The UK Law Commission has opened a consultation addressing one of the most complex challenges in digital asset law: determining which country’s laws apply when disputes arise over cryptocurrencies and decentralized networks. Traditional legal rules that rely on physical location break down when applied to distributed blockchain systems. The Commission proposes a groundbreaking supranational approach that considers protocol whitepapers and network participant expectations rather than attempting to force fit existing territorial rules.
The jurisdictional puzzle
The Law Commission’s latest consultation on digital assets tackles a fundamental problem of decentralization. When legal disputes arise involving digital assets, where is the appropriate jurisdiction and which country’s laws should apply? This challenge is particularly acute for decentralized systems involving peer-to-peer transactions though it remains clearer for centralized platforms. The Commission also published an FAQ relating to permissioned networks.
The stakes are high. The UK is widely used as governing law for international commerce which explains why it has sought to address these complex digital asset issues. The wide disparity between countries makes determining applicable law crucial. Some regions like the UK recognize digital assets as property. Others do not and some ban them entirely.
With decentralized networks and peer-to-peer transactions it becomes nearly impossible to define the location of relevant applicable laws. Even if location could be determined it might not serve justice if digital assets lack property recognition in that jurisdiction.
The limits of traditional rules
Conventional private international law relies on the lex situs rule: the law of the place where property is located governs legal matters concerning that property. For physical objects like houses or cars location is usually obvious.
Intangible assets present the first challenge. They exist “nowhere” so territory becomes irrelevant. Private international law then looks to personal connections particularly where a person habitually lives. For debts the relevant question becomes: where does the debtor live?
Digital files add another layer of complexity. If stored offline the relevant location would be where the storage device sits. If stored across multiple devices which location matters most? Where were the files originally created? For cloud-hosted files the servers’ location or the cloud storage firm’s jurisdiction typically provides the connecting factor.
The blockchain challenge
Bitcoin and similar permissionless blockchains with nodes distributed worldwide break these traditional approaches entirely. The Commission uses the term “omniterritoriality” to describe this phenomenon. However not all distributed ledger technology objects face these issues. Permissioned DLTs which are more centralized present fewer location challenges.
The problem arises specifically with truly decentralized networks where the traditional lex situs rules simply don’t work for crypto tokens.
Given the vast differences in digital asset legislation between regions even clear jurisdictional rules may fail. A rule pointing to a nation that doesn’t recognize digital assets may fail to uphold legitimate transactions. The authors considered but rejected developing rules for selecting “appropriate” jurisdictions where usable digital asset laws exist.
The ultimate aim remains achieving “just disposal of proceedings.”
The supranational proposal
The Commission settled on developing supranational rules. These would create “a special body of substantive rules of decision that apply only in private law cases in which the law of no country would be appropriate to apply to resolve the issue in dispute and the law of every country would be appropriate to apply to resolve the issue in dispute.” In essence there would be no single “applicable law.”
Courts have precedent for considering rules beyond national laws including religious principles and international frameworks like UNIDROIT for commercial contracts.
For peer-to-peer transactions on truly decentralized networks this approach would consider factors such as:
- Protocol whitepapers
- Whether court actions might prejudice other network participants
- The broader impact on network integrity
For example if a network were forked to recover someone’s lost or stolen keys that action might cause harm to other participants.
The Commission was clear in rejecting “Code is Law” concepts while still recognizing the importance of protocol expectations and participant rights within decentralized systems.
This consultation represents a significant step toward resolving the jurisdictional maze surrounding digital assets. By proposing supranational rules that consider the unique characteristics of decentralized networks, the UK Law Commission is attempting to create a framework that serves justice while respecting the technological realities of blockchain systems.
