The Law Commission’s Project 'Digital assets and ETDs in private international law: which court, which law?' Call for Evidence, Chapters 1 – 3 (II)

Chapter 1: Introduction

The introductory chapter sets the stage for further detailed exploration of private international law (PIL) challenges concerning digital assets and decentralised systems.

The chapter presents the Law Commission's work on emerging technologies, such as smart contracts, electronic trade documents, and digital assets (e.g., crypto-tokens). It emphasises how these technologies rely on distributed ledger technology (DLT) and are growing rapidly, facilitating international trade, asset transfers, and functioning as payment substitutes.

One of the core challenges mentioned is the uncertainty in current PIL frameworks regarding digital assets and decentralised technologies. Issues arise over jurisdiction, applicable law, and the recognition and enforcement of judgments. This uncertainty can add significant costs and risks to litigation. The Electronic Trade Documents Act (ETDA) of 2023 allowed legal recognition for digital trade documents. However, issues of jurisdiction and law application still need to be addressed in detail for digital assets and electronic documents.

The focus is placed on how traditional legal methods can be adapted to account for the decentralised and digitalised nature of these new technologies. The chapter highlights the need for market and commercial insights into how frequently these legal issues occur and their practical implications. It also touches on the problems posed by DAOs, organisations operating via smart contracts without traditional legal structures. The legal status and liability of DAOs and how PIL will apply to them are key questions that need further exploration.

The Ministry of Justice requested the project to address disputes likely to arise from digital contexts, such as contractual, tortious, and property disputes. The chapter also underlines that the Law Commission is only qualified to make recommendations for England and Wales but is interested in responses from Scotland and Northern Ireland. The next step, after gathering responses, will likely involve a consultation paper later in 2024.

Chapter 2: Private International Law – An Overview

This chapter provides an outline of the fundamental concepts of PIL. PIL concerns legal disputes that arise when the parties involved are from different countries or when the events giving rise to the dispute cross national borders.

Key Questions of Private International Law

1. Jurisdiction: In which country's court should the case be heard?

2. Applicable Law: Which law should be applied to resolve the dispute?

3. Recognition and Enforcement: Can a judgment from one country be recognised and enforced in another?

Different Approaches to Private International Law

1. Supranational Law: Using common rules agreed upon by multiple countries. For example, international conventions, such as the Hague-Visby Rules relating to Bills of Lading or the UN Convention on the International Sales of Goods, address specific legal issues.

2. Unilateralist Approach: Each country unilaterally decides which laws apply to cross-border situations. The unilateralist approach reflects its Continental origins in its premise that the substantive private law rights and obligations of persons are set out comprehensively in legislation. This premise means that the unilateralist approach cannot be applied easily, if at all, to the common law system of rights and remedies. However, it can be applied to UK statutes.

3. Multilateralist Approach: Countries agree on a framework for resolving disputes involving foreign laws. The most significant of the multilateralist framework’s principles is that every legal issue that comes before a court “naturally belongs” to one national legal system or another. This concept of legal issues having a “natural home” in one legal system or another is referred to in the literature as all legal issues having an objective “seat” in some legal system. The multilateralist approach asks: “which, of many possible laws, applies on the facts of this case?”

PIL in England and Wales

The multilateralist approach is the dominant framework in England and Wales. The application of the multilateralist method involves identifying the legal system most naturally connected to the dispute, which helps determine both the jurisdiction and applicable law. This means courts consider factors such as where the incident occurred or where the parties reside to determine which law applies. PIL is influenced by the law merchant (lex mercatoria), a body of international trade law developed in the Middle Ages to govern cross-border commercial transactions.

A key theme is the increasing challenge that digital and decentralised technologies, such as DLT and cryptocurrencies, pose to traditional PIL frameworks. These technologies operate across borders, making it difficult to identify a clear territorial connecting factor. The chapter emphasises the practical and theoretical importance of understanding different PIL methods and approaches, especially in the context of digital environments that challenge traditional territoriality in law.

Chapter 3: The Core Problem

While PIL traditionally resolves conflicts between different legal systems, this chapter explores how the internet, digitisation, and DLT have complicated these mechanisms. The central challenge is adapting PIL, which is based on territoriality, to address legal disputes in a borderless digital world.

