Blockchain and Private International Law Issues

Private International Law (PIL or PrIL)

Deals with cases before a national court that have connections with foreign countries.
Also referred to as Conflict of Laws (CoL).
Dicey and Morris on Conflict of Laws define it as the branch of law dealing with cases having a foreign element, such as contracts made or performed in a foreign country, torts committed there, property situated there, or non-English parties.
Private refers to civil/commercial cases, while international signifies a foreign element.
The application of different laws relevant to the foreign element is possible, hence the term Conflict of Laws.

Foreign Element

A foreign element can arise in three ways:
- Jurisdiction: Does a State offer the protection of its courts?
- Choice of law: Which law is applicable to the transactions?
- Recognition and enforcement of foreign judgments: Which conditions must be met for the judgment to have legal effect abroad?

Blockchain Transactions

Raises questions about jurisdiction, applicable law, and recognition/enforcement of foreign judgments.

Smart Contracts and Jurisdiction

Smart contracts are self-executing contracts with terms written into code.
They raise questions about which jurisdiction's laws should apply in case of disputes.
Private international law principles may be applied to determine the jurisdiction with authority over the smart contract, especially when parties are from different countries.

Cross-Border Transactions

Blockchain facilitates cross-border transactions without intermediaries.
Private international law determines the applicable law governing these transactions.
Parties may choose a specific jurisdiction or applicable law in their contracts.
Blockchain records provide transparent and tamper-resistant evidence in case of disputes.

Enforceability of Smart Contracts

The enforceability of smart contracts depends on their legal recognition in different jurisdictions.
Private international law principles can determine the enforceability and recognition of smart contracts across borders.

Data Privacy and Jurisdiction

Blockchain records often involve personal data storage and processing.
Data privacy and jurisdictional concerns arise when considering different countries' data protection laws.
Compliance with privacy regulations and resolving jurisdictional conflicts are critical, and private international law can address these challenges.

Dispute Resolution

Traditional legal systems may not be well-equipped for blockchain-related disputes.
Parties may include arbitration clauses in their contracts, specifying dispute resolution rules and procedures.
Recognition and enforcement of court decisions or arbitral awards can involve private international law principles.

Recognition of Blockchain Records

The legal recognition of blockchain records as evidence may vary across jurisdictions.
Private international law considerations determine the admissibility and weight given to blockchain records as evidence.

Regulatory Compliance

Blockchain projects face regulatory challenges, and compliance requirements may differ between jurisdictions.
Private international law principles may address conflicts between regulatory requirements of different jurisdictions where blockchain activities occur.

Uniform Private Law Rules

Consideration of uniform private law rules for legal relationships formalised on the Internet, such as the UNCITRAL Model Law on Electronic Commerce.
Questions arise regarding the interpretation of smart contracts and technological neutrality.

United Nations Convention on the Use of Electronic Communications in International Contracts (New York, 2005), Article 12

Addresses the use of automated message systems for contract formation.
A contract formed by the interaction of automated message systems shall not be denied validity or enforceability solely because no natural person reviewed or intervened in the individual actions.
Smart contracts and blockchain transactions can be qualified as “contracts”.
However, the rules do not address every question of private law arising out of the use of such technologies.
Responsibility of States to formulate specific domestic laws, but diversity of domestic laws creates legal uncertainty.
Private international law rules become necessary to remedy legal uncertainty by connecting a legal relationship to a particular legal order of a State, dealing with issues of jurisdiction, applicable law, and the recognition and enforcement of judgments across borders.

Traditional Aspect of PIL

Connecting a legal relationship to a legal order.
Determination of the seat of the legal situation.
Determination of the State with which the legal relationship has the closest connection.
It is hard to determine the “geographical location” of the transaction made online on a blockchain.
States have not taken steps to unify PIL rules via a multilateral treaty, etc.
In the absence of unified PIL rules, domestic conflict of laws rules apply.

Complexity of Applying PIL Rules

Questions relating to the determination of the applicable law, jurisdiction, choice of forum, and recognition and enforcement remain unresolved.
The complexity is due to the global reach of DLT applications, which do not recognise traditional national borders and thus require novel approaches to traditional concepts in PIL.
The main characteristics of DLT-based assets, agreements, and operations impact traditional considerations of PIL.

