Digital Assets in Scots Private Law
‘Digital Assets in Scots Private Law: Innovating for the Future‘ is a research project led by the University of Aberdeen with collaborators from the University of Edinburgh, University of Dundee (formerly from Edinburgh Napier University) and international law firm CMS. The third workshop of the project examined the Intra-UK and International Dimensions of Digital Assets for Scotland: With a Focus on Private International Law Matters and Developing International Frameworks. The Aberdeen project team, including Burcu Yüksel Ripley (University of Aberdeen), Alisdair MacPherson (University of Aberdeen) and Luci Carey (University of Aberdeen), has kindly provided the editors of the EAPIL blog with a post overview of some of the points addressed during the workshop.
Introduction
The third workshop of the University of Aberdeen’s research project ‘Digital Assets in Scots Private Law: Innovating for the Future’, funded by the Royal Society of Edinburgh (RSE), was held on 12 September 2024. The workshop examined intra-UK and international dimensions of digital assets for Scotland, with a focus on private international law (PIL) matters and developing international frameworks, with participants across the UK and Europe from the judiciary, academia, legal practice including law reform, the Law Commission of England and Wales (LCEW), the Scottish Government, Liechtenstein’s Government Office for Financial Market Innovation and Digitalisation, and international organisations, including the United Nations Commission on International Trade Law (UNCITRAL) and the Hague Conference on Private International Law (HCCH). This blog article provides an overview of some of the points addressed during the workshop (for further details, please see the workshop report).
International Legal Frameworks on Digital Assets
The participants first considered relevant international initiatives by UNCITRAL, the International Institute for the Unification of Private Law (UNIDROIT), and the HCCH.
UNCITRAL has adopted important frameworks to facilitate end-to-end digital trade, including the Model Law on Electronic Transferable Records 2017 (MLETR), and build a trusted and secure digital environment. UNCITRAL’s ongoing initiatives include a broad stocktaking exercise to examine existing texts; a guidance document on paperless trade to facilitate business-to-government exchange of trade-related data and documents electronically; and finalisation of the development of a guide, in coordination with the HCCH, on the use of distributed ledger technology (DLT) in trade. Future legislative work may arise from ongoing exercises, including consolidation of e-commerce texts, security interests on new types of assets like digital assets, and the use of decentralized autonomous organisations particularly for governance. The participants observed various global emerging trends, including the uptake for MLETR adoption, movement towards interoperable digital trade ecosystems and specialised service providers. They also highlighted the need for PIL input.
The participants next considered the UNIDROIT Principles on Digital Assets and Private Law (DAPL Principles), which is an international instrument designed to facilitate transactions in types of digital assets often used in commerce and which deals with private law questions. It is not a model law or an entire code, but it provides principles for national states to use, partially or as a whole, depending on their needs in devising their own laws. The participants considered the DAPL Principles’ functional and (technology and jurisdiction) neutral approaches among their benefits while noting that the Principles are imperfect and incomplete. Regarding Principle 5 on the law applicable to proprietary issues in respect of digital assets, it was observed that the extend of its scope of application would depend on the forum’s qualification of issues as proprietary. It was queried why the DAPL Principles do not address international jurisdiction given than they are only a set of principles and that Principle 5(1)(d) might become the key connecting factor to apply in the waterfall leading to the lex fori but with no accompanying rules on jurisdiction. Other comments were concerned with subsequent change of choice-of-law or of statutory seat, depeçage, the law specified in the system under Principle 5(1)(b), and criteria that an issuer has to fulfil for the application of the law of the issuer’s seat under Principle 5(1)(c). Some participants expressed the view that the US Uniform Commercial Code (UCC) Article 12 on Electronic Controllable Records, which Principle 5 was inspired by, should not have been the foundation for global harmonisation on digital assets. Additionally, some participants questioned whether the UNIDROIT DAPL Principles were the right place for providing choice of law rules on digital assets.
