Distributed ledger technology: Cutting through the paradox

Abstract

Despite recent market turmoil, distributed ledger technology (DLT) is expected to accelerate its transformation of the financial services industry. Assets made available for investment using DLT will extend beyond cryptocurrencies, non-fungible tokens (NFTs) and the like to embrace assets of all kinds, including equity and fixed income securities, loans, real estate and others that today generally are supported by highly fragmented legacy proprietary frameworks. DLT offers the prospect of a safer, more cost-efficient, more widely adopted operating environment across all types of assets and transactions. However, legal and regulatory frameworks for financial services have taken time to adapt to this sea change. While certain regulatory and legislative developments have grabbed headlines, less appreciated is the state of play of so-called ‘private law’. Private property law addresses ownership rights in digital assets as well as whether and how these rights may be asserted indirectly through intermediaries, requisites for transfer of ownership, rulesets for resolution of disputes regarding ownership and whether and how interests in such assets may be secured by collateral arrangements. More broadly, and more fundamentally, as the UK Law Commission has recently noted, ‘property law is default law’ and is particularly useful because, in principle, property rights ‘are recognised against the whole world, whereas other — personal — rights are recognised only against someone who has assumed a relevant legal duty’.1 This distinction is especially important where a party having responsibility for an asset becomes insolvent. Within individual legal systems, digital assets and methods for their transfer have struggled to integrate themselves with existing laws such as the law regarding property rights and laws addressing the impact of insolvency. Each legal system by and large has addressed this challenge in its own way and in its own time, complicating prospects for a broad, scalable take-up of DLT as a replacement for current inefficiencies and fragmentation as well as for new types of assets. This is likely to be especially problematic in the context of cross-border investments, holdings and dispositions — especially if the law of more than one jurisdiction might apply to the same investment. This paper argues that it is essential that legal systems grappling with digital assets are mindful of the risks and pitfalls of inconsistency with other legal systems and that in this respect consistent application of governing law and choice of forum especially should be considered. In particular, the efforts of the International Institute for the Unification of Private Law (UNIDROIT) should be supported in order to establish a conceptually sound set of principles for all jurisdictions to apply, regardless of the peculiarities of their respective legal systems.