Different functions of electronic transferable records: UNCITRAL’s definition

There are no fewer than three different functions which electronic records transferable on a blockchain may perform with the necessary support of applicable laws. The Model Law on Electronic Transferable Records currently drafted by UNCITRAL is only applicable to a type of electronic transferable record which fulfills one of them.
According to the latest draft published in an official document (A/CN.9/WG.IV/WP.135), for the purpose of the Model Law, an “electronic transferable record” [is an electronic record that contains all of the information that would make a paper-based transferable document or instrument effective and … “(Draft Article 3). The same article defines “paper-based transferable document or instrument” as “a transferable document or instrument issued on paper that entitles the holder to claim the performance of the obligation [indicated] in the document or instrument and …”. It will be possible to use a blockchain to transfer an electronic record which contains all of the information that would make a paper-based bill of lading, for example, effective. Such a record would would constitute an “electronic transferable record” within the meaning of the draft Model Law.
Cryptocurrencies, on the other hand, do not represent entitlement to claim the performance of any obligation. Unlike the traditional forms of electronic money, there is nobody who owes obligation to the holder of cryptocurrencies. If right conditions exist, the market will find an inherent value in cryptocurrencies (or some of them) and recognises them as substitutes for money. Cryptocurrencies are electronic records and transferable on a blockchain. But they do not fall within the definition of the Model Law.
A blockchain may also be used to transfer an electronic record indicating proprietary interests (such as security interests) in tangible or intangible properties. My suggestion for substituting a blockchain-based ledger for the registry of the Cape Town Convention (See my earlier post) relates to this type of usage. Such electronic transferable records do not represent entitlement to claim the performance of any obligation. Hence, they do not come within the definition of the Model Law.
The current Model Law project, therefore, leaves a vast area of use cases of the blockchain technology untouched. I think that UNCITRAL can be instrumental in harnessing the technology in all its applications. 

Difficulty of localisation in choice of law in other areas

In my earlier post, I have noted the difficulty of localising cryptocurrency for the purpose of choice of law for proprietary issues.

The difficulty of localisation in choice of law is not unique to blockchain. The high seas and outer space, too, present the same difficulty since no nation exercise sovereignty over such space. The difficulty does not solely concern proprietary issues but could also arise with respect to other issues such as tort, for which the applicable choice-of-law rules may specify the law of the place of the harmful event. I will discuss three approaches to get around this difficulty below.

One approach is to come up with an alternative connecting factor. Thus, where a ship is involved, its flag may be used as a connecting factor. In a case involving a collision of ships on the high seas, the Sendai District Court in its judgment on 19 March 2009 cumulatively applied the laws of the flag states to a tort claim for damages. It is not, however, easy to conceive of similar connecting factors for cryptocurrencies since their units are stateless by nature.

Another approach is to apply the law of the country with which the issue in question is most closely connected. This approach was taken by the Tokyo High Court in its judgment on 28 February 2013 when it determined the law applicable to a tort claim for damages caused by dangerous cargoes on board a ship while the ship was in transit on the high seas. Since a major (if not the most important) goal of choice of law rules is to ascertain the law of the country with which the issue is most closely connected, this approach pursues this goal directly without relying on other more concrete concept as a connecting factor. This approach could also be taken to determine the proprietary issues of cryptocurrency. But a drawback of this approach is the lack of certainty and predictability since all the relevant factors must be taken into account on a case-by-case basis.
A third approach is to unify the substantive rules of national legal systems. The unification of substantive rules, to the extent it is achieved, dispenses with the need for choice of law. The Cape Town Convention and its Space Protocol would offer many lessons when we consider proprietary issues of cryptocurrencies.

International registry of the Cape Town Convention

The Cape Town Convention (Convention on International Interests in Mobile Equipment) is one of the most successful international conventions in transnational commercial law. At the heart of its system of priorities lies the international registry. It is established by the Supervisory Authority who also appoints the registrar (Art. 17). The Registrar is liable for damages for loss resulting from its errors and omissions or those of its officers and employees (Art. 28(1)).

I think the Convention would benefit a lot from replacing the centralised registry with a blockchain-based decentralised system of registration. It would be much cheaper to operate and would be free from errors or omissions caused by the registrar or its officers or employees.