The discussion then moved on to the HCCH’s Project on Digital Tokens, which aims to study PIL issues relating to digital tokens. As mandated by the Council on General Affairs and Policy (CGAP) of the HCCH, the Permanent Bureau (PB) undertakes this project in partnership with relevant subject-matter experts and observers and in recognition of the importance of avoiding fragmentation among legal instruments developed by different intergovernmental organisations on related subject matter, including the UNIDROIT DAPL Principles. ‘Tokens’, in the context of the project, refer to ‘virtual representations, stored electronically on decentralised or distributed storage mechanisms’. The project focuses on representative concrete use cases and includes consideration of relevant (overriding) regulatory frameworks as necessary. The project excludes securities, Central Bank Digital Currencies, and carbon credits due to separate projects the HCCH is undertaking or is involved with regarding them. The PB will report to CGAP at its meeting in March 2025 on the outcomes of this study, including proposals for next steps.
Private International Law Aspects of Digital Assets in Scotland
The participants next considered PIL aspects of digital assets in Scotland and explored the scope for PIL reform in Scotland concerning digital assets.
The discussion started with the features of DLT that pose certain challenges for PIL, including global nature and reach, disintermediation, the distributed nature of the ledger, and pseudonymity. It was noted that there is no specific PIL provision and no PIL case regarding digital assets in Scotland. The work of the Scottish Government’s Expert Reference Group on Digital Assets focussed on substantive law matters. The LCEW’s ongoing law reform project on digital assets and electronic trade documents (ETDs) in PIL is being conducted for recommendations for England and Wales only. However, some PIL rules and the Electronic Trade Documents Act (ETDA) 2023 considered under that project apply across the UK, which make that project important for Scotland too.
The discussion next focused on some key preliminary questions and determination of the applicable law, including foreign element/internationality, characterisation and arguments making a distinction between (i) on-chain situations, involving (multilateral) relationships within the system, which are internal and contractual, and (ii) off-chain situations involving (bilateral) relationships external to the system and can be e.g. proprietary.
For contractual matters, it was observed that the application of the provisions of the Rome I Regulation to permissioned systems does not seem problematic and can result in the application of a single law (i.e. the chosen law if there is a valid choice of law under Article 3; or in the absence of a choice, the law of the habitual residence of the company that owns or operates the system as the service provider (under Article 4(1)(b)) or characteristic performer (under Article 4(2)). However, uncertainties exist for permissionless systems which typically have no choice of law or no obvious service provider or characteristic performer whose law could be applied. The closest connection test in Article 4(4) is difficult to apply to them because of decentralisation. Consumer protection was further considered.
For non-contractual matters, the limited utility of party autonomy was noted concerning digital assets under Article 14 of the Rome II Regulation, and, in the absence of choice of law, uncertainties exist regarding localisation, for example, in determining the law of the country in which the damage occurs under Article 4(1) for tort/delict.
For proprietary matters, the lex situs is predominant in Scots PIL but it is not clear how the Scottish courts would decide the situs of a digital asset underpinned by DLT. In England, there is no settled authority on this matter, with different court decisions referring to the place of domicile or residence of the owner. It was suggested that the Scottish courts may take a similar view on the matter based on a habitual residence or place of business test, but with reference to the ‘last known holder’.
In terms of the scope for PIL reform on the applicable law, it was suggested that, for cryptoassets, the developments in England and Wales and international developments (including HCCH’s work) in the area are to be monitored closely in Scotland, rather than looking into an immediate PIL reform in Scotland. For ETDs, there seems to be some justification for expedited PIL reform to increase legal certainty given the absence of PIL rules in the ETDA 2023 and because PIL rules in some other legislation (e.g. Bills of Exchange Act 1882) are not very suitable for application to ‘electronic’ documents. With reference to the LCEW’s ongoing law reform project including ETDs in PIL, it was also suggested that there would be benefits of UK-wide reform to lessen the likelihood of intra-UK conflicts.
