a declaration by an accreditation body (Article 12(a)(vi)). But it leaves the details to the national laws.
What is interesting about the Bahraini legislation is that it provides for the accreditation of an "operator", the latter being defined as a person who operates an information system for managing electronic transferable records (Article 1(l)). It sets forth the procedure and conditions for accreditation (Articles 15 and 16), though it delegates to the competent authority to lay out the details of the conditions by means of a regulation. It also provides for the withdrawal of an accreditation. Once an operator is accredited, the reliability of the method used by the operator is to be presumed unless evidence to the contrary is adduced (Article 8(2)). Furthermore, where reliance on an electronic transferable record has caused damage and the electronic record is managed by an accredited operator, it is to be presumed that the damage was due to the operator’s intention or negligence unless otherwise proven (Article 17).
The Bahraini legislation is applicable to electronic transferable records "whether or not an operator is used in respect of these records" (Article 2(1)). Accordingly, it seems applicable to electronic transferable records managed with the use of the blockchain technology. In view of the definition of an "operator" (Article 1(l)), it seems unlikely that any accreditation will be issued with respect to public blockchains. But the administrator of a private blockchain may fall within that definition. It will be interesting to see whether the conditions for accreditation issued by the competent authority will actually cover private blockchains as well as central registries.
Postscript (15 Feb. 2019): Jameel has informed me that the Bahraini statute entered into force on 1 February 2019 but the regulation is still being debated.
Saturday, 16 February 2019
Migration to another website
Google has announced its plan to discontinue Blogger, the site which hosts this blog, with effect on 1 April 2019. So it has become necessary to migrate this blog to another site. This site will no longer be updated at this site. For updates, please refer to the new site: https://blockchaincryptolaw.wordpress.com.
A further note (21 March 2019): It was only the Google+ function in Blogger which had been discontinued. So let me retract the statement above. This blog will continue to be updated at this site.
A further note (21 March 2019): It was only the Google+ function in Blogger which had been discontinued. So let me retract the statement above. This blog will continue to be updated at this site.
Friday, 11 January 2019
Conflict of Laws in Blockchain-Based Crypto-Assets
The Journal of Private International Law will be holding its 8th Conference at the University of Munich from 12-14 September 2019. In response to a call for papers, I have submitted the following abstract. I only mentioned choice-of-law issues because of the word limit. In my actual paper, I may as well touch on jurisdictional issues.
This paper will consider a range of choice-of-law issues arising from crypto-assets on blockchains.
(1) Contractual issues. Suppose that a contract is concluded pursuant to which bitcoins are offered to purchase goods. Given that cryptocurrencies are not a fiat currency and might not be seen as goods, is that contract to be characterised as a “sale of goods”, a “barter of goods”, or a “barter of service for goods” for the choice-of-law purposes? Aside from the question of characterization, blockchains will not raise particularly difficult choice-of-law questions in contract since party autonomy is almost universally adopted.
(2) Issues of non-contractual obligations. If bitcoins are stolen and the victim seeks redress from the offender in tort, where is “the country in which the damage occurs”? Again, if bitcoins are transferred by mistake and the transferor demands restitution from the transferee in unjust enrichment, where is “the country in which the unjust enrichment took place”? Such connecting factors raise difficulties because crypto-assets are recorded in distributed ledgers on a borderless network and accordingly cannot be localised in any specific country. But since obligations are owed by, and to, specific persons, it should not be too difficult to identify, as an alternative connecting factor, the country with which the issue in question is most closely connected.
