Modern Abstract Architecture in City of London

Proposed rule would be implemented by statute and would give primacy to parties’ choice of governing law and jurisdiction.

By Stuart Davis, Nell Perks, and Matthew Unsworth

There is at least a tentative consensus in English law that cryptocurrencies and other digital assets are capable of giving rise to property rights.[1] However, there remains considerable uncertainty around which laws should govern proprietary disputes about digital assets and which courts should have jurisdiction over those disputes.

The Financial Markets Law Committee (FMLC) explained the crux of this problem in their initial report on digital assets in 2018.[2] Traditionally, a question as to rights or entitlement to personal property is governed by the law of the place where the property is situated (lex situs).  But this rule is ill-suited to digital assets which, by their nature, are intangible, digitised, and constituted on a decentralised ledger shared across a network of participants in potentially any number of jurisdictions.

A New Governing Law “Waterfall”?

In its latest report, published last week,[3] the FMLC proposed enacting a new statutory rule to determine the governing law applicable to a distributed ledger technology (DLT) system or digital asset. The proposed rule would give primacy to any law chosen by participants — in other words, the law designated by the DLT system that participants are deemed to accept when they transfer, acquire, or deal in digital assets. In the absence of a choice of law, one of a “waterfall” of alternative tests will apply.

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The FMLC considers this approach is most likely to protect the “safe, efficient and effective operation” of DLT systems, as well as the liquidity of digital assets held and transferred within those systems. Failure to uphold participants’ choice of law may lead to a host of undesirable consequences:

  • Participants’ (and future participants’) confidence in a DLT system may be undermined by the prospect of an unexpected governing law being applied to their disputes;
  • The operator or administrator of a system may find it difficult to take appropriate and relevant legal advice if the governing law is unclear; and
  • Court orders in relation to a system applying a law other than that chosen by participants may be of “little or no practical effect” if participants refuse to comply and are beyond the court’s in personam enforcement jurisdiction.

Jurisdiction

There is similar uncertainty as to which courts should have jurisdiction over proprietary disputes related to digital assets — and here, too, the FMLC recommends statutory intervention. The FMLC’s proposal would modify the Civil Procedure Rules to introduce a new gateway applicable to claims that relate wholly or principally to digital assets on DLT systems. The courts of England and Wales would have jurisdiction to decide on a dispute if:

  • The digital asset or the DLT system contained an express choice of jurisdiction in favour of the courts of England and Wales; or
  • In the absence of a choice of jurisdiction, pursuant to the governing law waterfall outlined above, the digital asset or DLT system was governed by the law of England and Wales.

International Perspectives

The FLMC is not alone in proposing a waterfall of tests to determine questions of governing law and jurisdiction in respect of digital assets. In 2022, the United States introduced Article 12 as an amendment to the Uniform Commercial Code to create a legal regime for electronic intangible assets. More recently, in May 2023, the UNIDROIT Governing Council adopted a set of UNIDROIT Principles on Digital Assets and Private Law. While the nature and sequence of the tests in each waterfall vary, all three seek to uphold any choice of law (and, with the exception of the UNIDROIT waterfall, jurisdiction) by participants in a DLT system.

Given this apparent consensus, the FMLC hopes that more and more developers and operators of DLT systems may be encouraged to specify a governing law — and that the resulting legal certainty will enhance the liquidity and value of participants’ digital assets.

[1] See, for example, the judgment of Bryan J in AA v. Persons Unknown [2019] EWHC (Comm) 3556, which was endorsed by the Court of Appeal in Tulip Trading v. Bitcoin Association for BSV [2023] EWCA Civ 83. See also the Law Commission’s Final Report on Digital Assets (available here: https://lawcom.gov.uk/document/digital-assets-final-report/).

[2] See here: https://fmlc.org/publications/report-finance-and-technology-27-march-2018/.

[3] See here: https://fmlc.org/publications/paper-digital-assets-governing-law-and-jurisdiction/.