The discussion then moved on to jurisdiction with some preliminary points, including suggestions for PIL classification of digital assets as moveable property while being mindful that PIL classification is a functionally distinct exercise from domestic law classification; the position regarding blockchain in intimation (or an equivalent) in Scotland; and the role of the lex situs and of the lex fori in relation to jurisdictional grounds. Regarding domicile as general approach in the Civil Jurisdiction and Judgments Act (CJJA) 1982, it was noted that a person may be sued, ‘where he has no fixed residence, in a court within whose jurisdiction he is personally cited’ under schedule 8, rule 2(a). It was queried whether there is scope in Scots law to advocate this rule where the service of proceedings was possible via a non-fungible token (NFT) airdrop against persons unknown and all other avenues have been exhausted.
Regarding special jurisdiction for contract and ‘the place of performance of the obligation in question’ (schedule 8, rule 2(b); schedule 4, rule 3(a)), it was raised whether this is the place of delivery or control of digital assets. For delict (schedule 8, rule 2(c); schedule 4, rule 3(c)), the lack of jurisdiction for economic loss was noted as a key issue for digital assets. Regarding exclusive jurisdiction, it was queried whether some form of public register for digital assets could be advocated which would allow jurisdiction in relation to validity of entries in the register (schedule 8, rule 5(1)(c); schedule 4, rule 11(c)).
For the HCCH Convention on Choice of Court Agreements 2005 and HCCH Convention on the Recognition and Enforcement of Foreign Judgments in Civil or Commercial Matters 2019, in force in the UK from 1 July 2025, it was argued that some exclusions in Article 2 could be examined further in Scots PIL concerning digital assets.
Regarding forum conveniens, it was observed that forum conveniens could enable a pragmatic role for Scottish courts in shaping PIL’s contribution to dealing with digital assets.
In relation to a possible PIL reform on jurisdiction, it was suggested that Scotland needs to be future-proof as a forum of choice. The CJJA 1982 schedules 4 and 8 can broadly apply to jurisdictional aspects of digital asset disputes, with some points requiring further attention and consideration. It was suggested that the options for the future could be incremental interpretation by courts, or adaptation through further additional paragraphs within schedule 4 and 8, or a combination of both approaches.
The discussion next focused on issues in Scottish legal practice concerning digital assets, starting with ETDs. Although the ETDA 2023 was considered by some workshop participants as a ‘game-changer’ in the market, it was argued that it has not changed, and possibly will not change, legal practice very much in Scotland which, inter alia, relates to the ETDA 2023’s drafting technique. For a document in the statutory open list of potential ETDs, e.g. a bill of lading, the change the ETDA 2023 makes is about evidence (proving electronic material). However, even evidential issues are likely to be very rare occurrences in Scottish courts if the bill of lading includes arbitration or exclusive law and jurisdiction clauses in favour of England (which is very common). The merits would be heard in England (usually in London as the chosen forum) under English law, with the only possible involvement for Scottish fora being to enable ship arrestments for the obtaining of security for the claims made in English proceedings for which the applications would unlikely be affected by the form of the bill of lading.
In litigating cases concerning digital assets in Scotland, it was noted that the first problem would be the identification and designation of the defender, followed by the acquisition of jurisdiction over them. For contract cases, the main difficulty would be in the acquisition of jurisdiction over the defender in Scotland in the existence of exclusive jurisdiction (or arbitration) clauses in favour of a non-Scottish forum as that would likely be the end of the action in Scotland. In other cases where the Scottish court has jurisdiction, the question becomes whether the fact that the subject matter of the dispute is a digital asset, or relates to such an asset, has any real significance for the prosecution of the case. Regarding applicable law, issues relating to proof of the foreign law could possibly arise.
For delict cases, the identification of the defender and the acquisition of jurisdiction would be potentially more difficult. In contrast to England, one cannot sue ‘persons unknown’ in Scotland. The primary problem for the pursuer in a fraud case would be the need to identify and trace the defender, and to establish whether any assets belonging to him against which any decree could be enforced can be found somewhere that would recognise a Scottish decree (judgment).