Specific PIL challenges arising from DLT applications include

Terminology (e.g., what is the definition of “digital assets” on a blockchain).
Applicable law and choice of law (i.e., what is the most appropriate connecting factor defining the law applicable to a transaction via blockchain).
Jurisdiction and choice of court (i.e., how to determine the competent court to resolve a dispute in relation to a crypto asset).
Recognition and enforcement (i.e., how to enforce a foreign judicial decision in relation to a service regulated by a smart contract).
There is no clear PIL solution either concerning the applicable law to digital assets and corresponding transfers, or to the possibility of incorporating party autonomy and choice of law in DLT protocols.
Additionally, there is also no clarity as to which State has the jurisdiction to resolve disputes that may arise, with the very rare exception in which the dispute concerns transactions in which all nodes are located in one State (i.e., one-jurisdiction, permissioned systems).
Moreover, the applicability and enforceability of choice of court agreements involving digital assets still hang in the balance.

Proximity or Close Connection

The principle of proximity or close connection does not work well in a blockchain environment, i.e. where people or entities communicate and transact, peer-to-peer, on the internet, without relying on central control bodies or intermediaries.
With which legal order is the smart contract connected?
Which State has jurisdiction to determine whether the blockchain transaction has a legal scope?
Blockchain operates by the broader use of the Internet and forms part of the metaverse.
The internet is ubiquitous, dematerialized, and intrinsically transnational.
Its use knows no borders – this also applies to blockchain.
The scope of blockchain is international.
The international nature of the blockchain transactions is linked to the nodes.
The nodes that contain identical copies of the same blockchain will likely be located in different States.
It is complicated to identify nodes participating in a specific transaction.
Each transaction contains a potential conflict between the laws of different States.

Seat

The question of the “seat”, or “situs”, of the blockchain or the assets recorded on it poses insoluble problems.
The nature of a truly global register implies omnipresence in different countries, to which the blockchain is either completely unconnected or equally strongly connected.
“Finding the law applicable to the blockchain thus seems like trying to nail jelly to a wall.” – see Blockchain and Private International Law by Andrea Bonomi, Matthias Lehmann, and Shaheeza Lalani, Introduction.

Connections

Persons acting on the blockchain?
Person’s habitual residence or domicile to identify the country in which the assets held or transferred by this person are most closely connected.
Yet, this is extremely difficult because of the pseudonymity of the blockchain.
While all the recordings and transfers on the blockchain are fully transparent to the whole world, the identity of the persons acting is often hidden behind a code that acts like a pseudonym.
I.e., the public key in the case of the Bitcoin network.
Pseudonymity causes considerable difficulty not only for the determination of the state with the closest connection, but also for the determination of the competent court and for law enforcement.

Choice of Parties

Party autonomy?
Choice of the applicable law and dispute resolution means to the parties?
This is especially helpful, i.e. where it would otherwise be difficult or unequal to identify a strong connecting factor to a particular legal system.
Moreover, the choice of law by the parties would also seem to better reflect the liberal philosophy and decentralised operation of blockchain technology, a technique that seems difficult to frame by the application of rigid connecting factors.
Party autonomy, therefore, seems to be ideal to deal with PIL issues arising out of blockchain assets and transfers.
It is also fair and just.
However, this approach has its limitations:
Blockchain coders have a strong aversion to state law and courts, dating back to the first blockchain network, Bitcoin, which has been developed to counter the dominant influence of states on the financial system.
A corollary of the distrust in the state is the distrust in its law and its institutions makes it highly improbable that coders will select an applicable state law to govern their innovations or a competent state court to settle disputes arising from them.
Further, identification of parties? Who will agree?

Characterisation Issue

Other questions arise besides the localisation issue.
PIL operates on the basis of broad categories of legal relations and issues, such as contract, tort or property.
Before any conflicts rule can be applied or drafted, one must therefore know the proper legal category to apply. In PIL, this problem is known as “characterisation”.
The task is made difficult by the staggering variety of blockchain assets, which increases every day.
There is a multitude of different types of information that are recorded on the blockchain, including coins, tokens, or smart contracts.
The first step to achieve legal certainty would be a taxonomy.
Especially difficult in this regard is the question of ownership: to whom do the blockchain assets belong?
This issue can provisionally be addressed from a property law perspective without making a final determination on the proper legal characterisation.
Designing a special conflicts rule for a particular type of asset is not a trivial issue but may encounter fundamental objections.
The principle of technological neutrality also poses a particular obstacle in this regard.
It may require abstraction from a currently dominant technological solution, as well as the formulation of rules that are open for future development.
In traditional PIL, characterisation is only the first step to identify the relevant connecting factors.
In this regard, blockchain also raises specific issues.
Thus, if we assume that crypto assets should be characterised as “property”, the traditional situs rule cannot be extended to them, except if a “fictional” or “elective” situs can be determined – we will talk further in the next class.

