Background of the project
The digital economy has seen tremendous growth over the past decade for several reasons. This has given rise to a large number of digital assets that are commonly used as part of transactions in digital environments and beyond.
The development of distributed ledger technologies (DLT) with sophisticated cryptographic techniques has led to a plethora of new digital assets known as crypto-assets, among which Bitcoin and Ethereum are the best-known examples.
These innovations are disrupting the functioning of economic and financial markets in various areas, including payments and settlements, trade finance, capital markets, and lending. Digital assets, in all their variety of technologies and applications, present significant legal and regulatory challenges for the actors and institutions involved in the smooth functioning of commercial transactions and markets.
Thus, there is an urgent need to reduce legal uncertainty and enhance predictability in dealing with digital assets, especially from a private law perspective.
In this context, following proposals from Hungary and the Czech Republic, and extensive exploratory work, the General Assembly of the International Institute for the Unification of Private Law (UNIDROIT) approved the inclusion of a project on Digital Assets and Private Law Project in the Institute’s its 2020-2022 Work Programme.
The goal of the project was to develop a set of legislative principles relating to digital assets and private law. These Principles provide legislative guidance with best practices and international standards regarding a wide range of private law issues. This includes control of digital assets, transfer, conflict of laws, custody, secured transactions, insolvency, and enforcement.
The Principles have been drafted in an inclusive, technologically and jurisdictionally neutral manner. For this purpose, UNIDROIT has engaged with experts and observers from over 40 countries throughout the project, representing civil law and common law systems in all their varieties.
The Principles are accompanied by an introduction and a commentary to explain their content, guide interpretation, provide examples and assist parties, judges and states in using and adjusting them according to their own needs.
Relationship with existing instruments and projects
Some sections of the Digital Assets and Private Law Principles Project are naturally linked to other UNIDROIT instruments in capital markets. Notably, the Principles on secured transactions in digital assets draw inspiration from the UNIDROIT Convention on Substantive Rules for Intermediated Securities (2013) and the UNIDROIT Legislative Guide on Intermediated Securities (2017).
Coordination has also been ensured with the ongoing UNIDROIT Project on Best Practices for Effective Enforcement and its work relating to the enforcement of digital assets.
Apart from UNIDROIT, the Hague Conference on Private International Law (HCCH) and the United Nations Commission on International Trade Law (UNCITRAL) are also working on the unification of specific legal matters related to the digital economy and DLT innovations.
Therefore, the UNIDROIT Principles are closely coordinated with these other initiatives to avoid overlap. Due consideration has been given to the already developed guidance on particular issues, such as those in the UNCITRAL Model Law on Secured Transactions (2016).
Additionally, experts from all organisations are engaged in ongoing projects to improve the consistency of approaches taken to address issues related to the digital economy and digital assets.
The Principles in the making
The Draft Principles are the result of work carried out by an Exploratory Working Group, 7 Sessions of a full Working Group, four Sub-Groups, more than 12 Drafting Committee sessions, and a Steering Committee especially set up for this Project to solicit comments from UNIDROIT Member States, as well as several ad hoc workshops.
During the past three years, a wide range of legal aspects relating to digital assets have been considered. The Principles define a digital asset as “an electronic record which is capable of being subject to control.” This follows the technologically neutral approach adopted by the project and ensures that the Principles apply to a majority of the digital assets which are commercially transacted in the digital economy.
According to Principle 6(1)(a), a person has ‘control’ of a digital asset if the digital asset, or the relevant protocol or system, confers on that person: (i) the exclusive ability to prevent others from obtaining substantially all of the benefits from the digital asset; (ii) the ability to obtain substantially all the benefit from the digital asset; and (iii) the exclusive ability to transfer the abilities in (i), (ii), and (iii) to another person (a ‘change of control’).
Additionally, the digital asset, or the relevant protocols or system, should allow that person to identify themselves as having the abilities set out in Principle 6(1)(a). The exclusivity requirements are caveated to include exceptions for rules embedded within the digital asset or system and for situations where a person has agreed, consented, or acquiesced to sharing control with one or more other persons.
These requirements contemplate that ‘control’ assumes a role that is a functional equivalent to that of ‘possession’ of movables. However, ‘possession’ in this context is a purely factual matter and not a legal concept.
The Principles expressly recognise that a digital asset can be the subject of proprietary rights. Guidance is also provided on issues related to secured transactions that identifies control as the primary method for achieving third-party effectiveness for a security right in a digital asset.
Principle 16 further recognises that a security right perfected by control has priority over other security rights perfected using other methods.
Alongside these items, the Principles also offer guidance on issues related to conflicts of law, transfers of digital assets (including innocent acquisition and the rights of a transferee), issues related to custody (including the rights of clients, the obligations of custodians, the insolvency of a custodian, and the definition of a custody agreement), as well as procedural law including enforcement. Finally, the Principles also contain provisions related to the effect of insolvency on proprietary rights in digital assets.
Final remarks: Principles on digital assets and private law
The Principles are open for a Public Consultation to be concluded in February 2023. The Principles aim to facilitate transactions in digital assets which move a significant share of the global economy these days.
The Principles will serve as a guide for parties, their advisors, judges, and legislators in handling digital asset transactions. Adopting national laws based on these Principles will promote legal certainty and predictability in domestic and cross-border transactions.
As the Principles and Commentary on Digital Assets and Private Law are anticipated to be completed in 2023, the UNIDROIT Secretariat welcomes any states, industry actors and other interested parties for further inquiries.