Which conflict-of-laws rule is the most appropriate for the blockchain? This fundamental question is part of two parallel targeted consultation papers issued as recently by the European Commission.
One of the consultations covers the Settlement Finality Directive (SFD), while the other concerns the Financial Collateral Directive (FCD). Both regulate the “plumbing” of financial markets (the so-called market infrastructures) and contain conflict-of-laws provisions (see Article 9(2) SFD and Article 9 FCD). Yet, the infrastructures and transactions they target are conventional ones. The Settlement Finality Directive deals with payment and securities settlement systems, in which traditional cash (e.g. euros) and conventional financial instruments (e.g. shares and bonds) are traded. The Financial Collateral Directive concerns collateral provided in either cash or financial instruments.
The question posed by the European Commission is whether these texts also can (and must) be applied to modern digital assets, like cryptocurrencies (e.g. Bitcoin) and tokens, and whether they need to be adapted to them through reform. Since both directives also contain conflict-of-laws provisions, the relationship of crypto-assets to these regulations raises typical conflict-of-laws questions as well.
Take for example Article 9(2) SFD. Its text speaks about securities “legally recorded on a register, account or centralised deposit system” and submits them to the law of the Member State where this register, account or system is “located”. This raises the following issues: 1. whether a blockchain network is a “register” in this sense; 2. whether crypto assets can be said to be “legally” recorded, despite the lacking legal protections of such assets under most private laws; and 3. where blockchains, which may be distributed potentially on a planetary scale, are located.
Even more doubts are caused by Article 9 FCD. It submits financial collateral arrangements to the law of the country “in which the relevant account is maintained”. Blockchain networks basically operate without any intermediaries and do not feature “accounts” in the proper sense of the word. Even if they would, it would be hard to say where the account is “maintained” given the distributed nature of a blockchain network.
These issues have a certain sense of urgency due to the fact that some EU and EEA Member States have already pressed ahead and created specific rules for crypto assets.
France for instance allows for securities (such as bonds and shares) traded over the counter (OTC) to be issued on blockchain networks (described as “distributed electronic registers” (dispositif d’enregistrement électronique partagé – DEEP)). The condition is that the securities are issued in the French territory and governed by French law, see Art. L211-3 French Code monétaire et financier. The transfer and pledge of such crypto financial instruments is equally governed by French law.
Germany has drafted a bill to allow the issuance of bonds (including covered bonds) and investment participations on the blockchain. Section 32 of the bill provides for the applicability of the law of the country in which the administrator of the register is supervised.
Liechtenstein, an EEA member and as such also bound by the SFD and the FCD, has adopted an Act on Token and TT (Trustworthy Technology) Services Providers, which, by any standard, is one of the most comprehensive and innovative blockchain regulations in the world. The Act is appliable where: 1. the TT provider is headquartered or residing in the Principality; or 2. where the parties expressly chose its provisions, see its Art. 3(2).
These are three different approaches to the conflict-of-laws issues raised with regard to different types of crypto assets. But are those national laws compatible with the SFD and the FCD? Do the SFD and FCD apply at all to crypto assets? If so, are their provisions, including those on the conflict of laws, compatible with the nature of the blockchain? And if they do not apply, should they be extended to them? Some legal consistency and harmony would surely be welcome. The question is if and when the EU legislator will provide it.