Digital Assets as Property

Law Commission of England and Wales: “We consider that the law of England and Wales has proven itself sufficiently resilient, flexible and iterative to accommodate digital assets. But we also think that certain aspects of the law now need reform to ensure that digital assets benefit from consistent legal recognition and protection.”
Property (Digital Assets etc.) Bill 2024: targeted legislative reform: third category of personal property

Alternative Connecting Factors

The place of domicile or establishment of the issuer of the tokens, although his/her identity or localisation are not always easy to determine?
The place of the operator that administers the system (“PROPA”, place of the relevant operating authority)?
The place of the holder of the master key (“PREMA”), which could work at least for permissioned systems?
The law of the regulatory forum? But which criteria should the state’s supervisory authority be predicated?
This might stir positive conflicts (several potentially applicable laws).
At a first look, the task seems easier when it comes to determine the law governing certain blockchain transactions.
Indeed, the applicable law can then sometimes be determined by reference to a related off-chain transaction (i.e., Ricardian contracts, a type of smart contract that is readable by both humans and machines).
The relevant connecting factors often refer to the parties involved (typically, the habitual residence of the debtor of the characteristic performance), so that a localisation of the crypto assets is not required.
However, in such scenarios, the pseudonymity (or anonymity) of the parties raises additional questions.
The identification of the court with competent jurisdiction raises similar problems regarding the determination of the applicable law.
Several traditional jurisdictional criteria are not adapted to disputes related to crypto assets or blockchain transactions, to the point that universal jurisdiction is sometimes presented as an alternative.
The traditional PIL rules on jurisdiction “usually lead to a dead-end” for disputes arising out of blockchain transactions: this is due to the pseudonymity preventing the localisation of the parties (i.e., DAO members or third contracting parties), the exclusive execution of smart contracts on the blockchain, and the lack of connection to state jurisdictions.
Party autonomy poses further challenges.

Example 1: Cryptocurrency Theft

I.e., stealing cryptographic keys, hacking the exchange platform.
The hacking can cause a company to stop their activities and users lose their digital wallets, etc.
Can the user recover their cryptocurrencies or the corresponding amount in the insolvency proceeding of the hosting company?
Rights of a cryptocurrency holder?
Right in rem or right in personam?
Does the holder of the digital wallet have ownership of things?
Does the holder have a claim against the company hosting the platform?

If rights in rem:

The acquisition and loss of personal property rights are governed by the law of the place where personal property is located at the time of facts: lex rei sitae.
The location of the property is that with which the relationship has the closest connection.
Locating the digital wallet emptied by the thief?
Locating the private key of the victim?
Can the State exercise power over the private key of the coin to transfer it into the court’s digital wallet?
See “Realm of the Coin: Bitcoin and Civil Procedure” by Max Raskin at Realm of the Coin: Bitcoin and Civil Procedure by Max Raskin :: SSRN.
Not possible outside one particular jurisdiction
The location of the wallet is too random to constitute a useful connecting factor to establish the location of the stolen cryptocurrencies.
The wallet may indeed be kept in various ways, online and offline (e.g., on an online platform, a personal computer, an offline hardware wallet, or a ‘paper wallet’).
Establishing the location of the cryptocurrency by tying it to the location of the holder’s private key does not therefore provide a satisfactory solution in private international law

If rights in personam:

In most cases, the cryptocurrencies are kept on an online platform and the injured holder tries to obtain reimbursement and/or compensation from the company hosting the platform in the event of theft.
Action in tort enables the holder to recover an amount of money corresponding to the amount of cryptocurrency stolen, if the thief can be identified.
Claims in tort are governed by the law of the State in which the tort was committed or in which the result occurred if the tortfeasor should have foreseen that the result would occur there: lex loci delicti
This rule again makes it possible to establish the geographical location of the legal relationship: the place of the tort, or the place where the result of the tort occurred, is that with which the relationship has the closest connection.
Lex loci delicti requires establishing where the theft occurred, which means the location where the hacking took place.
Establishing the place of the result of the tort means locating the digital wallet emptied by the hacker, which brings us back to locating the private key of the victim.
The hacker may have acted from any location, or even from several locations if several hackers coordinated their efforts.
Locating the place in which the tort was committed may therefore prove extremely difficult and may result in the application of a variety of different laws.
It is impossible to establish a specific connection with a precise place in the case of a tort committed on the blockchain.
Furthermore, the hacker might have chosen to act from a country in which the theft of cryptocurrencies is not considered to be illegal.
The theft of cryptocurrencies is distinctive in that there is not necessarily an online interaction between the hacker and the victim.
The electronic communication devices of the holder of the cryptocurrencies are not directly affected by the hacking if the theft occurs on an online platform.
Likewise, when the cryptocurrencies are stored in a ‘paper wallet’, or even an offline hardware wallet, there is not necessarily an online interaction between the hacker and the victim.
However, the theft of cryptocurrencies as such always requires the use of the Internet.
This feature is a more decisive factor for determining the State with which the theft of cryptocurrencies has the closest connection than the location where the hacking took place or the location of the private key of the victim.
What about the physical location of the person whose cryptocurrencies were stolen?
The law of the State in which the injured party has its habitual residence or its domicile could also be considered as a connecting factor if the rules related to infringement of personal rights could apply by analogy or if the presence of a legislative gap could be recognised.
The place where the holder of cryptocurrencies has his or her habitual residence or domicile does not provide a satisfactory solution since he or she may connect to the Internet from anywhere and may therefore theoretically access his or her digital wallet from any location.
Therefore, the classic conflict-of-law rules cannot be used to determine the applicable law adequately in the event of cryptocurrency theft regardless of the qualification used.
The conflict-of-law rules on rights in rem, just like those relating to tort, need to be adjusted or at least reinterpreted in light of the distinctive features of the blockchain.

