OVERVIEW

UNIDROIT PRINCIPLES ON DIGITAL ASSETS AND PRIVATE LAW

The UNIDROIT Principles on Digital Assets and Private Law (DAPL Principles) were adopted by the UNIDROIT Governing Council at its 102nd session (Rome, 10-12 May 2023) and were published on 4 October 2023.

 

Purpose

Recent years have seen a rapid development of assets existing in a digital form, largely based on distributed ledger technology, including blockchain technology. Markets developed quickly and much of the focus has been on managing risk from a regulatory law perspective. However, a new, or potentially new, asset class also raises important issues of private law.

The DAPL Principles address legal issues arising from the transfer and use of digital assets and aim to harmonise private law, and in particular proprietary law across States. Given the lack of established practice in this field, the DAPL Principles represent an original attempt at creating − not merely identifying − an international standard on the proprietary aspects of digital assets based on the work of experts from all representative legal families and systems.

The Principles were developed through an inclusive process involving the work of almost 30 experts in private and technology law and with the input of over 50 institutional observers from international, governmental, industry, regional and non-governmental organisations as well as of a Steering Committee composed of representatives of 27 UNIDROIT Member States and one Regional Economic Integration Organisation (the European Commission).

 

Scope

The DAPL Principles establish clear rules relating to the private law aspects of digital assets, with a focus on proprietary rights. They address digital assets where they are the object of dispositions and acquisitions, and where interests in those assets are to be asserted against third parties. The DAPL Principles cover digital assets which are capable of being subject to control and provide guidance on issues related to private international law, control and transfer, custody, secured transactions, procedural law including enforcement, and insolvency.

The DAPL Principles are neutral in terms of technology, business model, and jurisdiction and are not meant to represent a specific solution for a particular moment or technology. The DAPL Principles are intended to be applied by any legal system, regardless of whether rooted in civil or common law, with the aim of assisting both legislators and users in addressing the complexities that result from dealing with digital assets in the market.

 

Core Concepts

The DAPL Principles include a number of substantive legal principles, including the main substantive principle that digital assets can be the subject of proprietary rights (Principle 3(1)). This is a fundamental basis of law which enables digital assets to be of commercial value and to be used in the same way as any other asset. Most of the other principles flow from, or depend on, this key principle.

For digital assets to be capable of being the subject of proprietary rights, there has to be a definition of digital asset which provides that digital assets have the features which legal systems would expect them to have as the subject of proprietary rights. Thus, the definition of digital assets in the DAPL Principles as an electronic record capable of being subject to control (Principle 2(2)), with ‘control’ in turn defined as consisting of three factual abilities: (i) the exclusive ability to prevent others from obtaining substantially all of the benefit from the digital asset; (ii) the ability to obtain substantially all the benefit from the digital asset; and (iii) the exclusive ability to transfer these abilities to another person (Principle 6(1)).

The core principle in Principle 3(1) is also a building block for the main principle on the transfer of proprietary rights in digital assets (Principle 8). Principle 8 states that the nemo dat rule (i.e., that one cannot give what one does not have) applies to transfers, but with an exception for a person who acquires a proprietary right in a digital asset, who obtains control of that digital asset, and fulfils the requirement of ‘innocence’.

The DAPL Principles provide guidance on security rights in digital assets (Principles 14-17), as well as a waterfall provision to determine the applicable law, with an emphasis on party autonomy (Principle 5). They also define the conditions under which a person acts as a custodian of a digital asset (Principles 10-12), and address the insolvency-related implications (Principles 13 and 19).

Apart from the substantive principles, other matters are left up to ‘other law’.  Other law refers to the applicable domestic law and includes regulation as well as other types of specialist law, such a procedural law, the law on enforcement, and insolvency law.  Other law also refers to aspects of private law which are not addressed by the DAPL Principles, such as the existence of a proprietary right in a digital asset, the validity and third-party effectiveness of a transfer of a proprietary right (including a security right) in a digital asset, inter-party rights, and the existence, requirements for, and legal effect of a link between a digital asset and another asset.

The DAPL Principles dovetail with more general aspects of private law in any particular State, so that the private law on digital assets in a State can be as consistent as possible with the general private law of that State in relation to other assets.

 

Relationship with UNIDROIT instruments and projects

In terms of the relationship with existing UNIDROIT instruments, important aspects of the DAPL Principles concern, among others: the legal analysis of holding, transfer, and the taking of security over digital assets; issues relating to the provision of digital asset custody services; and issues relating to the insolvency of the custodian of digital assets. These items naturally link with UNIDROIT’s work in capital markets and, more precisely, in the area of intermediated securities, providing crucial connections with existing instruments such as the UNIDROIT Convention on Substantive Rules for Intermediated Securities (2013) and the UNIDROIT Legislative Guide on Intermediated Securities (2017).

In addition, the DAPL Principles are relevant to the UNIDROIT–UNCITRAL Model Law on Warehouse Receipts, which examines the issuance and transfer of electronic warehouse receipts for goods stored in warehouses. Regarding synergies with ongoing projects, there is a natural fit with the Best Practices for Effective Enforcement project, which undertakes the analysis of the impact of new technologies on enforcement as one of its main objectives.

UNIDROIT’s work on digital assets also presents synergies with the project on Best Practices in the Field of Electronic Registry Design and Operation, which is run by the Cape Town Convention Academic Project in partnership with the UNIDROIT Foundation, Aviareto, and the Aviation Working Group. Specifically, the Guide on Best Practices for Electronic Collateral Registries provides guidance and best practices for the operation of electronic collateral registries, which may be an important element of a system of digital assets, particularly when used as collateral.