(3) Proprietary issues. If the provider of a cryptocurrency exchange is entrusted with bitcoins from its customers and becomes bankrupt, the customers may seek proprietary restitution from the bankruptcy administrator. Then, what law is applicable? Unlike tangible assets, for which the prevailing choice-of-law rules specify the lex situs, there is no settled choice-of-law rules for intangible assets. With respect to emissions quotas, a species of intangible assets which, like crypto-assets, are financially valuable, I previously argued for the application of the law of the country where they are registered ("Conflict of Laws in Emissions Trading" (2011) 13 Yearbook of Private International Law 145). But this connecting factor would be unworkable with crypto-assets since they are not recorded on a national registry but on distributed ledgers. So proprietary issues of crypto-assets pose a great challenge to the approach of choice of law. Noting this challenge, I previously suggested applying the law of the country with which the issue in question is most closely connected (A note on 4 November 2015 in my blog: Blockchain, Cryptocurrency, Crypto-asset and the Law). While the task of ascertaining that law is not always easy, the subsequent emergence of consortium blockchains and a “constitution”-based public blockchain should make it easier for such blockchains.
(4) Issues pertaining to transferable documents. Suppose that a company purports to issue its stocks or debentures on a blockchain. What law determines whether they are legally valid stocks or debentures? This question is important because the blockchain technology ensures the uniqueness of record, an essential feature of any electronic form of transferable documents. The clarification of law in this area will be a key to developing the “token economy.”
This paper will consider a range of choice-of-law issues arising from crypto-assets on blockchains.
(1) Contractual issues. Suppose that a contract is concluded pursuant to which bitcoins are offered to purchase goods. Given that cryptocurrencies are not a fiat currency and might not be seen as goods, is that contract to be characterised as a “sale of goods”, a “barter of goods”, or a “barter of service for goods” for the choice-of-law purposes? Aside from the question of characterization, blockchains will not raise particularly difficult choice-of-law questions in contract since party autonomy is almost universally adopted.
(2) Issues of non-contractual obligations. If bitcoins are stolen and the victim seeks redress from the offender in tort, where is “the country in which the damage occurs”? Again, if bitcoins are transferred by mistake and the transferor demands restitution from the transferee in unjust enrichment, where is “the country in which the unjust enrichment took place”? Such connecting factors raise difficulties because crypto-assets are recorded in distributed ledgers on a borderless network and accordingly cannot be localised in any specific country. But since obligations are owed by, and to, specific persons, it should not be too difficult to identify, as an alternative connecting factor, the country with which the issue in question is most closely connected.
(3) Proprietary issues. If the provider of a cryptocurrency exchange is entrusted with bitcoins from its customers and becomes bankrupt, the customers may seek proprietary restitution from the bankruptcy administrator. Then, what law is applicable? Unlike tangible assets, for which the prevailing choice-of-law rules specify the lex situs, there is no settled choice-of-law rules for intangible assets. With respect to emissions quotas, a species of intangible assets which, like crypto-assets, are financially valuable, I previously argued for the application of the law of the country where they are registered ("Conflict of Laws in Emissions Trading" (2011) 13 Yearbook of Private International Law 145). But this connecting factor would be unworkable with crypto-assets since they are not recorded on a national registry but on distributed ledgers. So proprietary issues of crypto-assets pose a great challenge to the approach of choice of law. Noting this challenge, I previously suggested applying the law of the country with which the issue in question is most closely connected (A note on 4 November 2015 in my blog: Blockchain, Cryptocurrency, Crypto-asset and the Law). While the task of ascertaining that law is not always easy, the subsequent emergence of consortium blockchains and a “constitution”-based public blockchain should make it easier for such blockchains.
(4) Issues pertaining to transferable documents. Suppose that a company purports to issue its stocks or debentures on a blockchain. What law determines whether they are legally valid stocks or debentures? This question is important because the blockchain technology ensures the uniqueness of record, an essential feature of any electronic form of transferable documents. The clarification of law in this area will be a key to developing the “token economy.”
Thursday, 4 October 2018
Cryptocurrencies entrusted to an exchange provider: Shielded from the provider’s bankruptcy?
My article, "Cryptocurrencies entrusted to an exchange provider: Shielded from the provider’s bankruptcy?", has been published in Charl Hugo (ed.) Annual Banking Law Update 2018: Recent Legal Developments of Special Interest to Banks (2018) at pp. 1-21. The book is a collection of peer-reviewed articles written as a basis for the presentations at Annual Banking Law Update. The full text of my article is reproduced here with permission from the publisher, JUTA.
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