Prescriptive Jurisdiction in Securities Regulations and ICOs (A further thought)

I presented a paper on the above theme at the conference “Recent Issues on Virtual Currency in the Financial Market” held at the Konkuk University (Seoul, South Korea). The program of the conference is attached below. Many thanks to Prof. Byoung Youn Kim for his invitation.

In the paper presented, I developed my thought which I had expressed in my article written last year (and published earlier this year: See this link for a summary.). I noted the decline in the number of ICOs and attributed it partially to the fragmentation of legal regimes. While the blockchain has technologically enabled borderless fundraising in the form of the ICO, the latter is not legally borderless. 

An idea of global unification of regulations should, however, be resisted because the optimal balance between the facilitation of fundraising and the protection of investors should be sought through regulatory competition. Attempts at the international level should instead be directed towards the coordination of different regulatory regimes. In this connection, whether the conduct test should be maintained is doubtful. It is a classic test for the territoriality principle. Yet, few would support it if asked whether regulations should be applied on the sole basis that the place of the relevant conduct is in the territory of the regulating State even if the conduct only targets foreign States. The effects test, on the other hand, has a good foundation as it allows the regulator to protect the interests affected. The coordination effort on the international level should also be directed towards developing a network of assistance in cross-border enforcement of regulations, especially those of the place of effects.  

For the enterprises wishing to conduct fundraising, the choice will be either to address the investors of the whole world save specific States to avoid being captured by the regulators of such States or to address the investors of the specific States by consciously complying with the regulations of such States. The latter may be called STO (security token offering).

The powerpoint slides used in the presentation are attached below.

“Prescriptive Jurisdiction in Securities Regulations and ICOs (Initial Coin Offerings)”

My article “Prescriptive Jurisdiction in Securities Regulations and ICOs (Initial Coin Offerings)” has been published ((2019) 117-4 Journal of International Law and Diplomacy pp. 1-25). It is based on my presentation in Japan and written in Japanese. The original title and citation are: 高橋宏司「証券関係法規の規律管轄権とICO (Initial Coin Offering)」国際法外交雑誌117巻4号(2019年) 1-25頁. Here is an English abstract.

The ICO is a new method of fund raising using the blockchain technology. It enables tokens to be issued on a blockchain in return for the contribution of funds in either fiat or crypto currencies. It is in vogue in recent years but has generated concern over fraud in a large number of cases. This has kindled the interests of regulators around the globe, who have been watching the space closely. While some countries have introduced an outright ban on ICOs, others have begun to see certain types of ICO tokens as securities with a view to protecting the investors. There is, however, much uncertainty as to the geographical reach of securities regulations as applicable to ICOs. As it is a question of prescriptive jurisdiction, this article begins by examining in the context of securities regulations the various principles underpinning prescriptive jurisdiction, such as the protective principle, universality principle, personality principle and territoriality principle. Since the territoriality principle is the cornerstone of prescriptive jurisdiction in securities regulations, this article proceeds to examine the various tests for the operation of the territoriality principle, such as the conduct and effects test and the transactional test to see how well they suit the regulation of securities of the traditional type. This article concludes by considering whether those tests are also fit to be applied to ICOs. Throughout this article, an intense analysis is conducted on the way the internet has affected the prescriptive jurisdiction in securities regulations and how the blockchain technology may affect it in the future.

Conflict of Laws in Blockchain-Based Crypto-Assets

The Journal of Private International Law will be holding its 8th Conference at the University of Munich from 12-14 September 2019. In response to a call for papers, I have submitted the following abstract. I only mentioned choice-of-law issues because of the word limit. In my actual paper, I may as well touch on jurisdictional issues.

This paper will consider a range of choice-of-law issues arising from crypto-assets on blockchains.

(1) Contractual issues. Suppose that a contract is concluded pursuant to which bitcoins are offered to purchase goods. Given that cryptocurrencies are not a fiat currency and might not be seen as goods, is that contract to be characterised as a “sale of goods”, a “barter of goods”, or a “barter of service for goods” for the choice-of-law purposes? Aside from the question of characterization, blockchains will not raise particularly difficult choice-of-law questions in contract since party autonomy is almost universally adopted.

(2) Issues of non-contractual obligations. If bitcoins are stolen and the victim seeks redress from the offender in tort, where is “the country in which the damage occurs”? Again, if bitcoins are transferred by mistake and the transferor demands restitution from the transferee in unjust enrichment, where is “the country in which the unjust enrichment took place”? Such connecting factors raise difficulties because crypto-assets are recorded in distributed ledgers on a borderless network and accordingly cannot be localised in any specific country. But since obligations are owed by, and to, specific persons, it should not be too difficult to identify, as an alternative connecting factor, the country with which the issue in question is most closely connected.