Example 2: Smart Contracts A

The example of a money loan contract entered into by two persons, where the lender is domiciled in Switzerland and the borrower in Singapore.
The parties agree that the loan must be repaid in ethers.
If the borrower does not repay by the agreed date and the lender wishes to force him or her to pay.
The first question is whether the fact of agreeing to a payment in ethers is legally binding. The answer depends on the law applicable to the agreement.
Contracts are generally governed by the law chosen by the parties.
Failing a valid choice of law, contracts are governed by the law of the State with which they have the closest connection.
For a money loan contract, the law assumes that the State in which the lender has his or her habitual residence is that with which the contract has the closest connection.
I.e., under Swiss law, cryptocurrencies are not legal tender. See Art. 2 of the Federal Act on Currency and Payment Instruments.
A creditor is therefore under no obligation to accept payment in cryptocurrency.
On the other hand, the parties can agree on the means of payment without it necessarily being a currency with legal-tender status.
Payment in ethers can therefore be validly agreed upon by the parties.
As is the case here, the agreement of the parties on this point is legally binding.
If the parties have used a smart contract to ‘back up’ this loan contract, by providing for the automatic repayment of the loan on the agreed deadline, the smart contract has the effect of transposing the base contract into the virtual world.
The performance of the contract is therefore simplified and does not (in theory) involve any risk, since the payment will be automatically triggered on the agreed deadline.
But there is a potential risk of error in smart contracts is not zero.
Assuming that the computer program itself is infallible, the risk of error is concentrated in the phase in which the base contract is ‘transformed’ into a smart contract.
The computer code is not spontaneously entered into the blockchain: the involvement of a physical person is (still) required to retranscribe the contract onto the blockchain. The code may therefore contain an error.
This risk is all the greater since it is impossible for a legal expert without detailed knowledge of computer programming to verify that the code corresponds in fact to the agreement between the parties.
For the same loan contract, i.e., a payment in ethers might be erroneously made to the digital wallet of a third party due to an error in the code of the smart contract.
If this person can be identified, he or she may be required to return the mistakenly transferred ethers under the rules on unjust enrichment.
The law applicable to this legal relationship is the law of the State in which the enrichment occurred.
In the case of enrichment resulting from an erroneous money transfer, this generally means the State in which the enriched third party is domiciled.
This rule can be applied by analogy to cryptocurrencies. The restitution of ethers can only be ordered if permitted by the law of this State.
If this is not the case, for example if the law of this State does not recognise the validity of cryptocurrency transactions, the question then arises whether a Swiss judge can apply Swiss law to order the restitution.
The parties may agree to apply a particular law, but the agreement of the enriched party may be difficult to obtain in practice.
Further, the smart contract can only produce its legal effects if it is a legally binding agreement under the law governing the contract.
I.e., a smart contract governed by Swiss law can only have legal effects if the Swiss legal order recognises its legal existence.
A choice of law in favour of the law of a State that recognises the legal existence of smart contracts will enable the parties to avoid the risk of the smart contract having no legal effect.
The effects of a choice of law contained in the base contract should in principle extend to the smart contract.
If the contract is governed by foreign law, the recognition in Switzerland of the legal effects of the smart contract (assuming these are valid under the law governing it) will only be compromised if this would lead to a result that is incompatible with Swiss public policy.
The situation becomes more complicated when a smart contract is entered into on the blockchain independently of any base contract.
If the smart contract does not ‘back up’ a base contract, the legal framework is established solely in the smart contract, in other words in the computer code.
In this case, it is no longer possible to refer to an underlying base contract existing outside the computer environment.
In the event of breach of contract, each of the parties to the contract can initiate legal proceedings if he or she knows the identity of the other party.
This question risks being unsolvable in practice, as it is not always possible to identify the other users of the blockchain.

