Tag: UNCITRAL

Symposium on MLETR and blockchains

I gave a paper in a symposium on the UNCITRAL MLETR (Model Law on Electronic Transferable Records) and blockchains (<a href=”https://www.waseda.jp/folaw/icl/news-en/2019/02/12/6519/”>Here is link</a> to the program) on 16 March 2019 at the Waseda University in Tokyo.

The proceedings were conducted in Japanese except the presentation by Luca Castellani, the legal officer of the UNCITRAL Secretariat who was responsible for this Model Law. So my powerpoint slides and handout (below) are also in Japanese.

I have underscored the potential of public blockchains for disrupting the society and considered whether they meet the requirements of the MLETR. Throughout the analysis, I have compared public blochains with permissioned blockchains and central registries. Each of the requirements of the MLETR poses an analytical challenge with respect to public blockchains.
I will try to write an English version of the paper once I have cleared a backlog of work on my desk.


Bahraini legislation based on the UNCITRAL MLETR

Bahrain became the first to enact a statute based on the UNCITRAL Model Law on Electronic Transferable Records. I have been provided with an English translation of the statute by Jameel Al Alawi, Senior Legal Adviser for the Bahrain Economic Development Board, who was in charge of drafting the statute. With his permission, I post it below.

The Model Law sets out the conditions which must be met for an electronic record to be treated as a “transferable document” (Article 10). The latter is defined as a document that entitles the holder to claim the performance of the obligation indicated in the document and to transfer the right to performance by means of the transfer of that document (Article 2). Bills of lading and warehouse receipts, for example, are covered.

The Model Law adheres to the principle of technology neutrality, which means that the law should neither require nor assume the use of a particular technology for communicating or storing information electronically. Thus, the blockchain technology is not excluded from the Model Law’s scope of application. It is in fact a technology well suited for creating and managing electronic records which purport to replicate transferable documents because it is capable of guaranteeing that there is a single true version of electronic records. 

The Model Law requires the use of a reliable method to establish an exclusive control of an electronic record that replicates a transferable document (Articles 10(1)(b)(i)(ii) and 11(1)(a)). In my previous work, I noted:

The reliability of the above-mentioned methods will be assessed by adjudicators on an ex post (i.e. after the occurrence of a dispute) basis. It would, however, be unfortunate if there were no foreseeability as to which methods would pass the reliability test since the use of such methods would then be deterred. A thought should, therefore, be given to the possibility of compiling a list of reliable methods on an ex ante basis. Such a list would need to be reviewed from time to time because neither the configuration of a central registry nor the algorithm of a blockchain is permanently fixed.

The Model Law lists a number of circumstances by reference to which to evaluate the reliability of a method, including the existence of a declaration by an accreditation body (Article 12(a)(vi)). But it leaves the details to the national laws.

What is interesting about the Bahraini legislation is that it provides for the accreditation of an “operator”, the latter being defined as a person who operates an information system for managing electronic transferable records (Article 1(l)). It sets forth the procedure and conditions for accreditation (Articles 15 and 16), though it delegates to the competent authority to lay out the details of the conditions by means of a regulation. It also provides for the withdrawal of an accreditation. Once an operator is accredited, the reliability of the method used by the operator is to be presumed unless evidence to the contrary is adduced (Article 8(2)). Furthermore, where reliance on an electronic transferable record has caused damage and the electronic record is managed by an accredited operator, it is to be presumed that the damage was due to the operator’s intention or negligence unless otherwise proven (Article 17).

The Bahraini legislation is applicable to electronic transferable records “whether or not an operator is used in respect of these records” (Article 2(1)). Accordingly, it seems applicable to electronic transferable records managed with the use of the blockchain technology. In view of the definition of an “operator” (Article 1(l)), it seems unlikely that any accreditation will be issued with respect to public blockchains. But the administrator of a private blockchain may fall within that definition. It will be interesting to see whether the conditions for accreditation issued by the competent authority will actually cover private blockchains as well as central registries.

Postscript (15 Feb. 2019): Jameel has informed me that the Bahraini statute entered into force on 1 February 2019 but the regulation is still being debated.

 

KLRI/UNCITRAL Trade Law Forum

I was invited to speak at the KLRI/UNCITRAL Trade Law Forum 2018 (Incheon in South Korea on 10-12 September 2018. For the programme, see a link here). The KLRI, Korea Legislation Research Institute, is a government-financed think tank.
My topic was “Cryptocurrencies entrusted to an exchange provider: Shielded from the provider’s bankruptcy?” I attach my powerpoint file below.
Very many thanks to the organisers for invitation and to the audience for stimulating questions.

"Implications of the Blockchain Technology for the UNCITRAL Works" – published.