The Territorial Nature of Law

The principle of territoriality is foundational to both public and private international law. In public international law, territoriality can be thought of in two core ways: the authority to prescribe and the authority to enforce. In private international law, territoriality must be approached from two angles - jurisdiction and applicable law. Jurisdiction deals with the sovereign authority to adjudicate. When it comes to applicable law, first, the unilateralist and multilateralist approaches to the conflict of laws operate on the basis that only the law of one sovereign state can prevail as the applicable law in any given dispute. Second, the multilateralist approach to the conflict of laws proceeds on the theoretical premise that every legal issue has an objective seat in the territory of a single sovereign state. This objective seat of the legal issue is also referred to as the “connecting factor”.

Therefore, territoriality implies that laws apply strictly within a sovereign state's borders. It also suggests that legal authority does not extend beyond those borders unless special provisions apply. PIL relies on territorial connections or connecting factors to identify jurisdiction and applicable law, making it difficult to apply to digital environments where activities are not confined to specific locations.

The emergence of the internet and digital assets has magnified the strain on these traditional concepts. Technologies such as Bitcoin and DLT operate independently of any geographic location, making it increasingly thorny for PIL to determine which laws and jurisdictions should apply.

Challenges of Digitisation

·?????? Internet and Data

As human activities increasingly occur online, traditional territorial boundaries become less relevant. Online actions can occur in multiple locations simultaneously, complicating jurisdictional questions. The fact that an object is intangible does not, in itself, say much as a matter of private international law. The main hurdle is finding some objective feature that convincingly points to one particular sovereign territory (i.e., the connecting factor) in a context where one cannot use physical features in the search for an appropriate connecting factor.

For example, distributed servers present great challenges when attempting to fit them within the current framework. Database "sharding" involves splitting a large database across multiple servers. Since individual servers can handle only a limited amount of data, sharding divides the database into smaller segments, known as shards, which are stored on separate servers. These servers typically use the same core technologies and operate together to efficiently store and process vast amounts of data. The issue is that when a user accesses what seems like a single digital file, multiple servers globally transmit the individual data shards that make up the file to the user. This creates challenges in determining the geographic location of the "single digital file" within a country's borders.

·?????? Online Torts

In the case of online torts (e.g., defamation), the injury might be sustained across multiple jurisdictions simultaneously, complicating the localisation of both the tort and applicable law.

Content published or uploaded in one location can be accessed by users worldwide, so a harmful action committed online could cause harm in multiple jurisdictions. Currently, many legal systems use the lex loci damni rule to determine which laws apply. However, applying this rule could result in courts using different laws and reaching different conclusions regarding whether tort liability exists.

·?????? Distributed Ledger Technology (DLT)

Technologies like Bitcoin and Ethereum represent a shift away from centralised control. No single entity or location can be pinpointed as the seat of activity. This raises questions about how to apply territorial-based laws to decentralised networks. Again, this is not an issue of intangibility but more an issue of decentralisation. This is why the parallel with patents and debts is not helpful. Patents are usually localised by reference to the register in which the relevant entitlements are maintained. Debts are usually localised by reference to the debtor. Both the register and the debtor are centralising concepts. The underlying logic common to both is that these are the places where the object of personal property rights can be effectively dealt with. Identifying a similar centralising concept for DLT is highly problematic, as it touches upon the very essence of how DLTs are built and used. In other words, it is not yet clear whether identifying such a centralising factor is compatible with the DLT notion.

The chapter concludes by recognising the pressing need for legal reform. As digital assets and DLT continue to grow in importance, PIL must evolve to account for the deterritorialised nature of these technologies. However, the chapter also acknowledges that while theoretically problematic, not all of these issues have manifested significantly in practice. Therefore, it is essential to classify and prioritise the challenges that are most likely to create practical legal issues in the near future. Moreover, there are existing rules of private international law that can be extended to apply in the digital, online, and decentralised contexts without undue difficulty. Therefore, rethinking regulation is a question of practical necessity, on the one hand, and degree, on the other.

?