Example 2: Smart Contracts B

It will be all the more difficult to identify the contracting parties in this type of smart contract.
In the absence of specific private international law rules on legal relationships formalised via the blockchain, the court will determine the applicable law after having qualified the legal relationship between the parties.
The application of conflict-of-law rules where a smart contract is in use makes it possible to determine the applicable law adequately, at least when the parties to the base contract have chosen the applicable law.
The situation becomes more complicated when there is no underlying base contract, as in this case it is necessary to determine which law is applicable to the smart contract and whether this law attributes legal effects to relationships formalised solely via the blockchain.

The Limits of the Traditional PIL rules

The examples of cryptocurrency theft and the use of smart contracts have shown that the existing rules of private international law are not suited to the intangible and ubiquitous environment of the blockchain whenever their application makes it necessary to establish the physical location of the blockchain transaction.
This creates a lack of predictability as to the applicable law and jurisdiction, and significant legal uncertainty.
It is impossible to establish the geographical location of blockchain transactions.
The blockchain is distinguished by its decentralised, network-based architecture. Transactions are incorporated in a block that forms part of the blockchain, of which every node (i.e., ‘full node’) in the network has an identical copy.
This results in the distribution of data between network participants.
In this kind of resource-sharing system, the involvement of a node is random and no one node has control over the other nodes in the network.
In other words, transactions made using this technology are located everywhere and nowhere.
Further, there is not even a central server that could be used as an anchor to establish the location of the data.
The limits of the traditional rules of private international law, which seek to establish the physical location of the property or legal relationship, become swiftly apparent in the context of a private international law reasoning.
It must be admitted that the geographical location of blockchain transactions is of no importance: only conflict-of-law rules that are independent of any location criterion are able to provide a satisfactory connection to a national legal order.
While the technique of locating the legal relationship cannot be satisfactorily transposed into a virtual environment, it is possible to get around the difficulty of establishing the location by selecting the applicable law via a choice of law clause.
However, this requires each of the parties to be able to effectively give his or her consent for the application of a certain law.
In this regard, it must be noted that the use of a blockchain occurs within a network that is more ‘closed’ than mere Internet use.
And it is not possible to identify the users.

Alternative Multilateral Way?

Since the traditional approach of private international law is antithetical to the essence of the blockchain, it is necessary to seek a new method that takes the characteristics of this technology into account in order to connect blockchain transactions to a legal order.
The adoption of private international law rules designed specifically for legal relationships formalised via the blockchain would have the benefit of offering a simple means of achieving the objective of predictability of law and the resulting legal security.
Ideally, every State should apply the same rules of private international law, as this would enable genuine legal security.
This level of uniformisation can only be obtained via an international instrument ratified by all States.
However, while the use of private international law rules provides a degree of predictability as to the applicable law (if achieved), there remains the problem that each State’s rules of substantive law will be different.
The question is therefore whether the involvement of States is desirable or whether it would be preferable to allow self-regulation of the blockchain to develop.

Lex Cryptographia?

Lex Cryptographia or lex numerica?
The specific rules might enable the formation of a legal environment that is detached from the legal environment of States.
This position is summarised in the slogan “code is law” or in the belief in the existence of lex cryptographica that is independent of the state.
This would be in keeping with the original philosophy of the blockchain.
The establishment of this kind of anational legal system requires confidence in the ability of participants in the blockchain to self-organise.
But it is also necessary to establish a mechanism to monitor the application of those rules.
The application of lex cryptographia must be monitored using a mechanism that corresponds to the logic underpinning the system, i.e. an online dispute resolution (ODR).
The dispute management role could be assigned to all members of the community – or to a body composed of members elected by the participants – which could be called into action in order to solve the dispute either on a consultative basis or by a decision adopted by vote.
This ‘peer judgement’ mechanism would be perfectly compatible with the community spirit of a peer-to-peer network. It appears inevitable to us that participants in the blockchain will be granted the right to participate, in one way or another, in decision-making power as part of a public blockchain model.

Lex Cryptographia and CDR

An extra step could even be taken by devising a computer dispute resolution (CDR), which could be called into action, or which would be triggered automatically in the event of a system malfunction.
The development of a lex cryptographia combined with a CDR might be the most suitable model of rules of law for open-access public blockchains that are managed by all their participants. However, determining the exact content of the lex cryptographia may prove to be difficult.
Further challenges…
Further discussion next week.