Proprietary Rights in Digital Assets and the Conflict of Laws

Abstract

The law governing rights with third party effect (proprietary rights, rights in rem) in digital assets has been a point of controversy for some time, in particular with regard to crypto assets. Crypto assets exist on distributed ledgers and therefore cannot be ‘located’ in the way tangible assets can, but they cannot readily be qualified as ‘rights’ either. This has led legislators and organisations worldwide to develop a broad range of different solutions with regard to the determination of the applicable law. Broadly speaking, proposed solutions can be divided into two groups: the first group of solutions (‘party-oriented’ solutions) takes the location of the current holder, transferor or security provider as the connecting factor, or the location of an intermediary holding the assets in custody for the holder, transferor or security provider, or the law governing the agreement with the intermediary. Advantages of these solutions include their simplicity and the legal certainty they provide for bulk transactions where the identity and location of the parties is known. Disadvantages include complications in the context of chains of assignments, joint holders, and changing locations, and of course generally unknown identity and/or location of the relevant party. The second group of solutions (‘asset-oriented solutions’) seeks to achieve uniformity of results within one and the same class of assets, trying to ‘locate’ a particular crypto asset in accordance with a choice of law made with regard to the whole class of assets or the whole ledger (elective situs) or some other objective criterion characterising the whole class of assets (such as the seat of the issuer). Any solution will normally end up with a waterfall of connecting factors, so the pivotal point is what should be at the top and at the bottom of the waterfall.