Digital assets and their physical geography — a view from LIDW 2023

A panel, chaired by Helen Pugh of Outer Temple Chambers, tackled the thorny issue of digital asset disputes and the approach of the courts when determining the applicable/governing law and court jurisdiction.

The conflict of laws issue

The problem was succinctly set out in the Law Commission pre-consultation paper ‘Digital assets: which law, which court’:

‘In recent years, the Law Commission has undertaken a range of work on emerging technology, including digital assets and electronic trade documents. In each of these law reform projects, several conflict of laws issues have been identified, including the problem of determining which law applies to tech-related disputes, and which court has jurisdiction to hear such disputes.

With digital assets becoming increasingly common in the “virtual world”, particularly where they are distributed internationally, there are inherent difficulties in determining the geographical location of these intangible objects, as well as associated acts and actors.’

These are very difficult issues to consider both in terms of the way in which the courts of England and Wales approach such disputes, ie whether the application of the existing conflict of law rules is appropriate, as well as how it is addressed within other jurisdictions. Which laws apply and which court has jurisdiction can have a significant bearing on whether a party can obtain legal redress. The need for legal certainty as to how these two issues are determined is therefore paramount. While this may be attainable within a specific court jurisdiction, there is considerable risk of conflicting approaches being taken by courts in other jurisdictions.

Application of conflict of laws

The good news is that, as the panel noted, a conflict of laws issue is unlikely to arise when dealing with contractual disputes in this arena, given that most contracts tend to include a jurisdiction and applicable law clause. Many of the digital assets on decentralised systems will still have some form of contract between the parties.

However, the same cannot be said of non-contractual disputes (eg fraud) and/or disputes involving third parties (eg disputes as to title) where such clauses are notably absent and the courts have to apply the existing conflict of law rules which tend to rely on geographical connecting factors for the jurisdiction. The obvious difficulty with this, arising from the decentralisation of such assets, is that there are no national barriers. Key considerations:

• Applicable law: When considering applicable law, the authorities provide that crypto assets can be a form of property although various comments throughout LIDW23 (in this panel session and others) debate this approach. The courts will therefore look to the lex situs. The issue is how this can be applied when dealing with intangible property. The courts have tended to apply it by analogy by using the concept of ‘control’ but how is this applied to cryptocurrency? There are many difficulties with this with examples given such as is there a central point of control? What is the place of the asset? When is this all considered ie at the time of the application?
• Jurisdiction: easier if the defendant is in the jurisdiction although forum non conveniens may come into play. Where the defendant is not, permission to serve out is required and many of the gateways require connecting factors to a jurisdiction. It can be really difficult to determine where the asset is located or where the acts complained of happened.

It was noted by the panel that where a digital asset is tethered to a physical asset, there is less likely to be a problem as the lex situs will be determined in line with that of the physical asset.

Existing case law

When considering the existing case law in this area, some overarching considerations were raised:

• it simply shows an emerging position—one which may change—given that these were interim applications decisions where the issues were not properly contested; the claimant simply needing to show a reasonably arguable good case
• the cases have tended to deal with bilateral disputes by focusing on connecting factors between the parties. However, it is questionable as to whether this approach is appropriate when dealing with non-bilateral issues which may affect third parties. For example, the remedy sought would affect not only the claimant but also all users of the blockchain. Blockchain works on the basis of consensus between the users of the network and it is therefore essential that the court does not place the needs and concerns of one user above that of all the others
• the focus of these cases has been on bitcoin which is an outlier of the many different types of digital assets.  Therefore, should the decisions as to it being property with a focus on the lex situs apply to other forms of digital assets
• many of the considerations have now been dealt with through amendments to the service gateways in October 2022 and new issues will most likely emerge that are not covered by the case law

The issue of control has been a key factor. The panel referred to the STEPS guidance note which considers ‘control’ of the private key as being the most important consideration and this dove tails in with the Law Commission’s expected position that a necessary condition for change of title is for a change of control.

A quick canter through the case law, revealed that although the issue of control of the asset seemingly underpins the decisions, there has been divergence between the courts as to location with some looking to the residence of the individual/business (a factual consideration) while others have looked to the domicile (a legal question). The cases are generally well known starting with Ion Sciences (2020) through to LMN v Bitflyer Holdings Inc (2022).

Insights into the position in other jurisdictions

Insight was also provided as to the position in other countries:

• US—there has been considerably less judicial activity in this area. Of note was the Uniform commercial code which has recently been amended to address the transfer of property rights where property is a digital asset.  However, each state can chose whether or not to adopt the changes and it only applies intra state and therefore would not apply in cross border cases.
• UAE mainland courts—the courts will always apply UAE law regardless of any agreed applicable law
• UAE and the financial free zone– the courts tend to adopt English common law and so will generally take the same approach as the English courts
• DIFC – the position is not clear at the moment but there is ongoing work with a digital law reform project

The panel also touched on the issue of intermediated securities and the application for digital assets with reference to the EU directives and as well as German draft legislation allowing bonds on blockchain.

The way forward

In England and Wales much will depend on the approach of the Law Commission. With its consultation not due to launch until the end of 2023, in the short term, at least, the courts will be left with trying to address the conflict of laws issues which arise by application of the existing rules. The hope might be that eventually there will be an international approach but the wheels of motion turn very slowly in that respect and ultimately it would take years to get to that point.

Notes:

The Law Commission Report can be accessed on their website: here.

A number of the judgments in this area refer to Andrew Dickinson’s chapter on conflict of laws in the textbook book: Cryptocurrencies in Public and Private law.

Panel members:

Helen Pugh, Outer Temple Chambers

Marc Jones, Stewarts Law

John Lee, Travers Smith LLP

Kathryn Matthews, Meister Seelig & Fine PLLC (US)

Justina Stewart, Outer Temple Chambers