Although, for Scots law, the consequences of digital assets being, or not being, property which can be possessed are significant, particularly in relation to remedies and interim protective measures which may be sought, the need to identify the defender remains. Even if the defender was identified and located in Scotland, the asset might not be capable of being arrested or attached as protective measures. The conditions imposed in s.27 of the CJJA 1982 to obtain a warrant for interim attachment or arrestment or inhibition of an asset on the dependence of pending foreign litigation would raise significant obstacles in relation to digital assets.
Experiences from Jurisdictions Across and Beyond the UK on Digital Assets
The participants then considered experiences from England and Wales, Switzerland and Liechtenstein.
The discussion started with the consideration of ETDs in England. It was noted that many documents, particularly the ones used in trade finance, usually do not have a governing law clause. The main concerns regarding PIL relate to electronic promissory notes and bills of exchange since conflict of laws rules in s.72 of the Bills of Exchange Act 1882 are intended for paper ones only. In contrast with MLETR, the ETDA 2023 is silent on whether it recognises and protects ETDs wherever they are issued and under whichever law. It was observed that governing law clauses designating English law are now being inserted to such documents based on the thinking that s.72 of the Bills of Exchange Act 1882 would then not apply to those documents because there would be no conflict of laws situation and the application of the ETDA 2023 would be ensured.
Observations were made on the emerging trends in England, including market involvement with various initiatives, resulting in the emergence and expansion of market experts; reliance on common law in the drafting method of legislation for English law and for some UK-wide statutes (e.g. ETDA 2023) which raises issues with leaving matters to the judiciary’s interpretation and relying on case law development; and the development of market standards.
The discussion next moved to digital assets under the private (international) law of Switzerland which amended its law in 2021, to respond to the developments of DLT, with a framework incorporating provisions into the existing federal laws, including the Swiss Code of Obligations and PIL Act. New articles were incorporated into the Code of Obligations on ledger-based securities to provide a private law regime for tokens registered on a blockchain (Article 973 and further of the Code of Obligations). Tokens become instruments comparable to securities with their own legal effects.
The Swiss PIL Act was also amended concerning the applicable law. Article 145a was introduced on the law applicable to a transfer [of a claim] by means of an instrument, which is the main provision addressing the applicable law of digital assets. It provides for the application of the designated law in the instrument representing or transferring the claim. If there is no designated law, the law of the seat of the issuer or, failing such, of its habitual residence applies. The issuer refers to the debtor of the claim. As regards the pledging, Article 105 provides an exception that in the absence of a choice of law, the law of the state of the pledgee’s habitual residence applies. The scope of application of Article 145a was also addressed at the workshop, as well as Article 106 on the applicable law of documents of title and equivalent instruments.
The discussion then focused on the experience of Liechtenstein which enacted the world’s first comprehensive legal framework for the token economy in 2019 by the Act on Tokens and Trustworthy Technology Service Providers (TVTG) in force since 1 January 2020. The TVTG contains regulatory provisions as well as a civil law section dedicated to private law issues. The TVTG sets out requirements of registration and supervision of TT Service Providers with headquarters or a place of residence in Liechtenstein. The TVTG applies to tokens issued by Liechtenstein TT Service Providers or if the parties declare its application. In these cases, the token is considered to be located in Liechtenstein and subject to the TVTG. Party autonomy was considered as the most reliable option to adequately provide legal certainty in this context given complexities with identifying and applying other connecting factors (e.g. based on location) in decentralised and digital environments. It is important to ensure to link the issuance and transfer of digital assets to a legal system which recognises the intended legal effects of that issuance and transfer.
In the absence of choice of law in favour of the law of Liechtenstein, challenges remain in determining the law applicable to tokens generated outside of Liechtenstein based on the connecting factors available in Liechtenstein’s PIL.
Thanks and Next Steps
The authors are very grateful to the RSE for its generous financial support for this project and to the participants for their invaluable contributions at the workshop.
The project’s final event will be a webinar taking place on 26 November 2024 at 13.00-14.00 (UK time). The webinar is free to attend but requires registration here.