(3) Proprietary issues. If the provider of a cryptocurrency exchange is entrusted with bitcoins from its customers and becomes bankrupt, the customers may seek proprietary restitution from the bankruptcy administrator. Then, what law is applicable? Unlike tangible assets, for which the prevailing choice-of-law rules specify the lex situs, there is no settled choice-of-law rules for intangible assets. With respect to emissions quotas, a species of intangible assets which, like crypto-assets, are financially valuable, I previously argued for the application of the law of the country where they are registered (“Conflict of Laws in Emissions Trading” (2011) 13 Yearbook of Private International Law 145). But this connecting factor would be unworkable with crypto-assets since they are not recorded on a national registry but on distributed ledgers. So proprietary issues of crypto-assets pose a great challenge to the approach of choice of law. Noting this challenge, I previously suggested applying the law of the country with which the issue in question is most closely connected (A note on 4 November 2015 in my blog: Blockchain, Cryptocurrency, Crypto-asset and the Law). While the task of ascertaining that law is not always easy, the subsequent emergence of consortium blockchains and a “constitution”-based public blockchain should make it easier for such blockchains.

(4) Issues pertaining to transferable documents. Suppose that a company purports to issue its stocks or debentures on a blockchain. What law determines whether they are legally valid stocks or debentures? This question is important because the blockchain technology ensures the uniqueness of record, an essential feature of any electronic form of transferable documents. The clarification of law in this area will be a key to developing the “token economy.”

Jurisdiction in matters relating to a contract for the exchange of cryptocurrency units with traditional currencies

In my earlier post, I have argued that a contract for “the provision of services” within the meaning of Article 7(1)(b) of the Brussels I-bis Regulation should be interpreted as covering both a contract for the exchange of cryptocurrency units and traditional currencies and a contract for the storage of cryptocurrency units. On that reading, the Regulation would give jurisdiction to the courts for the place of provision of the services (For the text of Article 7(1), see my earlier post). This post will consider where that place is in the context of such contracts.
The first thing to note is that this question will not give rise to the same difficulty of localisation as the choice of law for proprietary issues (as to the latter, see my earlier post). This is because the provision of services can be localised in the physical world even if the services deal with cryptocurrencies. Thus, the exchange of cryptocurrency units with traditional currencies does not take place solely on the blockchain. It also involves a transfer of the traditional currency between the account of the user and that of the service provider. Indeed, all necessary operations will have to be conducted at physical location(s). The storage of cryptocurrency units, too, will necessitate crucial operations at physical location(s) such as the safe keeping of the private keys in cold storage.
In the language of Article 7(1)(b), the place of provision of the services is the place “where, under the contract, the services were provided or should have been provided.” Interpreting the equivalent phrase for contracts for the sale of goods, the CJEU held that it should be understood to refer to the actual place of performance only where it was impossible to determine it on the basis of the contractual terms (Electrosteel Europe v Edil Centro (Case C-87/10) (2011)). It is hard to see why the same interpretation should not be applied to contracts for the provision of services. In the context of a contract for the exchange of cryptocurrency units with traditional currencies and a contract for the storage of cryptocurrency units, the physical location effecting the necessary operations described above may be indicated in the contract. The mentioning of the place of incorporation of the service provider or its postal contact address may not be sufficient.
Where the services are provided in several Member States, Article 7(1)(b) is to be understood to refer to the place of the main provision of services as it appears from the contractual terms or, in the absence of such terms, the actual performance of the contract. This is the interpretation taken by the CJEU in Wood Floor Solutions v Silva Trade (C-19/09) (2010). That case was concerned with a commercial agency contract and the CJEU added that where the place of the main provision of services could not be identified by either way, it should be deemed to be the place of the agent’s domicile. Unlike an agency contract, which may involve various obligations, neither a contract for the exchange of cryptocurrency units with traditional currencies nor a contract for the storage of cryptocurrency units would be likely to cause difficulties in identifying the main provision of services.

Finally, it should be noted that those contracts are likely to contain a choice-of-court agreement. If it is valid and effective under Article 26, it obviates the need to address all the complicated issues of interpretation arising under Article 7(1). A choice-of-court agreement is indeed generally concluded to avoid legal uncertainty. The User Agreement of Coinbase, for example, contains a choice-of-court clause in favour of the English courts. It should further be noted that special rules set forth in Section 4 of the Regulation are applicable if the contract is a consumer contract falling within the scope of their application.

VAT on transactions exchanging cryptocurrencies for traditional currencies and vice versa (comment on CJEU judgment 2)

The part of the judgment in which the Court held that transactions which consisted of the exchange of traditional currencies for bitcoin units and vice versa constituted the “supply of services” is relatively unremarkable. The “supply of services” and “supply of goods” are two main categories of economic activities taxable under the VAT Directive (Art. 2(1)). The Directive further provides, ‘“[s]upply of services” shall mean any transaction which does not constitute a supply of goods.’ (Art. 24(1)). Seen in this context, the notion of “supply of services” would hardly be expected to receive a narrow interpretation.

It may, however, be of interest to note that the European Court does not necessarily give the same meaning to a similar concept in different contexts. Thus, the Court once noted, “it is not necessary … to interpret the concept of the ‘provision of services’ set out in the second indent of Article 5(1)(b) of Regulation No 44/2001 in the light of the definition of the concept of ‘services’ in the Community directives on VAT” (Falco Privatstiftung and Rabitsch (Case C-533/07) (2009)). On that reasoning, the Court interpreted the concept of the “provision of services” narrowly for the purpose of the rules for determining the jurisdiction of courts of the Member States. In a future post, I intend to discuss whether a claim in matters relating to a contract for the exchange of cryptocurrencies with traditional currencies would fall within the “provision of services” under what is now Article 7(1)(b) of the Brussels I-bis Regulation and if so, how the provision is to be applied.