On 10 May 2023, UNIDROIT adopted the Principles on Digital Assets and Private Law. The Principles contain recommendations to national legislators on how to deal with the private law issues raised by digital assets, such as cryptocurrencies or tokens. The final text can be found here.
Principle 5 concerns the conflict of laws. A previous draft and online consultation by UNIDROIT (see this blogpost) led the European Association of Private International Law to create a Working Group on the Law Applicable to Digital Assets, which has provided special input on this provision. Some of the Working Group’s suggestions are reflected in the final version, which reads:
Principle 5: Applicable law
(1) Subject to paragraph (2), proprietary issues in respect of a digital asset are governed by:
(a) the domestic law of the State expressly specified in the digital asset, and those Principles (if any) expressly specified in the digital asset; or, failing that,
(b) the domestic law of the State expressly specified in the system on which the digital asset is recorded, and those Principles (if any) expressly specified in the system on which the digital asset is recorded; or, failing that,
(c) in relation to a digital asset of which there is an issuer, including digital assets of the same description of which there is an issuer, the domestic law of the State where the issuer has its statutory seat, provided that its statutory seat is readily ascertainable by the public; or
(d) if none of the above sub-paragraphs applies:
(i) those aspects or provisions of the law of the forum State as specified by that State;
(ii) to the extent not addressed by sub-paragraph (d)(i), those Principles as specified by the forum State;
(iii) to the extent not addressed by sub-paragraphs (d)(i) or (d)(ii), the law applicable by virtue of the rules of private international law of the forum State.
(i) those Principles as specified by the forum State;
(ii) to the extent not addressed by sub-paragraph (d)(i), the law applicable by virtue of the rules of private international law of the forum State.
(2) In the interpretation and application of paragraph (1), regard is to be had to the following:
(a) proprietary issues in respect of digital assets, and in particular their acquisition and disposition, are always a matter of law;
(b) in determining whether the applicable law is specified in a digital asset, or in a system on which the digital asset is recorded, consideration should be given to records attached to, or associated with, the digital asset, or the system, if such records are readily available for review by persons dealing with the relevant digital asset;
(c) by transferring, acquiring, or otherwise dealing with a digital asset a person consents to the law applicable under paragraph (1)(a), (1)(b) or (1)(c);
(d) the law applicable under paragraph (1) applies to all digital assets of the same description;
(e) if, after a digital asset is first issued or created, the applicable law changes by operation of paragraph (1)(a), (1)(b) or (1)(c), proprietary rights in the digital asset that have been established before that change are not affected by it;
(f) the ‘issuer’ referred to in paragraph (1)(c) means a legal person:
(i) who put the digital asset, or digital assets of the same description, in the stream of commerce for value; and
(ii) who, in a way that is readily ascertainable by the public,
(A) identifies itself as a named person;
(B) identifies its statutory seat; and
(C) identifies itself as the person who put the digital asset, or digital assets of the same description, into the stream of commerce for value.
(3) The law applicable to the issues addressed in Principles 10 to 13, including whether an agreement is a custody agreement, is the domestic law of the State expressly specified in that agreement as the law that governs the agreement, or if the agreement expressly provides that another law is applicable to all such issues, that other law.
(4) Paragraphs (1) and (2) are subject to paragraph (3).
(5) Other law applies to determine:
(a) the law applicable to the third-party effectiveness of a security right in a digital asset made effective against third parties by a method other than control;
(b) the law applicable to determine the priority between conflicting security rights made effective against third parties by a method other than control.
(6) Notwithstanding the opening of an insolvency-related proceeding and subject to paragraph (7), the law applicable in accordance with this Principle governs all proprietary issues in respect of digital assets with regard to any event that has occurred before the opening of that insolvency related proceeding.
(7) Paragraph (6) does not affect the application of any substantive or procedural rule of law applicable by virtue of an insolvency-related proceeding, such as any rule relating to:
(a) the ranking of categories of claims;
(b) the avoidance of a transaction as a preference or a transfer in fraud of creditors;
(c) the enforcement of rights to an asset that is under the control or supervision of the insolvency representative.
As one can see, the Principle is quite long and complex.
The starting point is that the law applicable to a digital asset may be chosen either in the digital asset itself (Principle 5(1)(a)) or in the system in which the digital asset is recorded (Principle 5(1)(b)). Thus, precedence is given to the principle of party autonomy. This remarkably resembles the recently adopted sec. 12-107 US Uniform Commercial Code (UCC).
In the absence of a choice of law, the law of the statutory seat of the issuer of the digital asset shall apply, provided that this seat is readily ascertainable to the public (Principle 5(1)(c)). This was one of the key proposals of the EA PIL Working Group. Yet the Principles define the issuer as the person who has put the asset “in the stream of commerce for value” and has identified itself as such as well as its statutory seat (Principle 5(2)(f)). This considerably reduces the provision’s significance. It would, for instance, not apply to those who distribute their assets via airdrop or those who choose not to identify their statutory seat.
If none of these rules apply, the Principles give the national legislator two options: Under Option A, it can submit digital assets to special rules of its national law, to be supplemented by the UNIDROIT Principles. Under Option B, it can directly refer to the UNIDROIT Principles as governing law. In both cases, any remaining gaps will be filled by the law that is applicable according to the conflict-of-laws rules of the forum state.
This latter technique, which effectively substitutes the law of the forum for the search for an applicable law, is known in French law as a substantive rule of PIL (règle materielle de droit international privé). It provides a simple solution to the conflict-of-laws conundrum. That the Principles suggest themselves as applicable law is novel, but well understandable given their goal of legal harmonisation.
Less harmonisation is the default rule, which refers to the conflict-of-laws rules of the forum. No indication whatsoever is given what these conflicts rules should look like. One might fear that this will lead to divergence between national laws. It is to be hoped that they can be overcome by the Joint Project of the Hague Conference on Private International Law and UNIDROIT on Digital Assets and Token, which was recently announced.
— Thanks to Felix Krysa and Amy Held for contributing to this post.