¶ 501
Overview
Scope of the chapter. A dispute about a digital asset that crosses a border raises three questions before any question of substance can be reached. The first is which court may hear the dispute. The second is which law that court will apply to each issue in it. The third is whether a judgment or an insolvency order made in one country will be given effect in another country where the asset, its holder or the intermediary that maintains the holder's account can be found. This chapter addresses the second question in depth and the first and third so far as they bear on the choice of law. It explains why the traditional connecting factor for property, the location of the thing, gives no stable answer for an asset recorded on a distributed ledger; examines the candidates that courts and commentators have proposed in its place; sets out the statutory rule for matters within Article 12 of the Uniform Commercial Code, U.C.C. § 12-107, and the companion rule for security interests, U.C.C. § 9-306B; considers the general American choice-of-law methods that govern every question outside Article 12; reviews the English authorities and the work of the Law Commission of England and Wales; and analyzes Principle 5 of the UNIDROIT Principles on Digital Assets and Private Law, which offers an international model. It then treats the contractual choices made by exchange terms of service, forum and arbitration clauses, jurisdiction against persons unknown, the recognition of foreign insolvency proceedings over tokens, and the law governing a trust that holds digital assets. It closes with drafting guidance and a checklist.
Why the question matters. A choice-of-law question about a digital asset is rarely academic. The law that governs a transfer decides whether the transferee took free of an earlier owner's claim. The law that governs a security interest decides whether the secured party's interest is perfected and whether it has priority over a competing creditor or a bankruptcy trustee. The law that governs a custody relationship decides whether customer assets form part of the custodian's estate on its failure. The law that governs a trust decides whether the trustee had power to deal with the asset at all. Those laws frequently differ, and when they do the answer to the choice-of-law question is the answer to the case.
Three ways of framing the problem. The authorities approach the problem in three ways. The first treats the digital asset as a thing and asks where it is, so that the familiar rule applying the law of the place where property is situated (the lex situs) can be used. The second abandons location and applies the law chosen by the persons who designed the asset or the system on which it is recorded, or by the parties to the transaction. The third treats each issue separately, applying to a contract question the law that governs the contract, to a tort question the law that governs the tort, and to a proprietary question whichever rule the forum adopts for that category. The statutory rules examined in this chapter combine the second and third approaches. The English case law, decided at an interlocutory stage and mostly against defendants who did not appear, has so far used the first.
Relation to other chapters. The characterization of digital assets as property, on which every proprietary choice-of-law rule depends, is treated in see supra ch. 3 for the United States and see supra ch. 4 for England and Wales and other common-law jurisdictions. The substance of Article 12, including control and the take-free rule, is treated in see infra ch. 6, and security interests in see infra ch. 7. Remedies against persons unknown, freezing orders and cross-border recovery are treated in see infra ch. 25, and exchange and lender insolvencies in see infra chs. 27 and 28. This chapter supplies the conflict-of-laws framework on which those chapters draw.
Terminology. This chapter uses "governing law" for the law that a choice-of-law rule selects, "connecting factor" for the fact (a place of residence, an express designation, the seat of an issuer) on which a rule fixes, and "forum" for the court seized of the dispute. It uses "proprietary issue" in the sense of the UNIDROIT Principles, which leave the classification to the law of the forum: broadly, questions about who holds what rights in an asset as against third parties, as distinct from the personal obligations of contracting parties to each other. The terms "key", "wallet", "custody" and "control" have the meanings given in see supra ¶ 180.