It has come to my attention that my article “Implications of the Blockchain Technology for the UNCITRAL Works” had been published from the United Nations in November last year.
The 50th anniversary Congress was a big occasion for UNCITRAL and it was my great honour to be part of it.
Here is my article excerpted from the book.

An additional note: In my original manuscript, there were some references to specific chapter numbers. I have noticed that in the published version, they have been changed to “Ch. 0” due to the editorial work which has removed all the chapter numbers from the headings. To see where those were actually referring to, please consult my original manuscript here.

Implications of the Blockchain Technology for the UNCITRAL Works

I will be presenting my thoughts on the subject above in the upcoming Congress of the UNCITRAL for the celebration of its 50th anniversary (4-6 July 2017).
My paper currently on the Congress website is a version which I sent to the UNCITRAL Secretariat some months ago and which no longer represents my latest thinking in some significant respects. I am asking the Secretariat to replace it with the latest version, to which I make a link from here. 
The paper gives a particular emphasis on the topic of proprietary restitution of blockchain-based tokens as an area which calls for a globally unified solution.
Postscript: As from 16 June, the Congress website carries the latest version. Many thanks to the Secretariat for swiftly acting on my request. 

Relevance of the blockchain technology to the draft Model Law on Electronic Transferable Recores (as acknowledged by the latest official document)

My article, “Blockchain Technology and Electronic Bills of Lading“, has examined the draft Model Law on Electronic Transferable Records and the Rotterdam Rules to see whether it is possible to interpret them in a manner compatible with blockchain-based bills of lading. What follows will note how the relevance of the blockchain technology has come to be acknowledged in the latest official document (A/CN.9/920 (2017)) which contains the draft Model Law with the draft explanatory notes.
The draft Model Law accommodates various types of electronic transferable records based on the principle of technology neutrality. The draft explanatory notes explain that reference in the Model Law to electronic transferable record management systems does not imply the existence of a system administrator or other form of centralized control (Para. 167). 
Nothing in the draft Model Law requires a person to use an electronic transferable record without that person’s consent (draft Article 6(2)). The draft explanatory notes state that consent to using distributed ledger based systems may be inferred by circumstances such as the exercise of control on the electronic transferable record or performance of the obligation contained in the electronic transferable record (Para. 48).
The draft Model Law is based on the principle of functional equivalence. Thus, where the applicable law provides for the endorsement of a transferable document, the draft Model Law treats an electronic transferable record as functionally equivalent to a transferable document only if the information required for the endorsement is “included in” the electronic transferable record (draft Article 16 on endorsement). The draft explanatory notes state that the words “included in” have been chosen to encompass instances when the information is logically associated with or otherwise linked to the electronic transferable record (Para. 141). This wide interpretation would accommodate the endorsement of a blockchain-based token through its transfer from one address to another on the blockchain.
Where there is a legal requirement of a signature of a person, an electronic transferable record can meet that requirement only if a reliable method is used to identify that person (draft Article 9 on signature). The draft explanatory notes acknowledge that certain electronic transferable records management systems, such as those based on distributed ledgers, may identify a signatory by referring to a pseudonym rather than a real name (Para. 60). The notes suggest that an identification by a pseudonym and the possibility of linking it to a real name, if need be, would satisfy the requirement to identify a signatory (Para. 60). The explanatory notes further suggest that linking of a pseudonym to a real name may be based on factual elements to be found outside distributed ledger systems (Para. 60). The same interpretation may be given to the notion of “identification” of the person in exclusive control of an electronic transferable record, a requirement which must be met to establish functional equivalence to the possession of a transferable document (draft Article 11(1) on control).

The relevance of the blockchain technology for the UNCITRAL Model Law on Electronic Commerce (1996), the UNCITRAL Model Law on Electronic Signatures (2001) and the UN Convention on the Use of Electronic Communications in International Contracts (2005)

One of the principles guiding UNCITRAL in its works in electronic commerce is the principle of technology neutrality or technological neutrality,[1] which means that the law should neither require nor assume the use of a particular technology for communicating or storing information electronically. The principle helps ensure that the law is able to accommodate future developments. Thus, blockchain technology, though not yet invented when those instruments were created, is not excluded from their scope of application.
It follows that under the Electronic Commerce Model Law, admissibility in evidence or other legal effect may not be denied to information solely on the ground that it is in the form of a data message stored in a blockchain (See Articles 5 and 9). Where only a hash value of information is stored in a blockchain, legal validity may not be denied to the information provided that it is referred to in the data message stored in the blockchain (See Article 5 bis added in 1998). In the context of contracts, an offer and the acceptance of an offer may be expressed by means of data messages on a blockchain (See Article 11 as affirmed by Article 8 of the Electronic Communications Convention). The performance of contractual obligations are also subject to the Model Law and the Convention. This has a particular relevance to a “smart contract,” a contract which can be automatically executed on a blockchain as programmed. Thus, where the communication of data messages such as notices of receipt of services, notices of failure to perform or notices of termination are programmed by a smart contract, they may not be denied legal effect solely on the ground that it is in the form of a data message (See Article 12 of the Model Law; Article 4(a) and Article 8 of the Convention). Article 12 of the Convention only mentions the formation of contract but the enacting States may wish to extend the idea to the phase of performance to cater for a smart contract. Thus, they may stipulate that the performance of a contract by an automated system may not be denied effect on the sole ground that no natural person intervened in each of the individual actions carried out by the automated system.
The principle of technological neutrality does not mean that any technology can create a data message which satisfies the paper-based requirements such as those of writing and signature. Only the technology capable of fulfilling the purposes and functions of the paper-based requirements can create a data message which is deemed to meet those requirements. This is called the principle of functional equivalence, another principle underlying the UNCITRAL works in electronic commerce. Thus, the Electronic Commerce Model Law sets out the conditions which a data message must meet to fulfill the purposes and functions of the paper-based requirements of writing and signature (Articles 6 and 7). The Electronic Signature Model Law elaborates on the conditions for the signature requirement. A data message stored in a blockchain is deemed to meet the requirements of writing and signature if it satisfies the respective conditions. The Electronic Commerce Model Law also provides that there must exist a reliable assurance as to the integrity of information contained in a data message before the information is deemed to satisfy the paper-based requirement that it be presented in its original form (Article 8). The blockchain technology is particularly apt to provide a reliable assurance as to the integrity of information since it is censorship resistant.
[1] See the Guide to Enactment of the Electronic Signatures Model Law (2001) para 5; the preamble of the Electronic Communications Convention. In the context of the Electronic Commerce Model Law, the expression “media-neutral” is used to convey the same idea (See the Guide to Enactment of the Electronic Commerce Model Law (1996) para 24). Only later, has that expression come to be understood as referring to non-discrimination between paper and electronic media (See the Guide to Enactment of the Electronic Signatures Model Law (2001) para 5).

Security rights in cryptocurrency-related assets

Any asset having market value will generate demand for use as a collateral. 
It would be possible to create security rights in a receivable which is denominated in a cryptocurrency in the same way as a receivable denominated in a fiat currency. 
The UNCITRAL Model Law on Secured Transactions (2016) sets forth a special set of rules for bank deposits (Article 25 on effectiveness against third parties and Article 47 on priority). Are they also applicable to a receivable denominated in a cryptocurrency? If the words “authorized deposit taking institution” as contained in Article 2(c) of the Model Law which defines the term “bank account” are interpreted as a generic expression covering any institution authorized to receive deposits, a company which is authorized to provide an online wallet service for the Bitcoin would be an “authorized deposit taking institution.” This interpretation, if adopted, would attract the application of the rules of the Model Law for bank deposits.
Then, would it be possible to create security rights in the units of cryptocurrency? This question concerns cryptocurrency units themselves rather than a receivable denominated in a cryptocurrency. Under the Model Law, any type of movable asset may be encumbered by a security asset (Article 8(a)) and the words “movable asset” is defined broadly as a tangible or intangible asset, other than immovable property (Article 2(u)). So the Model Law seems applicable to cryptocurrency units. 
There are, however, questions of interpretation as to how its rules are to be applied. Thus, a security right in cryptocurrency units would be effective against third parties under Article 18(2) where the secured creditor holds them at his address if it is possible to interpret the possession of a private key as being equivalent to the possession of a tangible asset.
Under the Model Law, the word “money” is defined as currency authorized as legal tender by a State (Article 2(t)). A cryptocurrency would be capable of meeting this definition if any State authorized it as its legal tender. However, money is supposed to be a tangible asset under the Model Law (See Article 2(ll)). Consequently, the special rules for preserving negotiability of money contained in the Model Law (Article 48 on priority) are not applicable to cryptocurrencies. Should it be thought that cryptocurrencies ought to benefit from the same rules, amendments would be needed.
Finally, the Model Law recognizes that the enacting State may specify certain types of asset as being subject to specialized secured transactions under other law (Article 1 (3)(e)) but it recommends such exceptional regimes to be limited (footnote 3).

Blockchain Technology and Electronic Transferable Records

Here is the powerpoint file for my presentation at the seminar “Electronisation of Transferable Documents or Instruments Used in International Trade” (10-11 March 2016) in Singapore (organised by UNCITRAL, Attorney-General’s Chambers of Singapore and the Association of Banks in Singapore (ABS)).